x Abu Dhabi, UAEFriday 19 January 2018

Band-aids won't stop bleeding in this debt crisis

As the sovereign debt crisis grows deeper, nothing travels quite as fast as fear, and the political courage to repel it is in short supply.

Politicians as well as bankers led the world into this maze of sovereign debt troubles, but only politicians can lead the world out of it. Yet it is far from clear that the leaders who matter have the courage, wisdom and political capital that the crisis demands.

While Greeks prepare for Sunday's elections - and a possible exit from the euro zone - the spotlight has shifted to Spain, which has just been promised loans of €100 billion (Dh459 billion) to prop up its troubled banks.

This crisis is not just European: the International Monetary Fund warned on Saturday that the UAE and the whole GCC also face risk if the debt crisis overflows the euro zone and spills around the world. Already, southern Europeans are withdrawing cash from troubled banks. Interbank lending is drying up. Nothing is quite as contagious as fear.

The day after the Greek vote, when G20 leaders assemble in Mexico, they will certainly have plenty to talk about. And they may raise their voices. Governments worked together in the markets crisis of 2008-9, but there is now much less accord.

And what is the solution? Some in Europe are talking about a "redemption fund" of pan-European bonds; debtor states would use their gold reserves as collateral. But the formation of a single European finance ministry, which the euro logically requires, is still politically impossible.

There are two approaches that deserve attention, both of them global, not merely European. The obvious one is economic growth. Inflation would reduce the real value of the debt, but it is destructive. Much better to spur growth by opening labour markets, encouraging competition, ending import restrictions and otherwise facilitating free trade.

Entrenched interests will fight such measures fiercely; political leaders will have to explain to voters that these growth policies can serve all.

The other approach is inspired by the Club of Paris, a still-functioning but little-noticed group of richer countries that has helped developing countries restructure their debts to avoid default since 1956. The Club proved its value during the 1980s Latin American debt crisis.

Now that so many governments are in debt trouble, a new self-help version of the Club might prove useful. This would take the form of a grand bargain of most or all major economies, with "haircuts" all around and some kind of enforceable guarantees to limit future sovereign borrowing. This would amount to one enormous "reset" of global debts.

Hard to imagine? Harder to orchestrate? Unjust to some? Unpopular with voters and banks alike? No doubt. But drastic problems call for drastic measures.