European Economy Today

Unbelievable: the Latin American model will be the key in solving the problems of the European Union.

At present time the world’s economic concerns revolved around a familiar ghost, Greece. It is likely that within weeks, or perhaps days, the Greek state to stop paying their debts, and subject, now in default.

Has only been a year since the rescue by 110,000 million euros orchestrated by the International Monetary Fund (IMF) and the European Union, but economic difficulties for Athens are more pressing than ever. His government bonds are paying interest of 20% per year (versus 3.3% in Germany), which has raised the Greek public debt to 140% of its Gross Domestic Product (GDP). If you continue to grow at this rate, next year equal to 160% of GDP and the reality would be obvious to everyone: this debt is not payable. In Greece, as in Ireland and Portugal, are committed to several European banks, particularly the French and Germans.

Europe has gotten into a vicious circle, where countries are at risk of default is still indebted to accomplish in the short term, but raise its debt burden to unsustainable levels over the long term. Ending the vicious circle requires a fundamental solution: recognize reality and debt restructuring. This is the same life raft which had to turn Latin America during the eighties and that avoided bankruptcy in Mexico, Brazil and Argentina, among others. The famous Brady Plan, designed by Nicholas Brady, former U.S. Treasury secretary, was the solution reached by the government of George Bush Sr. when he realized that the debt of Latin American countries with banking could not ever be paid.

The Brady Plan offered a variety of ways to reduce the amount of obligations. The menu included from pardon of liabilities to lower interest rates and longer terms of payment. Ultimately, openly acknowledged that he had to write off a portion of the debt in exchange for certain commitments from these economies, as a condition for normalizing their access to international capital markets. Thanks to the Brady plan, seven Latin American countries managed to change the debts that were concentrated in a few foreign banks for loans atomized over the world, with much lower rates.

The Europe of 2011 is considering replicating the formula of the 80 Latin American. According to The Economist, which Greece need is a Brady Plan to forgive a portion of their debts and end the lie that will eventually be able to honor the debts that you currently have. The weekly London argues that the plan should reduce the debt of Greece for at least half the maximum that can really support this country.

The menu of instruments that face the European authorities to do that is identical to Latin America two decades ago: reducing the amount of debt, lower interest rates and longer terms of payment. Would offer even a kind of ‘premium’ to investors to also benefit from the recovery of Greece when it starts to happen.

The solution requires not only the interests of French and German banks, which have to be a big strip-but the political will of policymakers in the Euro Zone countries. German Finance Minister, Wolfgang Schauble, and began to move in this direction, saying in recent days it was open to the idea of ​​a debt restructuring for Greece.

The clock is ticking for the European Union and its financial system. The big question is who will pay the bill. Will European banks that marketed the bonds of Greece? Will these sufficient capital to withstand the loss of a debt forgiveness? Does this imply the need for capitalization, as the U.S. banks in 2008?

Where will that money? “Again, in the battered public finances in European countries? The Brady Plan, the blow took the multilateral banks and banks of developed countries. At that time, Latin America was in economic crisis, but developed countries and the banks were growing there. In Europe today, the crisis countries and the lending banks are part of the same region. It is obvious that someone can come out to rescue them because the United States also goes through great hardship. The silver is in Asia and the Middle East, regions that have few links of solidarity with Europe.

Many questions and few answers. The worst is just beginning.