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.

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

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 The president of Greece indicated on Tuesday that almost $900 million had been withdrawn from the country’s banks in a single day.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.

In Dallas, for example, PrimeLending, is seeing rates below 4 percent for 30-year fixed rate mortgages and just above 3 percent for 15-year mortgages for qualified buyers. This is down about 80 basis points from a year ago. Bankrate.com says that new car loans have fallen from 5.59 percent rates a year ago to 4.47 percent.

The lower interest rates represent potential real savings for people. For example, Greg McBride, senior financial analyst at Bankrate.com in North Palm Beach, Fla. estimates that, compared to a year ago, the potential savings on a 30-year fixed rate mortgage would be about $180 a month on a $300,000 loan.

For an auto loan, which is over a shorter period of time and involves less money, the savings is about $12 a month, compared to a year ago, on a typical $25,000 loan, according to Mr. McBride.

“Every little bit helps at a time when household budgets are still tight and incomes are stagnant,” he says.

Another way to look at it is that lower mortgage rates give home buyers the opportunity to afford to purchase a home at a price of 15 to 20 percent more, without an increase in their monthly payment, compared to several years ago, says Mark Raskin, a senior loan office at PrimeLending, a PlainsCapital Company, in Dallas.

Consumers could also benefit from the lower rates by refinancing a current mortgage, he adds. For example, on a $200,000 loan that was taken out several years ago when interest rates were close to 6 percent, the savings could run as much as $200 to $250 a month.

“Obviously, it would be an even greater savings if it was someone who borrowed with a much higher rate,” he says.

Lower interest rates could also help the US government, which is carrying a budget deficit of close to $1 trillion this year. This means the US Treasury is frequently borrowing money to finance the debt. In fiscal year 2011, the government budgeted $251 billion for interest, not including another $203 billion owed to such entities as the Social Security Trust Fund.

“Most of that borrowing is about five years in duration,” says Mr. DeKaser. “We’re looking at a 10 to 20 basis point drop from where we were three months ago, so applied to several trillion dollars in debt it can amount something,” says DeKaser. “The question is how long it lasts.”

Unfortunately, the lower rates are not extended to credit cards which usually use the London Interbank Offered Rate (LIBOR), an international interest rate of what banks lend to other banks. The LIBOR rates are higher because banks are nervous about making loans to other banks.

“The LIBOR rate is reflecting some of the uncertainty in Europe,” says Bill Hardekopf, CEO of LowCards.com. “We don’t expect credit card interest rates to come plummeting down.”