Greece Fire

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.

Greece And California

The Greek debt crisis is putting enormous strains on the European Union.  Greece is heavily in debt.  Its 2009 budget deficit was projected to reach 13 percent of its Gross Domestic Product.  Greek’s mounting debt problems prompted fears that Greece would default, causing investors to sell Greek debt instruments, which in turn put pressure on the European Union’s common currency, the Euro.  As a result, European financial and political leaders are pressuring the Greek government to impose unpopular austerity measures, and some members of the Greek community have been protesting those cuts.  In the meantime, Greece is appealing to Germany and France, as the financially stronger members of the EU, for support.  The French President, Nicolas Sarkozy, says the EU has to support Greece or give up on the idea of a common currency and common political future.  The German government seems to be more on the fence.

The interesting point about this story is not that it has happened — with Greece’s borrowing-oriented, over-the-top welfare state mentality, a budget crisis was inevitable, and other debt-laden EU countries are not far behind — but the cultural and political fissures that have been exposed. In Germany, in particular, citizens and politicians are resisting bailing out the Greek government because they believe they are subsidizing sybaritic, free-spending ways of the Greeks.  In Greece, workers can retire at 63; in Germany, they must work until age 67Some Germans believe that the salaries paid to Greek civil servants are too large, that Greeks are too lazy, that the Greek culture is corrupt, and that Greek farmers are swindling the EU.

What the Greek debt crisis really demonstrates is that any political union must be based on trust and equity.  When times get tough, there must be a sense of shared sacrifice and shared values.  Eventually, if enough Germans believe they are being played for saps because they are working hard to support the unsustainable lifestyles of pleasure-loving Greeks (and others), they will refuse to continue to do so and the European Union will fracture and fail.

There is a lesson in all of this for California, which is facing its own version of a serious debt crisis.  Over the long term, California cannot expect the federal government to bail it out of its budget problems.  It won’t take long before hard-working Texans, or North Carolinians, or Ohioans, will object to subsidizing California’s absurdly generous public pension system, its unwillingness to cut programs, or its oppressive regulatory regime that has caused many companies to flee the Golden State for more business-friendly locations.

America is more politically and culturally cohesive than the European Union; Texans have much more in common with California than Germans have in common with Greece.  Still, the pressures that come from the ant subsidizing the grasshopper are the same, and would better be avoided by California getting its budgetary act together.