The following is the Executive Summary of a longer article that offers up a credible and comprehensive plan for the European Debt Crisis, which deals with the periphery debt overhang and weak balance sheets of Europe’s commercial banks. It has some great ideas and well worth your time.
A Credible Solution to Europe’s Debt Crisis: A “Trichet” Plan for the Eurozone
In April 1989, Mexico’s external debt negotiator, Angel Gurria, asked his country’s commercial bank creditors for a 55 percent haircut. This was the opening pitch of the newly created Brady Plan, which finally addressed both the debt overhang of developing countries and the weak balance sheets of their commercial bank creditors, ultimately resolving the LDC Debt Crisis.
More than twenty years later, Europe is in the midst of a similar sovereign debt and banking crisis. The EU is in a destabilizing feedback loop that it cannot control. Sovereign credit is deteriorating and this is reducing confidence in national banking systems, causing or increasing the likelihood that sovereigns will have to assume bank liabilities. This further impairs the sovereign credit and increases the lack of confidence in the banks.
We review the basic tenets of the Brady Plan in the context of our personal experience working on many of these sovereign restructurings and how they could apply in a comprehensive solution for the European debt crisis. The markets and the Eurozone desperately need a positive confidence shock in the form a comprehensive plan that simultaneously addresses the sovereign debt overhang and the balance sheets of European commercial banks. (click here for full article)