http://online.wsj.com/article/SB10001424052748704638304575636830900220828.html
For almost 30 years, I have been covering sovereign debt crises.
I was working in the New York bureau of Reuters in August 1982 when Mexico announced it couldn't meet its debts. I followed Latin America's debt travails through the 1980s and Mexico's in 1994-95. I was on hand for the Asian crisis of the late 1990s and the subsequent rescue packages for Brazil and Argentina.
These experiences have led me to the following profound conclusion: Like Tolstoy's happy families, debt crises are all alike. On the other hand, like his unhappy families, they are also all different.
Many of these crises ended in default; some didn't. The difference between the two largely hung on whether an economy could grow out of its troubles. If Greece's rescue and Ireland's impending bailout aren't being greeted with relief by financial markets, that is almost certainly because of worries about low growth, which are heightened by austerity policies.
South Korea and the other Asian economies grew after their crises, so injections of emergency funding through financial rescues led by the International Monetary Fund were generally enough to tide them over and avoid default.
By contrast, the 1980s debt troubles of Latin American countries condemned them to slow growth. That initially forced rescheduling of their debts, stretching out maturities initially a year at a time and later over multiple years.
Bolder action was prevented by the weakness of Western banks whose balance sheets weren't strong enough to confront the reality that these governments were never going to pay their debts in full.
Rescheduling reduced the net present value of the debts, but not by enough to allow the governments to escape their debt traps. In a parallel with the euro zone's current predicament, governments could only reduce debt burdens significantly once the banks had had time to boost their capital cushions and recognize the losses. In retrospect, Asia suffered a liquidity crisis; Latin America a crisis of solvency.
But the lesson from both crises was: Don't borrow from banks at floating interest rates and don't borrow in somebody else's currency. Borrowing in your own currency at fixed interest rates was supposed to be the answer. That way interest rate spikes wouldn't create an unpayable interest bill across your entire debt. Neither would you suffer the ballooning of dollar debts that followed, for example, the sharp devaluation of the 1994 Mexican crisis.
Another lesson from past crises, such as the depression that followed Chiles's banking collapse in 1981, is that private debt matters. In a crisis, excess private-sector debts will almost inevitably become public debts as they did in the U.S., U.K. and with devastating effect in Ireland.
Euro-zone governments didn't borrow at floating rates but many are now realizing that they didn't borrow in their own currency either. The peripheral countries of the euro zone borrowed in a currency that belonged mainly to Germany and the other core countries of the euro zone. As a number of correspondents have suggested to me, this isn't a true sovereign debt crisis because the countries involved don't have sovereign control over their monetary and exchange-rate policies.
But the euro did allow governments such as in Greece and Portugal to pile on debts that otherwise would have been recognized as unsustainable. When governments in what used to be called the third world defaulted, they often did so with those debts at between 40% and 60% of GDP.
Bond investors and bankers would quickly become nervous of high debts and deficits. In the mid-1990s, most Latin American countries, based on their debts and deficits, would have qualified under the euro zone's membership criteria.
By contrast, euro-zone governments were able to pile on debts for a decade way beyond what would have been tolerated of Latin America.
This has prompted another marked difference with past sovereign debt crises: the size of the debts relative to the size of the economies concerned. Ireland's probable bailout will approach 50% of gross domestic product. Spain's financing needs over 2011-13 to cover its budget deficits and its debt maturities are estimated at €350 billion ($467 billion).
European politicians are going through what all politicians do in such crises, phases of denial, shock and finally acceptance.
National governments struggle in such circumstances so it is small wonder that a loose economic confederation of states united by not much more than their common currency presents a spectacle of confusion.
As euro-zone members fashion a rescue plan for Ireland, with little sign that it has prevented contagion to other peripheral states in the currency area, I am reminded by what a senior U.S. policy maker told me in the late 1990s after he had backed a bailout plan for Brazil: "There is one thing worse than failure," he said, "and that's failure that takes a lot of your money and credibility with it."
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