To overcome its sovereign debt crisis, Europe needs to be decisive, it needs to draw on help from the private sector, and it needs strong political leadership. But most importantly, it needs to take note of the lessons learnt from past crises in developing nations. 

Global financial markets have, repeatedly over the past three years, displayed bouts of intense volatility, reflecting uncertainty about the sustainability of economic recovery in the US, the eurozone and Japan. Key contributing factors include underlying inflation anxieties; exceptional levels of national budget deficits and external debts by many countries; and, most importantly, questions about the ability of our political leaders to not only manage all these complex matters, but to forge sustainable economic growth paths.

The catalyst for much of the current concern has been the combination of very high national budget deficits and national debts accumulated by countries on both sides of the Atlantic. Sovereign debt crises used to be confined to developing nations – no longer. But the lessons from those past crises are key in confronting today’s problems. For too long many of these lessons have been ignored.

Steps to recovery

Tracing over my own experiences representing banking creditors in the debt crises of Latin America in the 1980s and Asia in the 1990s, as well as others, I have concluded that among the most important lessons of experience are: each country is unique and so a cookie-cutter approach does not work when dealing with a nation in crisis; the clock is always running against policy-makers in a crisis and postponing tough decisions makes the problems greater; the risks of contagion are always high, especially today when markets respond to news in nanoseconds; bringing in the private sector early to forge sovereign debt solutions is essential; and, most importantly, courageous political leadership is indispensable.

Right now, it is imperative to focus on leadership. We need courageous political leadership and, I believe, determined resolve by independent central banks as well as an authoritative International Monetary Fund (IMF).

When I and others worked with then US treasury secretary Nicholas Brady to formulate what became known as the 'Brady plan' to resolve Latin America’s crisis, it was clear that success crucially depended on the skill and determination of the region’s leaders. In the early 1990s, we found then Brazilian finance minister, later to be president, Fernando Henrique Cardoso, to be exactly the right leader at a crucial time. We finalised a 'Brady' restructuring and he announced the 'real plan'. It was a tough programme that he convinced Brazilians was home-grown and not imposed from the outside by the IMF and other foreign creditors. He won public support and put the foundations in place for what has become one of the world’s most dynamic economies.

A decade later, Turkey was in economic difficulty and I was asked to provide advice to the IMF and some G-7 authorities. In confronting the crisis, Turkish finance minister Kemal Derviş demonstrated boldness as his 'made in Turkey' reform programme stabilised conditions. His leadership was a great help in establishing the base for his country’s formidable economic advances.

Former South Korean president Kim Dae-jung provides another model for today. When he won a national election in December 1997 he had to immediately make very difficult decisions. He had opposed the government that he had defeated at the polls. He was a sceptic as an opposition leader of the IMF and the country's foreign bank creditors. Nevertheless, when I met with him in Seoul just five days before his February 1998 presidential inauguration, he told me he would do everything to support the efforts I was engaged upon on behalf of the banks, so long as it was in the best interests of his country. My role was to garner his support for a debt restructuring with the Korean banks, and I recount this story at some length in my book because Mr Kim serves in my mind as a model of a leader facing a sovereign debt crisis.

Mr Kim said that he would accept the IMF plan and that I could assure the banks that he would accept the necessary debt restructuring plans. It was signed soon thereafter. His words and his actions built international confidence in the country’s economic future – by April, South Korea successfully returned to the international markets with a $4bn offering.

Confidence is key

These examples are instructive as we look at the sovereign debt difficulties that have gripped the eurozone, and indeed at the debates over the budget and the debt ceiling in the US. Leaders need to be willing, as Messrs Cardoso, Derviş and Kim were, to promote programmes that both generate domestic support and raise international confidence. The message to national leaders is clear: do not postpone tough decisions, be bold and convince citizens that the path to growth calls for widespread sacrifices.

For those who suggest that emerging markets are different and that the challenges to leaders in mature economies are greater, I would point to two further model leaders. In the foreword to my book, 'Banker to the World', Paul Volcker says that one characteristic stands out from my career during all the years we worked together: “Tenacity, stick-to-it-iveness, get it done!” I think it is even more appropriate to apply that characteristic to Mr Volcker himself.

In the late 1970s, US president Jimmy Carter nominated Volcker to lead the US Federal Reserve board – at the time the country faced double-digit inflation and the prospect of economic disaster. Mr Volcker knew that his approach could thrust the economy into recession and would anger many powerful politicians. He drove ahead, demonstrated that a forceful and independent Fed could hold the course and the result, within a few years, was a restored and strengthened base for American growth. Moreover, he played a crucial leadership role after the onset of the Latin American debt crisis in building confidence and support among banking creditors and among the debtor countries, while mobilising the G-7 central banks, and greatly assisting the IMF.

Then, most recently, I have admired the determination of Jean-Claude Trichet, who is about to retire from the helm of the European Central Bank. Time and again he fought for the independence of the ECB. He moved with dramatic speed to add liquidity to the financial system in tense times in late 2008, which was crucial in containing the raging financial crisis. Much more recently, he has boldly seen the ECB purchase eurozone sovereign bonds as part of a vital set of actions to support regional financial stability. Wisely, he has also called upon EU leaders to recognise that a single EU currency requires not only sound monetary policy, but consistent fiscal policy prudence.

Be bold

Our present crisis calls for independent central bankers and bold political leaders with the skills to forge consensus. I also believe that in a world of finance as interconnected as it is now, we need a forceful IMF to serve with authority and independence to push for the right programmes by governments in crisis and to ensure the prompt private sector support for such programmes.

The Chinese word 'weiji' consists of two characters – one represents danger, and the other represents opportunity. The IMF today has a dual role – to raise the red flag of danger to national governments (even the largest and most powerful) when it sees signs of an emerging crisis, and push governments and their creditors into seizing the opportunity to take tough remedial actions before conditions become still more severe. The new leadership of the IMF could well look to the tenure of Jacques de Larosière as a key model for our times.

As the head of the fund in the Latin debt crisis he worked with national governments to forge effective reform programmes, then he ensured that fund disbursements were only made after hard evidence of programme implementation. Further, he would at times make disbursements conditional on private creditor support for the debtor nation, so underscoring the mutual interests of debtors and creditors alike. Mr De Larosière ensured the authority of the fund. Now we need such commanding authority again if politicians and creditors are to rise to current challenges, demonstrate courage and work together to strengthen the international financial system and set the global economy on a sustainable growth path.

William R Rhodes is the former senior vice-chairman of Citigroup and now president and CEO of William R Rhodes Global Advisors, LLC. He is the author of 'Banker to the World – Leadership Lessons from the Front Lines of Global Finance', published by McGraw Hill.

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