Motley Fool writer take on Greek finances: Weekly Walk of Shame: Greek Tragedy

[steve2470]

http://www.fool.com/investing/international/2010/05/05/weekly-walk-of-shame-greek-tragedy.aspx

By Alyce Lomax
May 5, 2010

Today's subject: When a government is beset by financial crisis, common sense dictates that it should pare back spending. Alas, to quote Voltaire, common sense is not so common. Thousands of Greeks are now protesting, even rioting, over the austerity measures their government has imposed to battle its disastrous debt. The Greeks' indignation seems shameful, if not downright bizarre.

Unfortunately, Greece's problems are only the tip of the iceberg for our global economic worries. Too many countries continue to carry unsustainable levels of debt.

Why you should be indignant: I'm not surprised that Germany and several other EU countries have balked at helping out their misbegotten Mediterranean neighbor. Greece not only spent more than it had, but also fudged its numbers to hide that fiscally irresponsible behavior. (As if it needed more bad publicity at the moment, Goldman Sachs (NYSE: GS) allegedly helped Greece conceal its debts.)

Last year, Greece's budget deficit reached 12.7% of its GDP, while its national debt as a percentage of GDP hit roughly 125%. My Foolish colleague Jordan DiPietro recently pointed out that Greece blatantly disobeyed EU deficit and debt rules to get into this mess, which has now become a huge risk to the Eurozone.

more at link above, critiques are welcomed.

[Kolesar]

1. our government's been spending money it doesn't have to make up for shortfalls from organic economic

...growth.

That part I agree with. Now the part I don't like.

... all to create an illusion of "business as usual." Sorry, Keynesians, but Greece and the Eurozone clearly show that long-term deficit spending is a lousy game plan for governments.

We needed a stimulus bill to make up for a loss in economic activity in this country. The stimuls gave the economy a 3% boost in spending, increased employment, and started companies spending on inventory and capital (machines, automation, and information technology).

[muriel_volestrangler]

2. I think this is the basic equation (all in the long term)

stable yearly deficit = public debt x GDP growth

For instance, if the public debt is 70% of GDP, and GDP growth is 2%,
stable yearly deficit = 70% * 0.02 = 1.4% of GDP.

That deficit, however, includes the interest paid on the existing public debt. So you can also say

Yearly spending - yearly revenue = public debt x (GDP growth - interest rate govt borrows at)

With, I think, the interest rate being 'after inflation' - eg if the actual interest rate is 3%, and inflation is 2%, then the figure for the equation is 1%.

But long term GDP growth, while economists would like it, runs into other problems, such as resource availability or environmental damage. So even a small long term deficit, say 1% of GDP, may be a problem.