American politicians proved at the weekend that the world's largest economy is offering a shoddy model of fiscal responsibility. On top of poor job numbers, the failure to agree on budget cuts and raising the debt ceiling sent worrying signs to the global economy. Not that Europe needed another reason to be gloomy.
For months fears of financial contagion from the Greek crisis have troubled the euro zone. The US dilemma reinforces the point that it is not just Europe's affliction, but that many countries a common problem. From Japan to Italy to America, top-tier economies are struggling under debilitating burdens of sovereign debt.
In a faltering global economic recovery, it's a reality that has to be met with a clear eye and a steady nerve. In the long term, it is not just Greece that will have to swallow austerity measures; but immediately, we have to admit that bailouts are not working and some of the debt has to be written off - perhaps as much as 50 per cent in Greece's case - and the rest restructured for gradual payment.
Last week there was further evidence that Greece wasn't the exception. The credit ratings agency Moody's demoted Portugal's debt status to junk; even worse for the euro zone, ratings agencies were warning about Italy's debt. Its costs of borrowing are rising just as it needs to refinance 26 per cent of its debt - Italy must pay $253 billion (Dh929 billion) in maturing bonds and bills by the end of the year and $352 billion next year.
The euro zone's troubles today will seem inconsequential if major economies like Spain and Italy start needing bailouts to service debt. The Greek rescue packages meant to stop that snowball have done little: nobody is convinced that staving off a default, by borrowing more, is a long-term solution.
Italy's shocks over the last few days prompted an emergency meeting of the European Central Bank this morning. There is some room for monetary policy fixes, such as lowering interest rates or increasing money supply, but the meeting will also focus on speeding up the second Greek bailout package. It would do better to combine that bailout with debt restructuring to staunch the bleeding.
The word "default" was even being bandied about - unnecessarily - regarding US debt yesterday. Not even Washington's partisan politicians will fail to reach a deal that will stave off that eventuality. But it is a symptom of a larger problem: borrowing more isn't the answer to excessive debt levels.