The Greek Economy Pays the Price of Drift
When Standard & Poor’s downgraded the long-term debt of Greece to junk, the European Commission responded that it expected rating agencies like S&P to be “responsible” at this difficult and sensitive time. This has been the wrong initiative. People and countries should never fail to listen when independent critics start saying that they are going downhill. Debt is no money growing on trees; it has to be served and repaid. A great deal of tax money which might have been used for investments to provide the ground for future jobs goes into the debt financial abyss. In addition, the higher is the public debt the lower becomes a debtor’s creditworthiness. The current debt crisis has two legs: overleveraged sovereigns because of public health care and other frills; and an undercapitalized banking industry. The two correlate; therefore, the crisis in Greece and in other Mediterranean countries (Club Med) is deeper and more widespread than almost anyone feared at its start. Assuming more debt to solve the debt problem has backfired, and the so-called Private Sector Involvement (PSI) did not deliver. Was this “voluntary” downsizing of loans justified? Was it intense government pressure, or the scare of a credit event , such as a Greek bankruptcy, which made the banks compliant? The fear of a credit event brought up PSI, and the irony is that, in the end, the credit default swap (CDS) event was not avoided.