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Remembering the Greek Debt Paradox

To restructure Portuguese debt will be at best a loss of credibility in the state of law and a loss of time; at worse it might just be the beginning of an unpredictable extrication of the whole of the Euro-zone system.

According to the latest available official figures, Greek public debt in relation to GDP in the third quarter of 2013 - that is, well after the 2012 debt restructuring - has already exceeded the level attained before restructuring, 171,8% against 170,3%. Projections point out to further public debt increases in subsequent quarters. The number one reason for the greatest financial restructuring in Europe after the Second World War, to diminish the public debt rate to GDP, simply did not work out. So the restructuring idea is out of fashion, right?

Wrong! A Portuguese impressive gathering of 74 personalities, including former leaders of all the political party spectrum, trade union and business association leaders, former finance ministers and top economic public opinion makers just signed a petition demanding a restructuring of Portuguese debt.

The idea was resisted fiercely but somehow paltry by the Portuguese Prime-Minister; he made projections showing how Portugal could reduce its public indebtedness to 60% of GDP given expected growth and interest rates. His calculations meant a transition of 135 years however. More importantly, the Portuguese public debt markets barely suffered any impact from the restructuring proposal.

Yet the proposal kept floating, as international heavyweights came into the scuffle supporting the restructuring. The original petition is drafted in quite a vague way, repeating the same argument on German post Second World War debt restructuring that was widely used before the Greek restructuring, but otherwise giving very few details on how and when the restructuring plan would occur and especially if there would be any change from the Greek experience.

Jens Bastian, a member of the European Commission Task Force for Greece in Athens from 2011 to 2013 makes a very interesting appraisal of the Greek restructuring that confirms most of the reasons why we should make our best to avoid such a prospect.

As he explains, the restructuring meant the transfer of credits from foreign banks, owing them to the public responsibility of the states supporting the European Stability Mechanism. Regarding the Greek banks owed public debt, their losses were covered by capital injections of Greek public funds and this is the main reason why Greek public debt did not change significantly after the restructuring. Social security funds, those which were owed funds in areas such as pharmaceutical companies, as well as private investors, were the big direct losers.

In short, there is no reason why one should believe that a debt restructuring in Portugal will fare better than it did in Greece, where it did not fare well at all. And I fail to understand how such a disastrous idea became so popular.

The point uniting both partisans and foes of the debt restructuring is their common erroneous belief that this crisis is a Portuguese public debt crunch. In fact the crisis - being especially acute in countries like Portugal and giving rise to a high public debt - is fundamentally a crisis of the Euro-zone economic and monetary policy. Its translation in public debt and its special sharpness in peripheral economies are side effects not root causes.

For an economic and monetary union to be sustainable, there must be an economic equilibrium among its members, translated into broadly balanced economic accounts - public accounts being an instrument to help achieving this goal rather than constituting the goal itself - and there has also to be a political equilibrium incompatible with high levels of unemployment and poverty.

The Portuguese problem with debt will be sorted out only when the external surplus side of the Euro-zone will start fuelling the European economy. The European Central Bank will be allowed to act in favour of growth and employment like a normal central bank and the loop-holes that undermine the European multinational companies' tax system will start to be addressed.

To restructure Portuguese debt will be at best a loss of credibility in the state of law and a loss of time; at worse it might just be the beginning of an unpredictable extrication of the whole of the Euro-zone system.

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