Contrary to what the White House has been saying for weeks, a former top economist at the International Monetary Fund told Newsmax on Thursday that a Greek default on loans will have an impact on the U.S. as well as the European economies.
"It is a joke to say 'there is very little direct risk to the U.S. economy from the Greek economy'" as White House press secretary Josh Earnest has been claiming at regular briefings, said Desmond Lachman, economic scholar at the American Enterprise Institute and onetime deputy director for Policy and Development Review at the IMF.
On June 4, Lachman predicted to Newsmax that there was a "75 percent chance" Greece would default on its obligations and be forced to leave the euro currency by the fall. When he spoke to us Thursday, Lachman said the chances of this happening much sooner are very high.
As for last-minute offers Greek Prime Minister Alexis Tsipras may make to his country’s creditors — the IMF, European Central Bank, and European Commission — this weekend on rearranging its loans (240 billion euros over next four years), Lachman held little hope.
Even if the Greek leader were to get the three lenders to agree to a new arrangement, he said, "Tsipras will be crucified when he presents it to the Greek parliament if it includes increased taxes and spending cuts. That means more austerity, and that’s what 60 percent of the Greeks voted against in the [July 5] referendum called by Tsipras himself."
As to the impact on the U.S. of a Greek default on its loans and resulting exit from the euro currency, Lachman said, "It’s not to be underestimated."
"Once Greece goes [from the euro], the European Central Bank will take immediate steps to prevent contagion [spread of economic collapse] to the rest of Europe by weakening the euro against the U.S. dollar. That means the dollar would grow stronger, and other people’s exports [to the U.S.] would become cheaper."
The economist said the ECB would work hard and swiftly to deal with possible contagion, because of the possible impact it could have on the European and U.S. economies.
But Lachman added, "The Federal Reserve Board has warned that stronger dollar appreciation could constitute a significant headwind to the U.S. economic recovery and could exert significant downward pressure on U.S. headline inflation."
As to the impact of a Greek exit from the euro, Lachman pointed out that this would be the first time a country has left the currency and that "we’re going into uncharted territory here." He did say that it could hit at the fragile economies of eurozone members such as Italy, Portugal and Spain, which is significant "considering how integrated is the global financial system and how important the European economy is to U.S. trade."
He emphasized: "I fully expect the ECB will do whatever it takes to prevent the contagion from a Greek exit from spreading to the rest of the European periphery."
The almost certain default of Greece on its 24 billion euro loan from the IMF will have an effect on the U.S. taxpayer, he said, because the U.S. is the largest shareholder in the international fund.
In 2009, at President Barack Obama’s strong urging, Congress then under Democratic control narrowly voted the IMF an extra $100 billion above its regular appropriations. Two years later, as Greece, Ireland and Portugal required IMF bailouts, Republicans led by Rep. Cathy McMorris Rodgers of Washington warned that the U.S. taxpayer would lose money and tried unsuccessfully to rescind the extra $100 billion in IMF funding.
Said Lachman: "That extra $100 billion was a mistake and the IMF didn’t need the extra money."
John Gizzi is chief political columnist and White House correspondent for Newsmax.
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