What’s going on in Greece?
Greece is defaulting on a key debt owed to the international community—and the Greek government is putting the question of whether the country will default on even more government debt up for a popular vote this week.
How did Greece get into such a financial mess?
Too much debt. For the past twenty years the government of Greece has spent more than it has collected in taxes.
Wait, that can’t be all there is to it. The U.S. does the same thing, doesn’t it?
Yes, but the U.S. is a rich country with a good credit rating while Greece is not.
A good way to measure a country’s debt is to compare it to its GDP. The United States deficit averaged -3.03 percent of GDP from 1948 until 2014, reaching an all time high of 4.60 percent of GDP in 1948 and a record low of -12.10 percent in 2009 (low is bad). Greece averaged -7.19 percent of GDP from 1995 until 2014, reaching an all time high of -3.20 percent of GDP in 1999 and a record low of -15.70 percent of GDP in 2009. In other words, Greece spends about twice as much (as a percentage of its GDP) as does the U.S.
Let’s imagine two countries—Greece and the U.S.—as if they were persons: GDP would be the person’s “income”; the deficit would be “additional credit card debt”; and interest on the deficit would be like “interest on a credit card.”
The U.S. has a high income (16.7 trillion a year) and every year adds about 3 percent to the total it owes the credit card companies (the national debt). No one is too worried that the U.S. will default on its loans so the credit card companies give them a low interest rate (2.43 percent).
Greece, on the other hand, has a relatively modest income (242 billion, or 1/70 the size of U.S GDP) and adds a lot more to its debt every year (7 percent). Greece has a low credit score (i.e., the credit card companies aren’t sure Greece will pay off its debt) and so is charged a high interest rate (about 15 percent).
Now Greece is refusing to pay its creditors, causing financial turmoil throughout Europe.
If Greece is such a small economy why does it really matter if they default?