Financial Times
May 4, 2011
In this column in December, I suggested the European Union follow a path similar to the Brady-plan approach to Latin America in 1989, to actually lower debt and interest payments. Despite EU leaders’ insistence that they would continue the current programme of bail-outs, there is greater interest in understanding how debt and interest payments can be lowered.
The shift was prompted by a senior Greek official’s admission in April that the country might need “more time” than provided by the bail-out programmes so far. German finance minister Wolfgang Schäuble muddied waters by admitting that “further measures” could be required to calm the Greek debt situation as yields on two-year Greek paper soared.
How, specifically, should the EU proceed with the restructuring? Failure of measures undertaken in Latin America between 1982 and 1985 are themselves helpful in suggesting what to avoid. I participated as a member of an investment team deciding on Latin American debt during the mid- to late 1980s. My assessments related to the countries’ macroeconomic firepower, and the willingness, to continue interest payments. With the region’s deteriorating debt service capacity during that decade, “shorting” the debt – borrowing a bank loan, promising to replace it after a set period for a fee – seemed a sure-fire way to make money.
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