Outstanding: When do we decide that Europe must restructure much of its debt? By Michael Pettis · February 25, 2015
Greece and Europe, in other words, have a choice. They can choose to restructure Greek debt explicitly, with substantial real debt forgiveness and with the costs optimally allocated in a way that maximizes value for all stakeholders, or Greece can continue to struggle for many more years as the debt is resolved implicitly, with the costs allocated as the outcome of an uncertain political struggle.
Until one or the other outcome, the country is not a viable creditor and it will not grow.
Most people also understand that the Greek debate is not just about Greece but also about whether or not several other countries — Spain, Portugal and Italy among them, and perhaps even France — will also have to restructure their debts with partial debt forgiveness.
What few people realize, however, is these countries have effectively already done so once. This happened two and a half years ago at the Global Investment Conference in London when, on July 26, 2012, Mario Draghi, President of the European Central Bank, made the following statement....
It is important to understand why this was effectively a kind of debt restructuring.
With Draghi’s statement, there was an immediate transfer of wealth from the ECB — or, more appropriately from the group of countries behind whom the credibility of the ECB is maintained, and this means Germany above all — to the governments whose creditworthiness was in doubt.