How to Climb Out?

Moisés Naím / El País

Denial (nothing's the matter). Rage (why me?) Negotiation (what can I do to postpone the inevitable?). Depression (why do anything more? It's all over). Acceptance (the world will go on). According to Elisabeth Kübler-Ross, these are the five stages one goes through in facing death or catastrophic loss. Perhaps she never imagined how useful her schema would be in understanding the behavior of a government faced with a grave financial crisis. The Argentineans (several times), Brazilians, Mexicans, Russian and Asians passed through these stages. Now it is the turn of Europe (and the US, but that's another story). I do not know (and think nobody knows) how the present economic convulsions will evolve, or how the governments and the financial markets will react in their interminable interplay. We know that the 150 billion that the EU sent to Greece did not buy much, and that heretofore unimaginable austerity measures have been passed in Italy, Spain and other threatened countries. But nothing seems to work.

When prediction becomes so difficult, it is good to take a look at the past; even in the knowledge that the past is not always a reliable guide for guessing about the future. But an analysis of a large number of financial crises of this type has enabled Carmen Reinhart and Kenneth Rogoff, in This Time is Different, their magnificent book on "eight centuries of financial folly," to identify the five most common tactics that debtor countries have used to climb out of their indebtedness.

1) Grow. Expand the economy. Fiscal revenue thus increases; the weight of debt diminishes. Many countries have tried this; few have succeeded.

2) Stop paying. In more technical language this is called debt restructuring, or default. In practice, it is just the raw notification that countries give to their creditors that they will pay less than they owe, and over a longer term than they had initially promised. Reinhart finds that, since its independence in 1832, Greece has been in default 48 percent of the time. Argentina is also a frequent deployer of this tactic.

3) Austerity. This is a word as painfully familiar now to Europeans as it was in the 1990s to Latin Americans, Russians and Asians. It means Draconian cutbacks in public spending, both in the superfluous and in what is less so. It reduces debt, but brings protestors out in the street, and can bring down governments.

4) Inflation. When prices rise, the value of debt in that currency diminishes in line with the rate of inflation. Inflation is bad for the economy, especially for wage-earners, and alleviates the debt problem in a less politically strident way, but does not solve the problem of debt in other currencies.

5) Financial repression. This occurs when governments channel toward themselves funds which would otherwise go to other purposes, or exit from the economy. The range of measures is tempting, dangerous and... frequently used. They include limits on the interest rates paid by the government, the obligation for banks to use public debt as part of their reserves, the nationalization of all or part of the banking industry, and controls on the free international flow of capital. It sounds extreme, and is. But it was in vogue in the less developed countries from the 1960s to the 80s. Reinhart, who suspects that measures of this sort may come back into fashion, points out that they were also common in the United States and other developed countries between 1945 and 1980, and were essential in helping to liquidate the debts accumulated in World War II.

None of these five tactics excludes the others. In particular, inflation and financial repression often go together.

Again, I don't know how this crisis will evolve. But the ideas in this book do help to visualize what lies behind many of the stories now in the news.