Friday, February 5, 2010

Reinhart : You can rescue one country. You can maybe rescue two. But you can’t rescue all of them.

WSJ's Jon Hilsenrath interviewed University of Maryland Professor Carmen Reinhart co-author of, “This Time Is Different: Eight Centuries of Financial Folly,” a catalogue of financial crises, their causes and consequences.

In the interview she provided a guide to the countries that have currently have the greatest debt problems, and possible outcomes:
WSJ: How serious a danger do you see in Greece right now?

REINHART: Since independence in the 1830s, Greece has been in a state of default about 50% of the time. Does that tell you something? They were in a state of default until the mid-1960s. If you relocated Greece right now outside of Europe, anywhere, you plop it down in Latin America or Asia or anywhere else, bet on an Argentina-style default. But it is a part of Europe. The European community sees itself very threatened by this. They’re going to do what they can. What I think is a likely scenario is that rather than have a default with a big bang, we’ll have a quieter type of default. If you look at a Standard & Poor’s definition of a default, it is anything that changes a debt contract to less favorable terms from the original contract to the lenders. In other words, lower interest rates or longer maturities. What we’re already seeing in Greece is the makings of that. We’re going to see a voluntary and less-than-voluntary shifting in Greece from marketable debt to non-marketable debt, with a bit of arm twisting.

WSJ: The market is asking, ‘Who’s next?’

REINHART: There are a lot of scary scenarios out there. Take governments that were virtuous governments, and continue to be virtuous. I’m talking about Ireland now. Their public debts were trending down and they have acted quickly and they’re credible. But external debt in the private sector is huge, more than 300% of GDP. In a crisis environment, private debts become public debts pretty quickly. Who knows what will happen with the Iceland referendum, and whether they vote to default on the Danish and the Brits.

WSJ: Are we seeing a second-wave of financial distress?

REINHART: [My co-author]Ken [Rogoff} and I have been arguing fairly forcefully that historically, following a wave of financial crises especially in financial centers, you get a wave of defaults. You go from financial crises to sovereign debt crises. I think we’re in for a period where that kind of scenario is very likely. I don’t think a repeat of the fall of 2008 is at stake here, where it looks like the world is going to end. But I do think there is still, for reasons that are beyond me, quite a bit of complacency out there. Eastern Europe is another source of concern, and Europe has limited resources. You can rescue one. You can maybe rescue two. But you can’t rescue all of them. The Baltics are very vulnerable. Romania is vulnerable. Hungary is vulnerable. Problems in these countries feed back to their lenders. Austrian bank exposure to Eastern Europe is great. The Italian exposure to Eastern Europe is great. The Swedish exposure is non-trivial. You started out with a major financial crisis in 2007 and 2008, in which some of these countries have seen their worst recessions, in a way that really harms fiscal sustainability, even if you were in a good shape fiscally at the outset of the crisis. It is the pattern that has been prevalent in the past, that these major financial crises have been followed by an afterwave of debt crises.

1 comment:

  1. I read that book. It was beyond boring. They make it sound so exciting and comprehensive and eye-opening (800 years of history! Lots of countries!) but it's just confusing chart after confusing chart, with little bits of obvious narrative here and there. It tries so hard to be scientific about the whole massive debt situation, but fails because ultimately there's always more to the story than that. One of many reasons why Austrians reject empiricism so strongly.

    This book is getting touted as some kind of new prophesy/authority for this crisis, that it's a guidebook for resolving it-- it's no such thing! Both the authors are globalists that worked/work for the IMF who believe that establishing the IMF as a world financial superregulator will solve all our problems. It's actually painful to read their suggestions and consider that they actually think they will work and will not suffer the same shortcomings that lesser-regulators do (such as regulatory capture, inability to calculate, political interference, etc.).

    She's a dangerous woman. Dangerously naive.