Increasing Complexity in Resolving Financial Crises

This Reuters analysis looks at what comes next in crisis resolution, especially in terms of European debt:

“It took $5 trillion and an unprecedented global coalition of G20 countries to stabilize the economy after investment bank Lehman Brothers collapsed in 2008. Quelling the next phase of the financial crisis may be even harder.

To stop the panic that erupted nearly two years ago, governments transferred a mountain of debt from private to public accounts. Now, those government debts are distressing financial markets and there is nowhere left to shift the burden.

Europe’s clumsy response to Greece’s debt woes highlighted the economic and political headaches that await debt-laden countries and those who finance their borrowing.

European leaders have yet to convince investors that they have a credible short-term plan to contain government deficits and a long-term answer to the region’s slow growth. Until they do, financial markets will remain volatile, and the hard-fought economic recovery is in jeopardy…

Fixing the problem will require money and political will. One cannot work without the other, and both are lacking.

I’ve said before “you cannot borrow your way out of debt anymore than you can drink yourself sober.” The various crisis leaders should keep that in my mind as they take the easy route — throw more and more money at the problems, but fail o make the hard choices when it comes to resolving them.

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Source:
Next phase of financial crisis may be the hardest
Emily Kaiser
Reuters May 21, 2010   
http://www.reuters.com/article/idUSTRE64K6B120100521

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