Why do nations not understand the dangers of building up unsustainable debt?

In recent article from the Associated Press, Greece actually had the audacity to go on a tirade about Moody’s reducing its debt grade to further below junk bond status. Their major argument is now that they may default on its loans, because a decline in credit rating, means that the country will borrow at a higher interest rate in order to compensate for the risk for the possibility of default. 

In my personal opinion, Greece has no right to complain about being downgraded because they refuse to change their policies. They honestly believe that debt means nothing when they pay their public employees substantially higher wages and better benefits than their private workers as well as their waste of social programs that have done little to end poverty within the nation as 20% of the country lives below the poverty line. Moreover, they finance this expense by high taxes and borrowing money from other nations. It is also interesting to note that their public debt is 144% of their GDP (2010). In addition, this country has a 12% unemployment rate. They have a service based economy making up 78.5% of their economy while both agriculture and industry is relatively low meaning they do not produce many goods.  Lastly, their GDP growth rate has continued to decline, which means their economy is shrinking.

If Greece actually wanted to improve its situation, it would reduce its spending and try to develop its industry and agriculture sectors as well. This way they could reduce the amount of debt they accumulate to sustain excessive wasteful spending and would have goods that they could export to bring in more revenue to help pay down their debt. However, this seems to be more difficult to do then said, and the political leaders are not even thinking about doing such a thing, thus their economy will continue to shrink and standard of living will plummet as they fail to understand basic economics.





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Filed under Financial Crises

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