One of the fundamental aspects in order to be able to analyze the possible ways out of the debt crisis in Europe is the need to have a series of policy options, each of which presents in a clear and defined manner, as far as possible, costs and benefits.
If the feared solution is to achieve a balanced budget, what will be the costs in terms of potential growth? What are the different consequences of acting on the expenditure or revenue side? Is it really realistic to think of an expansionary fiscal contract, and under what conditions? How much would a possible exit from the Euro really cost, and who would bear the costs more? What costs would a partial debt restructuring entail for the financial system and for holders of government bonds? Is there really a long-term cost, in terms of interest rate differential, due to the partial default or do the markets, as suggested by the article, tend to have short memories?
It seems to me that the article by Michele Fratianni ("It's time to consolidate the public debt: here are the advantages of extending government bonds" on FIRSTonline of 25 October 2011) goes in the direction of clarifying the costs and benefits of the possible options , focusing on a possible debt consolidation. However, there are difficulties. How to determine, for example, how far it is necessary to go to reduce debt? There is a credibility problem: is it enough for the markets to demonstrate that they can reduce the debt/GDP ratio by 20% or by 50%? Another choice concerns the possibility of acting on external or domestic debt, making the maneuver "pay" mainly to resident citizens or to the foreign sector.
To try to orient yourself among the possible options, it would be advisable to look at what has been done elsewhere, in the more or less recent past. The experiences of the Brady plan, the Argentina crisis and Uruguay's debt consolidation can teach us something. More recently, we can look at the experience of Jamaica, although it is a very different economy in terms of development levels, size and economic structure from the European ones.
In Jamaica, over the past few years, public debt has exceeded 130% of GDP and interest expenditure has reached 25% of GDP, causing a sharp contraction in public investment and social spending, a slowdown in productivity and a consequent economic stagnation. In 2010 the government, together with the International Monetary Fund (IMF), implemented a debt restructuring plan (Jamaica Debt Exchange – JDX), aimed at reducing the average maturity of domestic debt and the average interest rate applied to new bonds. The plan, aimed at preserving the stability of the financial system (which owned a large part of the domestic debt), involved almost all of the eligible debt stock (65% of the domestic debt) and resulted in lower interest payments, in the order of 3% of GDP. Overall, this is a maneuver that does not completely solve the problem, since the debt is still at high levels that jeopardize its future sustainability (see Article IV of the IMF of 2010 and a more critical document of the CEPR). However, what is relevant to the European experience is the possibility of designing restructuring plans as efficient as possible.
