For private debt the scenario of debt both remains

The rescue of the public debt of the Greece by the IMF and the European Union overlooked a major aspect of the crisis: the excess of private debt. To keep the Greece, the Spain and the Portugal permanently in the euro area, they must recover their competitiveness and reduce their unsustainable trade deficits, which means the recession, the decline in wages and prices. And the reduction of the private debts.

In 1933, the great Economist Irving Fisher, in his famous article: "The Debt both Theory of Great Depressions", published in the journal "econometrica", explained that, in an economy in recession and deflation, the credit bubble inherited from the boom turned the recession into depression. With deflation recession, firms are strangled by debts contracted in boom times higher and remained stable in nominal terms. Catch in the throat by the actual weight increasing their debt service, they go bankrupt, which affects banks, their suppliers and unemployment. The "debt both" transforms a temporary recession in the great depression. Time of Fisher, the solution came in January 1934: Roosevelt fought against deflation devaluing the dollar by 60 from gold!

Back to the Greece, the Spain and the Portugal. They had current deficits of 10 of GDP or more, related to public and private deficits (Portugal and Greece) or private (Spain, with the housing bubble). From 1998 to 2007, they borrowed from 5, while their nominal GDP growth of 5 to the Portugal and 8 per year in Spain and Greece. The debt was painless and increased standards of living. The result was overheating. From 1998 to 2008, unit labour costs increased by 2 in Germany, 20 in France and in the euro area, but 41 in Spain and 45 in Greece.

Today, it rétropédaler. To achieve the level of competitiveness of the France, the Spain must lower its wage costs by 20 and 25 Greece, otherwise international private lenders may suddenly stop to lend. At worst, people will refuse this brutal adjustment in their standard of living and associated with radical reforms. The default on their public and private debt would be inevitable, and output of these countries in the euro area. The consequences would be dramatic for a bankruptcy of banks and their populations with a major recession (caused by instantaneous reduction of public and external deficits). At best, this adjustment will be spread over several years (with the help of the IMF and the European Union), with even a long stagnation and deflation of wages and prices. The choice is therefore between vertical drop and slide. In all cases, the weight of debt, denominated in euros, will increase GDP (effect reinforced by the increase in these countries risk premiums). International aid will help to spread the weight of the debt. For private debt, the scenario of "debt both" remains.

Where is the exit Knowing that the European Central Bank will maintain inflation at 2, that international assistance will not come to the aid of private debts, only one opens. It is urgent to organise the restructuring of the debts of the countries affected. They should change their laws in order to quickly transform their excessive private debts into equity (shares), including in banks (convert the subordinated equity bank debt), or even impose de jure of significant claims aborts (between a third and half of the amount). The impact will be negative for the creditors of the private sectors of these countries, bankers and European insurers. But they were in a sense already lost their investments: those who were quite reckless to lend in a gigantic credit bubble must share the adjustment.

Instead of the "debt both" 1932, European Governments should realize that the restructuring of debt in countries "cicadas" is inevitable. Better organize that have. Of course, bankers and European insurers will strangle the reading of these lines. But they will have to make and not taking themselves to blame for having too much lending, without adequate control, to "cicadas".