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The Monitor's View

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.

By the Monitor's Editorial Board / April 28, 2010

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.

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But in any country with debt woes, it’s not easy to do the necessary clean-up work, as President Obama noted at the first meeting of his commission on US debt reduction this week.

“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.