Article by Erik Smith. Published on Monday, November 07, 2011 EST.

No Time to Stop Worrying, Says State’s Top Economist

Arun Raha, director of the state Economic and Revenue Forecast Council.

By Erik Smith

Staff writer/ Washington State Wire

OLYMPIA, Nov. 7.—The state’s top economist is saying everything looks stable for now – but just watch what happens in Greece.

            Arun Raha, Washington’s official economic prognositcator, released his economic review Friday, and the main surprise this time around was that there wasn’t any more bad news. But don’t worry, he said, there’s still plenty of reason to worry.

            “Two months have passed since the September forecast, and nothing has gone off the rails, but it is premature to stop worrying about the future,” he said.

            The economic review might be seen as a preview of the big announcement that comes Nov. 17, when Raha will reveal the tax-revenue figures that the Legislature will have to work with when it returns for a special session Nov. 28. Things are still looking mighty bleak – the economy is still in the dumps, it appears the Legislature overspent by about $1.3 billion in its last budget, and lawmakers will have to slash about $2 billion in spending during their Yuletide-season gathering. That’s because they want to leave at least a little money in the bank.

            But the big news this time around is that things really haven’t gotten worse since September. Actual revenue collections were only about $2 million off from the last estimate, really a drop in the bucket – a difference of about a tenth of a percent. So realistically speaking, the Legislature’s problem hasn’t gotten any deeper.

            There will be at least one more revenue report before Raha’s final pre-session forecast. The Nov. 11 report will show how much the state got in tax money during the month of October. Barring a sharp plunge, lawmakers can be relatively confident that the problem they face in December will be awful. But the good news is that it won’t be worse than awful.

            European Crisis Means Worry for Washington

            The big question mark right now is what happens in Europe, where Greece is leading a pack of countries into a dark economic pit. “The key for the U.S. and consequently Washington economies is whether the European authorities can be successful in containing a sovereign debt crisis in southern Europe from turning into a full-blown European banking crisis,” Raha said. “The former will do some damage, but the latter will be devastating.”

            The latest news from Europe is that the Greek government has decided not to stage a popular vote on austerity measures demanded by French and German authorities in return for a bailout. That may ease some of the jitters felt in the markets here. If Greece says no, that could mean a default that will batter some of the most important financial institutions in Europe, and eventually the effect will be felt here. But Greece isn’t the only country in trouble – right behind it are Portugal, Italy and Spain.

“The most immediate danger is of a Greek default,” Raha said. “Greece is not just in an economic but a political mess as well, and most likely will default. The fallout from a Greek default might be more defaults perhaps by Italy or any of the others at risk. What is more worrying though is the impact of Greek default on the health of German and French banks.

“So far the German and French authorities have negotiated a debt deal with Greece that voluntarily reduces their debt, but in return expects them to cut government wages and pensions in a severe austerity program. To keep the German and French banks from going into crisis mode from their losses on Greek debt, these banks would be required to recapitalize with assistance from the EMSF, the European monetary stability fund. It is not clear if the political will exists to accept the austerity measures that will prevent the default, also if Italy or any of the other countries default. The EMSF does not yet have enough capital in it to protect the banks in the rich or poor countries.

 “A European banking crisis will become a U.S. banking crisis because of our banks’ exposure to European banks. A U.S. banking crisis could push the U.S. back into recession. This fear of European problems spinning to our side of the Atlantic has rattled markets, eroded confidence and crimped spending by both businesses and consumers.”

The direct exposure of American banks to Greek sovereign debt is about $2 billion, not much in the scheme of things, but their exposure to all public and private debt in the troubled European countries is $700 billion. Credit and loan guarantees and credit default swaps add another $1.4 trillion, for a total amount at risk of a little over $2 trillion. Suddenly that’s real money.

            Congressional Gridlock Another Worry

There’s another problem right here at home, Raha said. No one knows yet if the deficit “supercommittee” appointed by Congress will find a solution palatable to all sides. If there is no agreement on cutting $1.5 trillion in debt, big automatic cuts in military and non-military spending will be triggered on Jan. 1, 2013. “Political gridlock in the nation’s capital, evident in the debt limit talks, give little confidence that the congressional supercommittee will be able to come up with the necessary debt reduction plan that can be passed by Congress,” he said. “Although anything is possible, none of this helps with consumer or business confidence,” he said.

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