Beware of Greeks Bearing Debt!

There’s a lesson to be learned from the turmoil that has gripped Europe and the financial markets for past few weeks. Greece, one of Europe’s PIGS (Portugal, Italy, Greece, and Spain) has more sovereign (government) debt than it can possibly repay, and is likely to default on bonds that are coming due in the next few months without some sort of bailout.
That debt has been building over many years as successive Greek governments have found it politically expedient to borrow more and more money to pay for the socialism that is the foundation of the Greek nation. The deficits, and the resulting debt, have been piling up for a long, long time.
More than one third of Greek workers are on the government payroll. (The correct term is “public servant” but that is obviously a ludicrous title.) And those who feed at the public trough are guaranteed a job and benefits for life, a promise which is at the heart of the current fiscal crisis. Yesterday, those “workers” called a nationawide general strike to protest the government’s latest “austerity” budget plan. The city of Athens came to a stop. Apparently, all that leftist jabber about “the common good” is fine when the TV cameras are rolling at a campaign stop, but the sacrifices liberals extol so earnestly are meant for others. Those on the Left are every bit as selfish and greedy as the conservative financiers they accuse of being selfish and greedy. Or more.
As a rule, governments don’t pay off their debt. They merely “roll it over” incrementally refinancing what is currently owed while adding to the balance to pay for the latest round of vote-buying promises. And for a while this strategy is feasible, if not altogether sound. But markets change… as do interest rates. As do the economies that create the wealth to pay for debt. And as with any sort of refinancing of debt, a debtor’s ability to continue to make the requisite payments, his credit history, is of prime concern. But like the family which has lived beyond its means by taking on more and more credit card debt to support a lifestyle it can’t afford, Greece is no longer able to afford the government deficits and debt payments that are supposed to pay for it socialist promises. Greece is technically insolvent.
Compounding Greece’s fiscal problem, and that of other EU countries as well, is the fact that the European Union itself and the European central bank are legally disallowed from bailing out member countries. Europe’s leaders and finance ministers have been meeting in Brussels to work out a solution that will calm investors’ concerns about Greece, the rest of the Euro-zone countries, and the Euro currency itself. From the NYT:

European officials faced great urgency to devise a bailout for Greece after fears its government might default caused a recent slump in financial markets worldwide…
Together with the president of the European Central Bank, Jean-Claude Trichet, the finance officials agreed Wednesday that they could no longer allow uncertainty about the future of Greece — and the euro zone — to disturb global investors…
At the same time, officials are worried about the “moral hazard” of any Europe-backed solution for Greece: If one country is bailed out by the others, investors will come to expect a similar response should other weak economies that use the euro, including Portugal and Spain, fall into serious trouble.
There are also questions about how to apply any commitments so that the weaker governments would be pressured to deliver painful economic overhauls.
The effort to support Greece, which included a discussion of what steps Athens might be required or even forced to take to deal with its own financial problems, came as Greek citizens demonstrated on Wednesday in protest against austerity measures announced by the government, which many market participants think are far from adequate.

If investors doubt the fiscal integrity of Greece, or any other nation, it will be unable to borrow in the market and its bonds will remain unsold.
And the threat of a domino effect across the European financial markets is real. Portugal, Spain and Italy are tottering right behind Greece, while last week France’s Cour des Comptes, the nation’s senior audit body, reported that France must reduce its own budget deficit and debt immediately. Government debt in France is already near 85% of GDP and still climbing and the deficit, legally limited to 3% of GDP is already at 8%. The UK is not in much better shape.
The lesson to be learned is that ever increasing deficits and debt are not sustainable long-term. This is particularly true in an environment where interest rates, too low for too long, are starting to rise despite central bank efforts to avert the increase. As interest rates go up, so too do the payments on current debt. And of course a drop in credit rating reduces the availability of credit while increasing the cost of borrowing. Credit rating agency Moody’s Investor Services has already warned that the US AAA credit rating will be in jeopardy if the deficits and debt are not more prudently “managed.”

The U.S.’s debt burden will climb to 97.5 percent of gross domestic product next year from 87.4 percent, the Organization for Economic Cooperation and Development forecast in June.

In the greater scheme of things financial, Greece is rather insignificant. Its economy is roughly 3% of the total of the EU. But it is the first western nation to reach the precipice of possible default and financial chaos. Fortunately for Greece, there are other, larger, more consequential entities which will likely help Greece through the current crisis. But that help will come at a cost. Utopia is unaffordable.
The US isn’t yet at that precipice. But as the world’s biggest economy, with the world’s biggest government deficit and debt, we have no one else to bail us out when the time comes.
We need to take our financial future seriously, reduce our deficit, stop spending money we don’t have, and stop making financial promises we can’t keep, before we reach that precipice.
Greece may be relatively inconsequential, but the lesson here isn’t. And neither is the US. Socialism doesn’t work. As Margaret Thatcher once put it,

Sooner or later, you run out of other peoples’ money.