The Greek debt crisis that was supposedly solved a year ago is making a reappearance.This revives bad memories of shaken global financial markets. Hopefully, though, the Greek threat can also spur American politicians to cut US debt.
As Americans learned in “Greek Debt 101” last year, the US economy differs significantly from the Aegean version, but a debt problem left unchecked has serious repercussions for individual nations and the world.
In 2010, European governments and the International Monetary Fund (IMF) bailed out Athens with about $157 billion in loans. But it’s now clear that total Greek debt is continuing to grow and Athens cannot meet its belt-tightening, deficit-reduction targets.
Hence, this week’s downgrade of Greek debt by Standard & Poor’s, a trip to Athens by European and IMF inspectors to review the situation, and another nationwide strike by Greek workers saying “enough” to austerity.
First, remember the pitfalls of putting off until tomorrow what should be done today. Last year, the Greek debt crisis was almost upon Europe before governments acted. They also had a hard time deciding what to do. The financial markets, including those in the United States, did not react well to the time squeeze and indecision. Watching Wall Street drop, American consumer confidence fell, slowing the pace of recovery and influencing the 2010 elections.
At least this time, Europeans recognize early a problem that’s coming. Greece is now seeking debt funding for 2012 and 2013 as its European-IMF loan runs its course.
But will Europeans act in a timely manner? The biggest bankroller, Germany, wants to wait until after this week’s European and IMF inspectors issue their findings in June. And who knows how long after that? The temptation is to put off a decision, because the options ahead – either more loans or a restructuring of Greek debt – are economically painful and not likely to sit well with voters.
Similarly, politicians in Washington may be tempted to put off the heavy lifting on a debt-reduction plan. For instance, they may put reforming costly entitlements such as Medicare aside until after the 2012 elections.
But remember, the financial markets have a highly sensitive nose that can sniff out half-baked solutions. And they don’t like to be kept in suspense. Republicans and Democrats should not wait until the last minute to agree on a substantive plan to reduce deficits and raise the debt ceiling, which can be financed only until Aug. 2. After that, it’s default time for America.
Even if Washington comes up with a meaningful plan, it must keep in mind whether a plan can actually be implemented. Greece has cut government salaries, pensions, and increased taxes – all requirements of the bailout – even in the face of stiff resistance and strikes.
But it has not finished its reforms, including privatizing public assets. Unions have delayed the consolidation of several hundred state organizations. Tax evasion is still a huge problem. Meanwhile, the austerity measures have contributed to economic contraction, reducing tax revenues to pay down debt.
Also, economic assumptions changed. Greek data were revised downward, which threw off the plan from the start. Then came the bailouts for Ireland and Portugal, which worsened financial market conditions in Europe.
Whatever plan America settles on will differ in the details from what’s happening in Greece. But the US version must likewise be timely, substantive, and doable – all of which will require considerable political will and cooperation by both parties. The plan may also need adjusting in years ahead.
These are America’s Greek lessons. May it learn them.