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The Council on Foreign Relations just released a great conversation on the Latin American lessons for the European debt crisis. With panelists Adam Lerrick, Chairman of Sovereign Debt Solutions Limited, Ernesto Zedillo, former President of Mexico (1994-2000) and William R. Rhodes, President and Chief Executive Officer of William R. Rhodes Global Advisers (and head of Citibank during the 1980s), and moderated by Roger Altman, Founder and Chairman of Evercore Partners, it provides wide-ranging insights on the issues the European Union faces.
Though a different time and place, much is reminiscent of the early 1980s in Latin America. Over a year later, Europe can barely contain, much less resolve its problems. Contagion is a growing threat, with worries over the last six months about Ireland, Portugal, Spain, and most recently Italy. The IMF struggles to play its traditional role – establishing the rules of the game, evaluating Greece’s progress, and (so far) certifying its compliance. The ever mounting costs of dithering too are there.
But, as the Europeans will quickly remind you, there are big differences that matter (though perhaps not the ones they are emphasizing – such as levels of development, culture, and institutional strength). The problem is, if anything, much worse today in Europe than it was in Latin America in the 1980s – debt to GDP ratios in Greece (160-170% of GDP) – Italy (roughly 120%) and Belgium (90-100%) are higher. Markets too are much more interconnected than thirty years ago, making it both harder to resolve problems, and more painful globally if you don’t. And with the Euro, Greece or others can’t devalue their way back to growth – a viable option for Latin American nations.
Latin America’s “lost decade” of the 1980s also holds cautionary tales for Europe. In searching for solutions the powers that be -- governments, banks, the private sector, and the IMF -- have to devise a plan that provides some sort of hope for the people that must live with it, otherwise it will be doomed to fail. They also can’t – or at least shouldn’t -- wait seven years to resolve the problem, the time between the Mexican default and the launch of the Brady plan.