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How Greek economic woes could help US consumers

Fears that Greece may default on its debt are spurring interest in US Treasury bonds, driving down interest rates on mortgages and auto loans – but not (alas) for credit card debt.

By Ron SchererStaff writer / May 16, 2012

Newly appointed caretaker Prime Minister Panagiotis Pikramenos (l.) shakes hands with Greece President Karolos Papoulias ahead of their meeting at the Presidential palace in Athens on May 16.

John Kolesidis/AP

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NEW YORK

For the past three weeks, US interest rates have been falling.

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But, unlike normal times, it’s not because of actions taken by the Federal Reserve. This time, rates are dropping because of fears that Greece, which is still trying to form a government, will totally default on its loans.

So, as in the 2008 financial crisis, investors are looking for a safe haven in a storm. And, as in other times of trouble, they are moving into US Treasury securities, driving interest rates lower and lower.

For the US, there are ramifications for this flight to safety – most of them positive. Mortgage rates are now hitting record lows. Automobile loan rates are falling as well. And the cost of borrowing money for the US Treasury is also dropping, perhaps helping to lower the national debt. Whether the decline in interest rates might foreshadow something more sinister, such as a global economic slowdown, is still too early to know.

“Lower interest rates are a good thing,” says economist Richard DeKaser, deputy chief economist at the Parthenon Group, a consulting company in Boston. “But in this context, they are also symptomatic of heightened risk aversion, which means it could be more difficult for some borrowers to get loans.”

The lower rates are also coming at an opportune moment. Spring data indicated that the US economy had hit a soft spot. Employers slowed their hiring and business delayed some investments.

“It is nothing that appears to be serious,” says Fred Dickson, chief investment strategist at D.A. Davidson & Co in Lake Oswego, Ore. “We’re just seeing a little pullback.”

By way of contrast, the last time interest rates got this low was last September when there were fears that the US economy was going into a second recession – a double-dip. Congress and the White House had just engaged in a stare-down over the debt ceiling which froze business investment. And the stock market was struggling.

Mr. Dickson says that part of the reason for the current drop in interest rates is capital flight from Europe. The president of Greece indicated on Tuesday that almost $900 million had been withdrawn from the country’s banks in a single day.

“It has to flow somewhere,” says Dickson. “The biggest 'bank' that can handle that is the US Treasury, which is kind of viewed as the universal bank of last resort.”

What that has meant in the US is that lenders are dropping their rates.

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