Courtesy of Mish.
In response to Spain Needs to Debate Leaving the Euro; Tooth Fairy Economics I received a nice email from Michael Pettis confirming my translation was correct. He also attached the original article in English.
Michael Writes …
Thank's Mish.
I am attaching the original, but the translations you got were basically right and covered the main points, which you understand anyway.
- Excessive debt impedes growth, and very few sovereign debt crises in history have been resolved by growth
- The only other way to "resolve" a debt crisis is to assign the losses to one group or another
- It is usually workers through unemployment and middle class savers through hidden or explicit taxes who end up paying
- It may or may not be worthwhile to save the banks at the expense of the middle and working classes, but at the very least we should discuss it openly and make sure that this is what we have really decided is in the best interests of the country.
Michael
Original Text in English
Spanish Government Debt is not Sustainable
Within four years of the 1837 crisis, before it was truly a united country under a central government, two-thirds of American states, including several of the richest, defaulted on their foreign debt. The US survived. If the European Union is to survive, European debt must be resolved. The longer we wait, the more likely a permanent breakup of the euro and the European Union.
Depending more on faith than on economics or history, Madrid assures us that with the right reforms Spain will eventually grow out of its debt. Every country facing a debt crisis has made the same promise, but has nearly always failed. Excess debt itself prevents growth, and even without the straightjacket of the euro Spain probably cannot grow out of its debt.
Even those who reject debt forgiveness admit that only Germany’s guarantee, hidden behind the ECB, prevented Spain from defaulting. Because the German banking system could not survive a default even in one country, they point out, Berlin has no choice but to guarantee Spanish debt forever.
They are terribly wrong. In spite of their hateful policies right-wing extremists throughout Europe have succeeded mainly because protecting the euro and the European banks creates tremendous costs for the working and middle classes. By attacking Europe, these extremists exploit the refusal of Europe’s leaders to acknowledge their mistakes. The longer the economic crisis continues, the greater their prospect for winning, and the greater the likelihood of national defaults and an end to Europe.
But even without the extremists, Spanish debt cannot be sustained. Only the promise by the ECB in July 2012 to do “whatever it takes” to protect the euro prevented Spain and other countries from defaulting. But as debt continues to grow faster than GDP throughout Europe, the ECB’s burden increases inexorably month by month. At some point growing debt and more weakness in the German economy will threaten the credibility of the ECB guarantee, which will become worthless – slowly at first, and then very suddenly. Spain’s default would follow within months.
What is more, Germany’s willingness to support European debt is not permanent. In order to protect its banks Berlin is playing the same game that Washington played with Latin America in the 1980s. While debt is continuously rolled over, German banks are rebuilding capital to protect themselves from the default many in Berlin believe will come …
Picture source.
