El-Erian: Europe using same losing game plan for Portugal as was used for Greece and Ireland
Mohamad El-Erian was in the FT stating the obvious, that is, when you are insolvent, you don't get into more debt. But Europe doesn't seem to like that solution. Austerity is an issue, but the honest thing would be for the European countries to declare bankruptcy. Via PIMCO:
Enlarging the lending resources of Europe’s rescue fund would do nothing fundamentally to address the unsustainable stock of debt and its adverse impact on growth, investment and employment.
More people are recognizing that the time has come for another approach, one that involves the orderly restructuring of some European sovereign debt on terms that allow a meaningful chance of re-accessing markets in the future at sustainable rates.
Last week, higher borrowing costs raised concerns as to whether Portugal could successfully tap the market in a regularly scheduled government bond auction. Fearing that the country would join Greece and Ireland in both losing access to new market funding and facing alarmingly high risk spreads on existing debt, the official cavalry jumped into action.
Portuguese officials sought to reassure the markets of their fiscal credentials. The EU talked of enhancing the flexibility of its rescue funds. The European Central Bank stepped up its market intervention, buying millions more Portuguese bonds. To make absolutely sure that the auction would succeed – and it did – China and Japan signalled their willingness to buy European debt instruments.
This is the same game plan that was used for Greece and Ireland. The probability of success is the same – very low.
You do not solve a debt problem by adding new debt on top of old debt. Yet it seems that European officials are fixated on this approach. How else would you explain the two main proposals discussed ahead of today’s meeting – namely, to enlarge the lending resources of the rescue fund and enable it to buy existing debt?
If implemented, this would do nothing fundamentally to address the unsustainable stock of debt and its adverse impact on growth, investment and employment. Instead, it would facilitate an even larger and quicker transfer of debt from the private sector to the public sector.