Wall Street Journal
April 18, 2011
Political risks are rising across the euro zone—and not just in the peripheral countries most weighed down by debt.
The success of the anti-European "True Finns" party in Sunday's Finnish general election could roil markets. It follows a week when yields on Greek government debt hit 13% and Ireland's debt was downgraded to a few notches above junk. Not surprisingly, there are growing calls to end the bailouts and push ahead with a rapid restructuring. But this would be a mistake.
Sure, an immediate restructuring is superficially appealing. If you believe that Greece, Ireland and Portugal are facing crises of solvency, not liquidity, then there is no way these countries can exit their current problems without writing off some of their debt. The sooner their fiscal positions are put on a sustainable footing, the sooner households and companies can start spending and investing again, enabling the economy to grow.
What is more, the longer this decision is put off, the more the peripheral-country debt burden is shifted onto wider euro-zone taxpayers, whether openly via bailout packages or stealthily via European Central Bank liquidity programs.
Even so, there are three good reasons to delay. First, it makes little sense to restructure any euro zone member's debts while it is still running a primary deficit, excluding debt interest. A country that defaults would find itself shut out of debt markets so the government still wouldn't be able to pay its bills without continued support—defeating the purpose of the restructuring, which should be to draw a line under the crisis.
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