Heavily insolvent European nations must "reset" their economies through debt reduction and restructuring, otherwise further recessions are imminent, according to a derivatives and risk management expert.
The solution to the European wall of sovereign debt was "blindingly simple" in terms of proposition, but would be very difficult to execute, Satyajit Das said at an Australian Centre for Financial Studies seminar yesterday.
"The first thing you need to do is reduce the debt loans," Das said.
"Most southern European countries have more debt than they can actually pay back [and] that automatically means the insolvency of a large part of the European banking sector, because European banks are large owners of this sovereign debt.
"Not to mention that in reality all the banking systems around the world are joined at the hip, so basically our sovereign problem would be a banking problem anyway."
Das said under those circumstances, a recapitalisation program for those banks would be necessary.
"Then you need to quarantine the stronger countries and then to fundamentally get out of a debt problem, we have to restore economic growth."
He said "extreme money", mainly debt, had continually been stacked upon the real economy, but Europe and the United States did not have the capacity to do that anymore.
The combined balance sheet total of the eight major central banks in the world - the US, United Kingdom, European Central Bank, Japan, Germany, France, China and Switzerland - was about $5.4 trillion in 2006 but stands at over $50 trillion today.
Furthermore, relying on miraculous growth and inflation to solve and correct problems of massive debt was hugely flawed, Das said.
High levels of debt to gross domestic product had resulted in the current "era of Botox economics" whereby nothing was solved, just covered up, he said.
"We're using financial Botox, which is cheap and easy money primarily in the form of government debt and massive liquidity splurges by central banks, to try to cover this and hope the good times will come back. But Botox is temporary and has side effects," he said.
"[Europe] has stopped lending because the only way they can correct this problem, absorb the losses and recapitalise themselves is to shrink the size of their balance sheets."
