Sir John Templeton, awarded “Stock Picker of the Century” by Money magazine, once cautioned that the most damaging phrase in investing is, “this time it’s different.” Europe needs to learn from this.In a column in the Financial Times by John Paul Rathbone, “A beginners’ guide to debt crises; lessons from Latin America,” he cautions that unless Europe heeds the lessons from Latin America, “It risks falling victim to the same vanity today.”
Of critical importance is a popular mandate for the needed reforms. Without that, Rathbone warns in his Financial Times piece, “any government is just a caretaker.”
The inevitable resentment against a lender will result, according to Rathbone. This will also push down private debt as any loans from multi-lateral organizations like the International Monetary Fund or China will entail seniority status.
Any previous lenders will quickly find themselves devalued into a “junk rating.” A major factor different for Europe is that “banks are also part of the crisis, which is a much a problem of over-lending as over-borrowing.”
The one advantage Europe has, writes Rathbone, is much stronger societal institutions.
After more than 10 euro zone debt summits with no agreement in sight and a mass sovereign debt devaulation being threatened, the value of these is certainly called into question.
And, as Rathbone warns and no doubt Sir John Templeton would to, that “higher economic costs always follow poor and tardy policymaking.”