The Show Isn't Over Yet

Jul 13, 2010

Recent fiscal performances have been a mixed bag. The troubled Greek government finally pushed through significant pension reform, but doubt still lingers over their long-term viability. At the same time, trouble on the Iberian Peninsula seems to be brewing. To top it all off, the head of a global banking giant has warned that we aren’t out of the woods just yet.

Starting with the positives, the New York Times reports that Greece has finished major legislation to improve their fiscal outlook. Changes include upping the retirement age from late 40s to a flat 65, modifying the formula used to calculate pensions, and making it easier for private companies to fire employees. The legislation was met with obvious displeasure from Greek citizens, though the protests resulted in only one injury and no arrests, a serious improvement from the previous riots. In fact, the New York Times speculates that this calmer opposition may reflect a wider acceptance amongst the Greek populace that spending cuts have become necessary.

While this is obviously a positive step for the Greek government, they are still getting hammered in the bond market, where traders cannot shake the fear of an imminent debt restructuring. As a result of these jitters, the yield on Greek long-term bonds is still an incredibly high 10 percent.

Travelling westward, Portugal got hit today with another sovereign debt downgrade. This two-notch drop by Moody’s follows S&P’s two-notch drop in early May. Citing a growing debt-to-GDP ratio and very modest projected growth, Moody’s does not seem to be forecasting a pretty future for Portugal. Moody’s view on Portugal is now much closer to that of the other two major ratings agencies, S&P and Fitch, both of which have a similarly negative outlook on Portuguese creditworthiness.

Finally, Stephen Green, the Chairman of British banking giant HSBC Holdings, has warned that, though we are “on our way out,” the fiscal crisis is not over yet. He claims that the possibility of further macroeconomic shocks from indebted nations and protectionist policies enacted by countries struggling to boost growth underscore the need for global fiscal cooperation and coordination.

Though it may be unpleasant to watch, it is quite obvious that the global fiscal dance is far from over. Intermission just ended, and the critics are still debating over whether the second act will see the dreaded double-dip or simply a slow recovery. One thing, however, is for certain: if the United States doesn’t get its fiscal policies in order, we may soon be entering stage left.