The deepening crisis over Greece underscores what runaway and mismanaged government finances could do. The government of Greece is unable to meet its debt obligations which are falling due in the first week of May. It is somewhat a much bigger version of what had happened earlier in the year to Dubai. Ultimately, Dubai was saved by its much more affluent Gulf neighbours. Now Greece is hoping something similar happens.

At the heart of the Greece crisis is the huge debt that the government has notched up which it is now unable to service. The government is finding it impossible to raise funds from the market as interest rates on two-year Greek bonds soared to 16% according to market reports. This is exorbitant for even commercial organizations let alone for the government which cannot have returns anywhere approaching these rates. So the only alternative for Greece now is hoping to get concessional finance from the International Monetary Fund and, now it appears, other members of the Euro zone. The Euro zone members are caught between two cleft sticks: if they don't support Greece, Euro as a currency comes under pressure and the Euro zone economies face a related crisis. On the other hand, it is like bankrolling a country which paid scant attention to living within its means. Meanwhile, there are rumours that even Spain is staring into the face of a financial crisis of similar nature.

The Greek government has been living far beyond its means for years now. It hosted the Athens Olympics with great pomp and expenses. The Greeks had been enjoying high standards of living and liberal government support virtually on borrowed money. As a member of the Euro zone, it had the same currency as the strongest of the European economies. The market supported Greece on the false notion that as member of the Euro zone it will have the same economic strength as, say, Germany. It was a false notion and the fiasco over Greek finances now confirms it. Germany, which had built up its economic foundations through frugal management and hard work improving its overall productivity levels, is being asked to foot the biggest portion of proposed Greek bail-out package. No wonder that Germany as a country is resenting this.

The Greek crisis further demonstrates that a currency union without deeper integration of the economies and ultimately close political union cannot survive. Greece has been following its national economic policy which was totally different from those followed by the more conservative members of the Euro zone. They flouted the debt to GDP ratios agreed under the so-called Maastricht treaty. The productivity gains, the technology edge that made Germany the largest exporter in the world, were not part of Greek efforts. Both IMF and particularly Germany is now insisting that Greece must lay out a clear plan for expenditure cut and overall reforms before a bail-out package is agreed upon. For the European Union, the Greek crisis is a poser: whether it is judicious to extend a currency union to ever larger number of countries without really integrating these economies and their national economic policy making.

Hopefully, the crisis over bulging government debt will be confined to Greece. Because government debt has ballooned following the financial crisis and the Great Recession, there is fear that many other governments might also go bankrupt. The development is of course acute in the west, as the governments there have undertaken large fiscal stimulus to give push to demand in the midst of the worst recession since the 1930s. As mentioned, Spain is being mentioned as the next critical case followed by Portugal. UK has large fiscal deficit and large debt which is worrying. USA had largest of them, but with a continental economy and faster growth rate, the United States is looking like grappling with the situation better.

Until now, there was a belief that government debt was risk free. They were described as such, when government debts were called the “gilt-edged securities”. Now the government's promise to pay back is doubted and the gilt-edged has become somewhat leaden. This has also lessons for those who advocate government spending as having no material consequence on repayment. No, even the government has to respect the fundamentals of sound house-keeping. In fact, government debt is risk-free as long as it is under control and within prudent limits, as understood by the ordinary housewife. (IPA Service)