Debt crisis in Greece: Junk bond rating demands action
With its bonds rated as junk, the debt crisis in Greece must prompt Athens to take far greater austerity measures than originally planned. Political leaders and the public must find the courage for the necessary sacrifice.
In Greece, the future has met the present. Now that its government debt has been downgraded to “junk” by Standard & Poor’s, it can no longer afford to talk about getting its house in order, it must actually pick up the broom.
“In theory, there are few issues on which there is more vigorous bipartisan agreement than fiscal responsibility,” the president said. “But in practice, this responsibility for the future is often overwhelmed by the politics of the moment.”
That’s because it takes sacrifice to move from theory to practice – to dig out from indulgence. Like Americans who borrowed heavily for homes they couldn’t afford, governments the world over have rung up unsustainable bills, leaving their debts to future generations. This week, financial markets judged that Athens probably can’t make good on its debts. Now Greece must show concretely that it can change, and that will take courage, from both leaders and the public.
Greek Prime Minister George Papandreou has shown some spine. Shortly before his Socialist party won elections last fall, the conservative government claimed Greek’s budget deficit would be 6.7 percent of gross domestic product in 2009. After Mr. Papandreou took office, he reported it would really be about twice that. He called for austerity measures, and interestingly, the public generally backed him.
But the measures amounted to baby steps, so no wonder the prime minister avoided full-scale revolt. Increasing the retirement age from 61 to 63 to lower pension obligations? If only other developed countries had it so good. Freeze public sector salaries? Ask Californians about forced furloughs of state workers.
What’s required is not only far more serious belt-tightening but also economic and financial reforms – a dual challenge for other European countries, such as Spain, Italy, and Portugal. Indeed, concern is building that the Greek debt crisis will spread to them.
Athens faces modern-day Herculean labors: downsizing its bloated bureaucracy, overhauling the pension system, enforcing tax collection, removing red tape and labor inflexibility to encourage entrepreneurship.
But even this description masks what’s really necessary in Greece, which is a culture change. For too long, the state has been viewed as the personal piggy bank of its leaders and a generous provider for a public used to widespread tax evasion. That is why Germany hesitates to throw its good money after bad by bailing out Greece, and why the International Monetary Fund (IMF), too, demands steps far beyond the prime minister’s original austerity measures.
As it begins to dawn on Greeks that their standard of living will significantly decline if the government agrees to tougher IMF and German demands, a public backlash has started. Only 23 percent approve of the government’s handling of the debt crisis, and public workers are again striking.
Will public resistance push Greece into following the path of Argentina, which, in 2002, declared bankruptcy rather than pay its debts? That move, however, only worsened poverty. A chaotic Greek default would have serious implications for the euro currency system, to which Greece belongs.
Greece may be the worst managed industrialized economy in the world, which makes fixing it much harder than what’s required in other countries with high deficits and debts. Yet political leaders in many of those countries can’t seem to find much courage, either.
In Britain, which undertook its own wrenching economic reforms during the Thatcher years, the leading candidates facing May 6 elections can’t bring themselves to speak beyond generalities to bring down the budget deficit. At nearly 12 percent of economic output, it’s Britain’s highest peacetime deficit. In the US, meanwhile, Mr. Obama has been forced to appoint a nonbinding debt-reduction commission after the Senate refused to endorse one with real teeth.
In both countries, voters demand government fiscal responsibility. They’re out in front of the politicians on this subject. And yet, one wonders how Americans might react to the implementation of possible solutions – higher taxes, for instance, or radical reform of expensive Medicare, or both.
Personal sacrifice and courage are required from all sides, from politicians and the public, to rebuild high-debt economies on a more sustainable basis. As the Greek financial tragedy so clearly shows, one day the financial markets will decide that the unsustainable is no longer an option. They’ll stop issuing credit cards. And that’s no theory.