Satyajit Das: Defaults Are Needed in Euro Zone
With yields on Portugal now above 7.4%, many are predicting Portugal will soon need a bailout because it cannot reduce its debt load with yields that high. Portugal simply cannot grow its economy fast enough to pare debt with yields that high. Satyajit Das, author of ‘Traders, Guns & Money‘, says the reality is that defaults in the Eurozone are inevitable. The ECB has played a crucial role in funding the periphery through this crisis. However, this is just a short-term solution. The euro crisis is not a liquidity crisis but a solvency crisis because the debt loads cannot be worked off without some kind of debt relief. Some in the periphery don’t have the growth or the tax base available to keep the debt loads from spiralling upward.
I would argue that the only country in the periphery which truly had a solvency crisis from the start is Greece. However, the way that the eurozone and the periphery governments have dealt with the problem has created serious contagion. Ireland has allowed a banking solvency problem to shift into a national solvency problem, Spain has dithered in cleaning up its savings bank problem and Portugal has been caught up in the mess due to contagion. At this point, that’s neither here nor there because the yields on Portuguese bonds make it impossible for Portugal to reduce its debt without some sort of bailout or default. What the periphery now faces is the prospect of austerity and internal devaluation followed by continued doubts about their longer-term solvency. Das, a frequent contributor at Naked Capitalism, argues that this path puts the the eurozone periphery in a death spiral. See his post "Satyajit Das: European Death Spiral – Mission Unaccomplished. What the periphery needs is growth.
In the CNBC Europe video below, he cogently makes this case and suggests a proper longer-term plan involves leaving the eurozone.