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More nasty debt restructuring can be expected Add to ...

The markets are full of hope now that Europe is starting to contain Greece's fallout, but the real story is that very little has changed about the region’s underlying problem: too much debt.

And its not just Europe. “Global public debt is extraordinarily high,” said Kenneth Rogoff, the co-author of This Time is Different, a seminal book on financial crises that came out in 2009. Going back eight centuries, he and Carmen Reinhart tracked the world’s biggest financial collapses and found that they were call caused by debt, and that the recoveries took years.

The same is true this time around. Even if Greece can get its debt down to 120 per cent of gross domestic product by 2020, no one really believes that that's a sustainable level. And the countries that think they’re better off because their national indebtedness is lower relative to that sky high level aren’t doing themselves any favours.

Seeing as how this crisis fits the historical mould, there’s only one thing we can expect: a long, nasty restructuring.

“There’s no pretty way to do it,” Mr. Rogoff said, alluding to what his research documented. “Politicians would have you believe that you [can]just have faster growth. Unfortunately, when debt is that high, you’re going to have slower growth.”

Looking back, the two authors found that dramatic action is necessary after major crises, including major tax hikes, enormous government spending cuts, austerity packages and very often, defaults.

Their findings are in line with what BlackRock chief executive officer Larry Fink said in his conversation with TD Bank CEO Ed Clark when he visited Toronto earlier this month. Both men agreed that resolving the crisis is going to take years.

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