Standard & Poor’s has cut Greece’s credit rating to “junk” status. In so doing, the ratings agency indicates that it considers it unlikely that investors who purchase the bonds will ultimately be paid the principal amount of the bonds and all required interest payments.
What is the meaning of this for the United States? The fact that some other country’s debt is considered likely to default is not earth-shaking news; this article notes that bonds issued by Egypt and Azerbaijan have the same rating that has now been assigned to Greece. No, the risk is that Greece’s unrelenting troubles — and the corresponding reduction in the credit rating of Portugal — will inflame general investor skittishness about the massive governmental debt among European countries and the U.S.A. If investors perceive greater risk of non-payment, they are going to insist on higher interest payments to bear that risk, and higher interest rates mean more deficits and a spiraling debt problem that becomes increasingly difficult to solve. The yield on Greece’s 2-year bonds is now trading at about 15%. Imagine if the United States, or debt-ridden states like California, had to pay 15% interest on their borrowings, and an ever-growing portion of the federal budget therefore had to be devoted to debt payments to overseas investors.
The lesson to be drawn from Greece’s predicament is that deficits must be addressed, non-essential spending must be cut, and budgets must be balanced. As Greece has now demonstrated, constant deficit spending and borrowing is the path to perdition.