<div style="overflow: hidden; color: rgb(0, 0, 0); background-color: transparent; text-align: left; text-decoration: none; border: medium none;">see <a href="http://www.ft.com/cms/s/0/ee728cb6-773e-11e0-aed6-00144feabdc0.html">http://www.ft.com/cms/s/0/ee728cb6-773e-11e0-aed6-00144feabdc0.html</a><br>
<br></div><div class="ft-story-header"><h1>Europe is running a giant Ponzi scheme</h1><p>By
Mario Blejer
</p><p>Published: May 5 2011 22:47 | Last updated: May 5 2011 22:47</p></div><div class="ft-story-body"><div class="clearfix" id="floating-target"><p>One of the pillars upon which
the euro was established was the principle of �no bail-out�. When the <a class="bodystrong" title="FT In depth - Euro in crisis" href="http://www.ft.com/indepth/euro-in-crisis">sovereign debt crisis
hit the eurozone</a> this principle was ditched. As Greece, Ireland and
Portugal were unable to service their unsustainable levels of debt, a
mechanism was instituted to supply them with the financing necessary to
service their obligations. This financing was provided, supposedly, in
exchange for their implementing measures that would make their, now
higher, debt burdens sustainable in the future. Yet the mode adopted to
resolve the debt problems of countries in peripheral Europe is,
apparently, to increase their level of debt. A case in point is the <a class="bodystrong" title="FT - Portugal reaches deal on �78bn bail-out" href="http://www.ft.com/cms/s/0/b8e251a8-75c7-11e0-82c6-00144feabdc0.html">�78bn
($116bn) loan to Portugal</a>. It is equivalent to more than 47 per
cent of its gross domestic product in 2010, possibly increasing
Portugal�s public debt to about 120 per cent of GDP.</p><p>It could be
claimed that this mechanism is helping the countries involved since the
official loans, although onerous, carry better conditions than the ones
that need to be serviced. But the countries� debts will increase (as a
percentage of GDP the debts of Greece, Ireland, Portugal and Spain are
expected to be higher by the end of 2012 than at the start of the
crisis). The share of debt owed to the official sector will also
increase (in addition to the <a class="bodystrong" title="FT - ECB debt
buying plan suffers fresh setback" href="http://www.ft.com/cms/s/0/3ee5e0e6-75b2-11e0-80d5-00144feabdc0,s01=1.html">bond
purchases by the European Central Bank</a>, which reportedly owns 17
per cent of these countries� bonds with a much higher percentage held as
collateral).</p><div id="floating-con"><div class="nav-collection
clearfix"><h3 class="section"><span>EDITOR�S CHOICE</span></h3><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/0/e550a554-76f9-11e0-be6e-00144feabdc0.html">ECB
holds fire on interest rates</a><span class="pub-date"> - May-05</span></h4></div><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/3/935d6bda-7729-11e0-be6e-00144feabdc0.html">Lex:
European Central Bank </a><span class="pub-date"> - May-05</span></h4></div><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/0/4449b4c8-76fb-11e0-be6e-00144feabdc0.html">MPC
keeps interest rates on hold</a><span class="pub-date"> - May-05</span></h4></div><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/0/b7d79688-773e-11e0-aed6-00144feabdc0.html">Lisbon
reforms to focus on jobs and deficit</a><span class="pub-date"> -
May-05</span></h4></div><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/0/ad7c6ee8-773e-11e0-aed6-00144feabdc0.html">Portugal�s
�12bn bank fund questioned</a><span class="pub-date"> - May-05</span></h4></div><div class="clearfix"><h4><a href="http://www.ft.com/cms/s/0/ba665b52-766a-11e0-b05b-00144feabdc0.html">Global
Insight: Clouds darken ECB meeting</a><span class="pub-date"> - May-04</span></h4></div></div></div><p>Is
this ongoing piling of debt an indication of imminent defaults?
Probably, but not necessarily. An immediate default could result in
major market commotion, given the high exposure of European banks to
peripheral debt. Therefore, European governments are finding it more
convenient to postpone the day of reckoning and continue throwing money
into the peripheral countries, rather than face domestic financial
disruption. Consequently, as long as European and international money
(through the International Monetary Fund�s generous financing) is
available, the game could go on.</p><p>It is based on the fiction that
this is just a temporary liquidity problem and that the official
financing helps the countries involved to make the reforms that will
allow them to return to the voluntary market in normal conditions. In
other words, the narrative is that the recipient countries could and
would outgrow their debt. To �prove� this scenario is feasible several
debt sustainability exercises are being dreamt up. But the fact is that
this situation is only sustainable as long as additional amounts of
money are available to continue the pretence.</p><p>Here is where this
situation resembles a pyramid or a <a class="bodystrong" title="FT -
Asset purchases like �Ponzi scheme�" href="http://www.ft.com/cms/s/0/83307ab2-e382-11df-8ad3-00144feabdc0,s01=1.html">Ponzi
scheme</a>. Some of the original bondholders are being paid with the
official loans that also finance the remaining primary deficits. When it
turns out that countries cannot meet the austerity and structural
conditions imposed on them, and therefore cannot return to the voluntary
market, these loans will eventually be rolled over and enhanced by
eurozone members and international organisations. This is Greece, not
Chad: does anyone imagine the IMF will stop disbursing loans if
performance criteria are not met? Moreover, this �public sector Ponzi
scheme� is more flexible than a private one. In a private scheme, the
pyramid collapses when you cannot find enough new investors willing to
hand over their money so old investors can be paid. But in a public
scheme such as this, the Ponzi scheme could, in theory, go on for ever.
As long as it is financed with public money, the peripheral countries�
debt could continue to grow without a hypothetical limit.</p><p>But
could it, really? The constraint is not financial, but political. We are
starting to observe public opposition to financing this Ponzi scheme in
its current form, but it could still have quite a way to go. It is
apparent that, if not forced sooner by politics, the inevitable default
will only be allowed to take place when the vast part of the European
distressed debt is transferred from the private to the official sector.
As in a pyramid scheme, it will be the last holder of the �asset� that
takes the full loss. In this case, it will be the taxpayer that foots
the bill, rather than the original bondholders that made the wrong
investment decisions.</p><p>Is this good or bad? It all depends on how
one assesses the value of the time gained. Would a bank crisis now be
more damaging to the European economy than a future debt write-off? Or,
alternatively, is recognising reality and accepting a debt restructuring
now preferable to increasing the burden on future taxpayers? At the
end, it is a political decision, but it would be refreshing if things
are called by their name. Euphemisms may be useful in the short run, but
one finally recognises a Ponzi scheme when it persists.</p><p><i>The
writer was governor of Argentina�s central bank and director of the
Centre for Central Banking Studies at the Bank of England. Samuel
Brittan is away</i></p></div></div><br clear="all"><br>-- <br>P2P Foundation: <a href="http://p2pfoundation.net" target="_blank">http://p2pfoundation.net</a>� - <a href="http://blog.p2pfoundation.net" target="_blank">http://blog.p2pfoundation.net</a> <br>
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