The US economy grew at 3.2 percent in the first quarter, which is a good sign that the US economy is experiencing a strong recovery. The first quarter in 2010 also marked the third consecutive quarter of positive GDP growth in the American economy. Looking forward, it is important to note that one of the main factors behind the growth rate is the 3.6% increase in consumer spending, a growth rate not seen since early 2007. This is more of a positive sign for the US economy than increased inventories because it demonstrates that the US consumer is returning to a more normalized behavior. However, although these are positive signs, investors must be cautious with their decisions and do what they can to mitigate the risk of another downturn

Turning our attention away from the US and back to the bigger global picture, we must again re-visit the story of Greece, or rather the tragedy of Greece. As I mentioned a few weeks ago, I believed that there would be an IMF/EU combination rescue package for Greece in order to stop contagion from occurring. Over the last week, it may appear to many that the typically slow response of Europe might have not stopped this sovereign epidemic. The S&P cut Greece, Portugal and Spain’s debt rating and it seems all but likely that another European country is in S&P’s sites. Although, it can be argued that the ratings agency made unwarranted downgrades as no new material information released over last week, it still has an affect on bond yields and can dramatically increase the cost of borrowing for sovereign countries.

The current plan under review by European ministers and the IMF will enable Greece to draw on more than 100 billion euros in loans from the IMF and eurozone. There is a fear that this action, albeit sufficient, is not enough to stop the spread of fear in the markets. Now, with Spain’s downgrade and their ridiculously high unemployment of 20%, they will find it extremely difficult to survive without a bailout, as the cost of their debt increases, interest payments will crowd out money available for government services. The political consequences are tremendous and the ability to pay down debt reduces everyday as populations strike or vow to elect politicians that ignore their fiscal well-being and maintain public services. This populous action only hurts the country’s ability to pay back debt as less people work and less taxes are paid. Sovereign nations are not like companies, they cannot file for chapter 11 and there is only a debt component to their capital structure. In good times and in bad, countries look to raise money by auctioning bonds while they simultaneously seek to lower tax revenues and reduce future cash flows because it is politically popular. Tough decisions are needed by the people of countries around the world to get themselves out of a potentially disastrous situation. It makes sense to borrow in bad times in order to give a jolt to the economy, but it does not make sense to place huge debt burdens on a country during good times as sovereign debt crises will be inevitable during downturns.

All nations that are debt laden have to address their bloating budget deficits before the markets gang up and essentially force a default. In addition to addressing budget concerns, the markets, companies and countries need to be more transparent with their finances so that people aren’t surprised or infuriated by decisions and actions made under the cloak of secrecy.