Across the Atlantic Ocean, another financial disaster seems to be brewing.

After two years of surviving turbulent economic times and latching on to “glimmers of hope” of recovery, Greece reminds the world of just how fragile the global economic recovery is.

This past month, Greece’s government bonds were demoted to junk bond status, causing private capital investment to wither and further escalating fears of an economic collapse of the nation. Greece’s demise would trigger a financial downward spiral of the European Union.

Such fears have taken hold, as demonstrated by the rising dollar against the euro. Greece’s economic troubles parallel the United States and others, and their plight should be highlighted as what not to do.

Greece’s national debt ballooned to $414 billion this year as years of unrestricted spending, cheap lending and failure to implement fundamental reforms to financial and capital markets have jeopardized the nation’s balance sheets. While the debt itself may be alarming, many analysts point to the nation’s debt to gross domestic product ratio–a whopping 120 percent estimate for 2010, while the country’s deficit is close to 13 percent.

The inability and refusal of Greek politicians since the ‘90s to cut governmental spending, enact market reforms and stabilize lending has paved the path to Greece’s dire conditions. Only now, in the midst of a crisis, is the Greek government slashing more than half of public-sector employees and hiking taxes on almost anything imaginable.

As a result, workers are striking, and citizens are rioting and protesting the government’s actions. Paralleled with Greece, the situation in the United States is not so far off, as Washington refuses to cut spending or end the “too big to fail” mentality, which has yet to bring true reform to the nation’s financial institutions.

Greece’s only saving grace has been negotiations with Germany and France, which may provide liquidity to their neighbor. But French President Nicolas Sarkozy and German Chancellor Angela Merkel have been cool to the idea as the electorate has grown sour to countless bailouts. However, if Greece defaults, a domino fallout effect could knock out some of the marginal EU member states such as Portugal and Ireland. If others continue to collapse one after another, bigger countries could be overwhelmed by the fallout.

Such fears should be a lesson that governments ought to be prudent in spending, contain risks through diversified portfolios, and not end the practice of overextending benefits.

 

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