Each of us has a credit rating….


Governments are no different. They have credit ratings too, and when they go the wrong way, they can break economies and lead to unpleasant outbursts from angry public employees on strike.

In the European Union, Greece is the equivalent of the free-spending consumer living beyond his means, and whose ability to repay big debts is at now risk, at least according to the credit rating agencies. Each of the three biggies – Fitch, Standard & Poor's, and Moody's – has downgraded Greece in recent weeks….

What now? What if Greece teeters on the edge of bankruptcy? After considerable debate, the EU has adopted a tough-love strategy for Greece – no bailout coming. That means the other ailing PIIGS (the acronym for Portugal, Italy, Ireland, Greece and Spain) won't get one either, though a disaster scenario might trigger an International Monetary Fund rescue mission.

The no-bailout approach – if it sticks – is a good thing even if it means Greece is lost in the wilderness of fiscal pain. An EU bailout of Greece or the other piggies wallowing in the muck of debt would be the equivalent of a reward for bad behaviour. Rather than protect Ireland and the EU's vulnerable southern flank, a bailout would do the opposite….


… Governments should create fiscal cushions when economies are on a roll, all the better to soften the blow when the bad times come. Canada did this in the years before the financial crisis, by eliminating deficit spending and trimming debt. Spanish banks use a version of the same strategy. Regulations require them to build up their loan-loss provisions in good years so they can draw them down in bad. As a result, Santander and other big Spanish banks are performing well even though the Spanish economy is stuck somewhere between recession and depression.

In the meantime, Greece is going through hell. The socialist government of George Papandreou disclosed its 2009 budget deficit will be 12.7 per cent of gross domestic product, more than double the previously announced figure. The goal is to trim it to 9.1 per cent in 2010, which is still three times higher than the EU's economic stability rules allow. The government slapped its citizens with a 10-per-cent cut in social security spending, abolished bonuses at state banks and nailed the bonuses of private bankers with a 90 per cent tax. …

Greece could go either way. The EU estimates its national debt will rise to 125 per cent of GDP next year, the highest in the EU. Absent an economic turnaround, Greece could go bankrupt, require an IMF bailout or even be forced to drop the euro and go back to the old drachma, which could be devalued. For Greece, living the high life for years is coming at a high cost, as it should.

This article is excerpted from the 24 December 2009 edition of “globeandmail.com”.