Rogoff: The Euro at Mid-Crisis

"The Euro at Mid-Crisis, by Kenneth Rogoff, Commentary, Project Syndicate: Now that the European Union and the International Monetary Fund have committed €67.5 billion to rescue Ireland’s troubled banks, is the eurozone’s debt crisis finally nearing a conclusion?


Unfortunately, no. In fact, we are probably only at the mid-point of the crisis. ... The endgame is ... likely to entail a wave of debt write-downs, similar to the one that finally wound up the Latin American debt crisis of the 1980’s.

For starters, there are more bailouts to come, with Portugal at the top of the list. ... The Portuguese rightly argue that their situation is not as dire as that of Greece... But Portugal’s debt levels are still highly problematic by historical benchmarks... Portugal will likely seek help sooner rather than later.

Spain is a more difficult case. The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater. The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt. Here again, history gives no cause for optimism. It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse.

But bailouts for Portugal and Spain are only the next – and not necessarily final – phase of the crisis. Ultimately, a significant restructuring of private and/or public debt is likely to be needed in all of the debt-distressed eurozone countries. ..."

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