In the news each day Greece’s financial problems are presented as a vital issue of Europe; apparantly (my understanding of money when not my own is always hazy) they spent so much and are so in debt to themselves that their economy threatens the Euro zone.
Ok, but then, reason leads me forward into the dark room of supposition, what did our Periclean friends spend all this money on? I mean, dudes, this is a lot since apparently they are 131% over their GDP in debt, making the US government look like Ebeneezer Scrooge during a recession. But WHAT did they get for their money? I never heard of Greece being the center of socialistic benefit paradise (that’s Sweden, at least in my out-of-date oversimplistic understanding) nor do they have the latest robotic weapons, or in fact anything I could think of that would cost so much.
It is very easy to get into debt. Just spend more than you earn. I could speculate (bloated civil service, unfunded pensions, etc.) but I will leave that to people who actually know something about the situation.
If people want services and are unwilling to pay taxes, they will vote for governments who, in the short run, will follow their wishes.
Trouble is France has a ‘bloated’ public sector of 1/3 workers being in it; yet is not in need of a bailing out. It’s got to be a magnitude worse than the usual European socialism. Portgual isn’t wealthy (are they on the Euro?) but aren’t in the news needing a bailout.
…yet. They (and Spain) may not be far behind Greece.
To follow up on Hari’s point, have a look at California: with a restricted ability to either cut spending or raise taxes, the economy is in a dire mess. Sometimes even countries hit their credit limit.
Do countries have to deal with the compound-interest treadmill? That’s what did me in ten years ago, and it took me over five years to crawl out of the hole. The actual debt spening wasn;t that huge, but the interest charges kept building and building on themselves until the whole thing collapsed.
Are there credit counsellors and bankruptcy programs for countries?
Spain was pretty fiscally sound prior to the current crisis though. Only when their housing bubble collapsed and their tax-revenue cratered did they start running large deficts. And being stuck on the Euro, they can’t inflate their currency to help them climb out.
Greece basically has all the problems Spain (and Portugal and Ireland) have, but with the extra problem that the OP talks about: they were running large deficits even when times were good. That’s why they’ve become the poster child for troubled EU States.
As to why they were running large pre-crisis deficits, the explanations I’ve heard is that 1) They spend more on defense-per-GDP then most (all?) EU states, due to poor relations with Turkey. 2) They have a high level of corruption which leads to inefficient spending and an inability to collect taxes (they apparently had the highest level of tax fraud in the EU), 3) Even aside from the tax-evasion problems, they just don’t have very high taxes in comparison with the size of their public sector.
Someone told me that Brazil cancelled all its bonds once. That’s effectively declaring bankrupcy. I guess it helps that any debtors who got screwed had to use Brazilian courts.
Offically speaking, the interest is paid each year out of each year’s annual budget and therefore, through the magic of politician-speak, it does not compound.
But if the annual budget is running a deficit, then the interest on the debt is a factor in what’s being financed each year. So in a practical sense, yes, there’s compounding.
Of course, we should keep in mind that public-sector debt has far lower rates than credit cards. 2-3% is pretty typical for Treasuries (though it varies by type and maturity period, obviously). The lower interest is, the less important compounding is.
From what the German press reported these last few weeks
revenue side
tax fraud estimated at 20 billion €/yr i.e. about 1,800 €/yr for every Greek man, woman and child
expense side
civil service not overpaid but much overstaffed due to a culture of patronage (e.g. 140,000 teachers, of which 18,000 cannot be found (don’t ask me - it was reported that way), for a population of 11.3 million)
generous pension system - average entry into retirement at 61 years with average pension at 95.7 % of previous salary