Saturday, March 19, 2011

A Tale of Two Deficits Part Deux: The Greek Tragedy

A Tale of Two Deficits Part Deux: The Greek Tragedy

In 2008 and 2009, the financial world was mainly concerned about the survival of private companies, from the financial institution, mortgage companies to car companies, stories largely revolved around whether many companies would survive the collapse of the housing market and broader economic downturn. In early 2010 attention slowly turned to sovereign financial survival, concerns moved from primarily private entities to concerns over the financial health of countries, it begun with concerns over the sultanate of Dubai and its ability to pay debts it had accrued in the construction binge of the past five years. These concerns soon turned to the more serious case of Greece, whose financial mess not only threatened its own future, but that of its neighbors. A debt contagion was thought to soon engulf Europe.

As a signatory to the Stability and Growth Pact (SGP), Greece is bound to maintain a budget deficit no higher than 3% of GDP and a debt to GDP ratio of no higher than 60%(AB, 168). As early as March 2009, however, the EU was already concerned with Greece’s deficit/debt situation, considering it to be “excessive” even pursuant to the more flexible 2005 reforms to the SGP debt/deficit guidelines (AB, 192). According to EU forecasts, the Greek deficit stood at 4.2% and its debt at 94.8% of GDP, both metrics clearly above the agreed upon limits. What is quite fascinating about the Greek case is that the reality was far worse, in late 2009 the in coming Greek Prime Minister announced that his predecessor had misrepresented the actual deficit, noting that it was likely above 12%, what followed was a classic debt crisis, Greek bonds were relegated to junk status, the interest rates Greece attracted sky rocketed and the financial markets avoided Greek debt. In order to avoid defaulting on its obligations, Greece had to rely on a $140 billion rescue package from EU member states and the International Monetary Fund (IMF), a most embarrassing prospect for an industrialized nation. This assistance was tied to deep budgetary cuts and tax increases, there was extreme resistance to the budget cuts and alterations to existing public sector labor agreements ( a number of strikes were called), but the Greeks had to swallow the bitter pill in order to receive assistance from abroad.

As a member of the EU, the financial crisis has: “heightened the constraints of Euro membership. Unable to devalue their currency to regain competitiveness (as Japan just did) and forced by EU fiscal agreements to control spending…” especially during periods of economic contraction, when some would argue for deficit spending (AB, 160).These are policy constraints that do not apply to the US, the US’s current deficit is 9.7% of GDP with a debt to GDP ratio around 64%, “excessive” in EU terms on both counts. However, the current U.S. deficit could be considered a consequence of short term economic contraction and government efforts to provide countercyclical stimulus to the economy. Though the deficit and debt issues have (of late) dominated the systemic (and institutional) agendas, the situation in America is not yet considered dire. As AB note their discussion of US v. Argentina, deficits and debt are not created equal.

The U.S. is in a far stronger financial footing than Greece and can shoulder the current economic downturn with greater aplomb. In addition, the U.S. is not limited in its policy alternatives as Greece is.


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