One of the best pieces we’ve seen on Europe’s debt crisis is Kenneth Rogoff’s, The Euro at Mid-Crisis, posted today over at Project Syndicate.  He doesn’t hold back in criticizing how policymakers, excluding Angela Merkel,  are deluding themselves and in denial. He believes  a “huge sustained burst of growth” could solve Europe’s problem, but is not likely and defaults and debt restructurings are inevitable.  He writes that Portugal is at the top of the list for the next bailout,

With an average growth rate of less than 1% over the past decade, and arguably the most sclerotic labor market in Europe, it is hard to see how Portugal can grow out of its massive debt burden…The Portuguese rightly argue that their situation is not as dire as that of Greece, which is already in the economic equivalent of intensive care. But Portugal’s debt levels are still highly problematic by historical benchmarks (based on my research with Carmen Reinhart). With a baseline scenario of recession or sluggish growth amid budget austerity for years ahead, Portugal will likely seek help sooner rather than later.

Spain, he says, is a “more difficult case.”  He writes,

The central government is arguably solvent, but a significant chunk of municipal and provincial bank debt seems underwater. The big question in Spain is whether, as in Ireland, the central government will allow itself to be gamed into taking on private (and also municipal) debt. Here again, history gives no cause for optimism. It is very difficult for a central government to sit on the sidelines when the economy’s key players are on the brink of collapse.

Rogoff believes the final phase of the crisis will be a significant restructuring of private and/or public debt across all the “debt-distresseda” eurozone countries,

After all, bailouts from the EU and the IMF are only a temporizing measure: even sweetheart loans, after all, eventually must be repaid.

He notes that Latin America’s rebirth only began after the debt write-downs of the Brady Plan,

Already facing sluggish growth before fiscal austerity set in, the so-called “PIGS” (Portugal, Ireland, Greece, and Spain) face the prospect of a “lost decade” much as Latin America experienced in the 1980’s. Latin America’s rebirth and modern growth dynamic really only began to unfold after the 1987 “Brady plan” orchestrated massive debt write-downs across the region. Surely, a similar restructuring is the most plausible scenario in Europe as well.

He thinks the Eurozone policymakers are in denial,

It sometimes seems that the only eurozone leader who is willing to face the likely prospect of future debt restructuring is German Chancellor Angela Merkel… Many pundits would have one believe that Ireland would have pulled through unscathed absent Germany’s blundering statements.

That is nonsense..Allowing European debt problems to fester and grow by sweeping them under the carpet through dubious theatrics can only make those problems worse.

He tears the Irish bailout apart,

Here is where the latest Irish bailout is particularly disconcerting. What Europe and the IMF have essentially done is to convert a private-debt problem into a sovereign-debt problem. Private bondholders, people and entities who lent money to banks, are being allowed to pull out their money en masse and have it replaced by public debt. Have the Europeans decided that sovereign default is easier, or are they just dreaming that it won’t happen?

By nationalizing private debts, Europe is following the path of the 1980’s debt crisis in Latin America. There, too, governments widely “guaranteed” private-sector debt, and then proceeded to default on it. Finally, under the 1987 Brady plan, debts were written down by roughly 30%, four years after the crisis hit full throttle.

Rogoff’s conclusion,

As European policymakers seek to move from one stage of denial to another, perhaps it is time to start looking ahead more realistically. As any recovering alcoholic could tell them, the first step is admitting, with Merkel, that Europe has a problem.

Good stuff.  The path to the “endgame” will be full of turbulence and volatility.  Stay tuned!