Paul Blustein's Laid Low, and Some Musings on the Next Crisis

(This is a joint post by Mark Weidemaier and Mitu Gulati)

We jointly teach a class on international debt, focusing on what happens when sovereign governments and the entities they control go bust. We love this class, because we work with our students to design a restructuring plan for a country in financial distress, and our students often come up with terrific ideas. This semester, we're focusing on Venezuela, which would involve an enormously complicated restructuring. One reason is that Venezuela has not exactly cozied up to the IMF, which typically plays a key role in a restructuring. To get a sense of the IMF's role and limitations, we asked our students to read Laid Low, Paul Blustein's new book about how the IMF played a part in managing (and mismanaging) the Greek debt crisis. Blustein is a terrific story-teller, with rare access to key players at the IMF and elsewhere. Although we followed the European debt crisis closely, much of what's in Laid Low was new to us.

Every crisis is unique. For the Greek crisis, the reason was that it hit Europe, which was supposed to be immune to such things. But the crisis showed that many governments in the "new third world" (to quote Michael Lewis) had over-borrowed to a spectacular degree. Meanwhile, the supposed "grown-ups" in the room--institutions like the IMF, the European Central Bank, the Bundesbank, and the US Treasury--didn't see the tsunami coming.

A lesson that emerged from the Greek crisis--and a major theme of Laid Low--is that the IMF and European authorities failed to recognize the depths of the crisis. At first, some European leaders simply refused to acknowledge that a Euro area member could go bust, becoming apoplectic if anyone so much at uttered the word "restructuring." The result was that official actors did not plan for the inevitable. Then, when it was finally acknowledged that Greek debt was unsustainable, projections about what it would take to return the country to sustainability were consistently over-optimistic. "Too little, too late" is not a good recipe for a quick return to financial health. So it is no surprise that Greece is still mired in a debt crisis--only now its debts, formerly in the hands of private investors and relatively easy to restructure--have been heaped on the backs of European taxpayers. It will not be easy to wipe these away (though "creative" accounting may allow European governments to pretend otherwise). 

It is not unlikely that we will see another sovereign debt crisis in countries formerly thought to be immune. The Italian debt stock is so enormous, and the country's growth so anemic, that we shudder to think of the consequences of a crisis in that country. The institutions that manage such crises need to learn from their past mistakes. With a country like Italy, "too little, too late" could be a recipe for disaster.