Debt Downgrade for Greece (and Portugal)

Apr 27, 2010

In previous blogs, we have discussed how the three credit rating agencies have hinted that the United States needs to get its debt under control (see these blogs on Moody's, U.S. debt, and sovereign risk jitters).  Well, today, Standard and Poor’s lowered the boom on Greece by giving its government debt “junk status” (as well as lowering Portugal’s rating, but not nearly to junk status). Greece has already taken measures to cut spending drastically and it faces huge public outrage, including public employee strikes, at the necessary and severe cuts.  And the New York Times  reports that the vice president of the European central bank, Lucas D. Papademos, is warning that Greece may have to take even harsher measures to get its debt under control quickly.

While the United States does not face an immediate crisis, now is the time for the United States to act.  By announcing a credible plan to lower its debt, the United States can signal that it is serious about reducing its debt and avoid the crisis that Europe (and in particular, Greece) faces. In addition to giving the United States credibility with rating agencies and investors about its debt, it may also help stimulate U.S. economic growth.  And by implementing policies slowly to lower our debt, the United States can avoid having to make drastic and severe cuts quickly as Greece has been forced to do in recent weeks.