Opinion

Mohamed El-Erian

Deal or no deal, debt drama is not going away

Mohamed El-Erian
Aug 1, 2011 13:58 UTC

Are you tired of all the stories on Europe’s financial crisis and American politicians’ endless bickering about debt and deficits? Are you tired of weekends of hectic negotiations as policymakers rush to cobble together some agreement before markets open? If you are, you are not the only one.

Millions of people, including stressed-out policymakers on both sides of the Atlantic, wish to put these issues behind them. Unfortunately, despite many announcements, they are unable to do so decisively, and for good reason.

So we better understand why, if we want to minimize the risk of collateral damage and unintended consequences.

To do so, you need only remember one rather clumsy phrase: “safe de-levering” (also known to some as “safe de-leveraging”), or the lack thereof. Consider please each word, starting with the second one.

De-levering refers to the rehabilitation of balance sheets that have gotten over-indebted to such an extent that they are unsustainable going forward. The contributing causes are usually numerous and many years in the making.

Is Europe’s debt crisis a “Lehman Moment” for America?

Mohamed El-Erian
Jul 5, 2011 14:37 UTC

By Mohamed A. El-Erian
The opinions expressed are his own.

With its high unemployment and stretched balance sheets, today’s US economy can ill-afford a negative shock from abroad. Yet, this is what it is experiencing. And it explains why markets go through bouts of nervousness about the debt crisis in Europe, and why American policymakers are worried about a foreign financial situation that is getting worse by the day.

Europe’s debt problem is indeed a headwind for what remains a disappointing US economic recovery. It dampens America’s export prospects, can raise the cost of borrowing for some American companies and diminishes an already low enthusiasm among banks to lend to households and small companies.

Having said that, it is unlikely, though not inconceivable, that Europe’s debt crisis would constitute a “Lehman Moment” — a situation that totally paralyzes American economic activity, puts the country on the verge of a depression and triggers yet another round of extreme crisis management measures.

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