There was a time not so long ago when thevast majority of experts agreed that a country could not emergedecisively from a financial crisis unless it solved problems ofboth “stocks” and “flows”—that is, secured a flow of money to coverits immediate needs and found a way to manage its stock ofoutstanding debt over time.

In Europe today, this conventional wisdom appears to be fading.The temptation there is to declare victory having solved only theflow, not the stock, challenge.

The flow/stock intuition is quite straightforward. In the firstinstance, a crisis-ridden country must generate enough resources tomeet its pressing funding needs, and do so in a manner that doesnot erode its growth potential. Soon thereafter—or, even better,simultaneously—the country needs to realign its longer-term paymentobligations in a manner that is consistent with both its abilityand willingness to pay.

Unless a country does both, the productive commitment of its ownpeople and companies will be too tentative to drive a full andproper recovery. It will also be a lot harder to attract the scaleand scope of long-term foreign direct investment that is so helpfulfor enhancing growth, jobs, and national prosperity.

The need for a comprehensive approach was most vividlyillustrated during the Latin American debt crises. Having securedsufficient emergency financing and embarked on serious economicreform efforts, the successful countries devoted lots of effort toimproving their debt maturity profiles, better aligning thecurrency composition of their debt, and, most important, reducingthe size of their contractual obligations. These efforts wereinstrumental in productively re-engaging the domestic privatesector and in attracting sizable foreign investment.

Peripheral countries in the euro area—such as Greece andPortugal—have done a lot to deal with their flow challenges overthe last few years. They have also made some progress in addressingstock challenges, yet quite a bit remains to be done.

Consider the case of Greece. Serious and difficult multiyearefforts to cut deficits and reduce inefficiencies havesignificantly improved domestic finances. Indeed, Prime MinisterAntonis Samaras stated in a recent interview: “We have no fiscalgap; we have no financing gap.”

By improving the maturity of its debt service payments, Greecehas also started to address its stock challenges. But its stock ofsovereign debt is still hovering at 180 percent of gross domesticproduct—an excessively high level for a country wishing to growquickly, if only to be able lower its 26 percent unemployment rateand even more alarming youth joblessness of well over 50percent.

None of Greece's regional and multilateral friends—be it theEuropean Commission, the European Central Bank, the InternationalMonetary Fund, or Germany—has much desire to highlight this stockissue, especially as their loans may be among those mentioned forsome type of forgiveness.

Greece averted a much bigger economic and social disaster thanksto its willingness to step up courageously and provide massiveemergency financing. It is understandably hesitant to go back toits stakeholders—many of whom initially opposed the lending—andsuggest that the loans should be forgiven, even partially.

Don't look for private creditors to make much of a fuss, either.True, new and prospective creditors would be more secure if part ofthe old debt was somewhat extinguished. But with Greece's immediateflow issues resolved, and with the central banks around the worldholding interest rates at low levels, they are just thankful to beable to invest in higher-yielding, short-maturity Greek bonds.Older private creditors, for their part, have already suffered around of deep debt restructuring.

As mutually reassuring as all this may sound to the partiesinvolved, the collective obfuscation will do little to solveGreece's need for many years of high economic growth to make itsdebt burden more bearable. No wonder Samaras is insisting onGreece's euro-area partners “keeping their part of the deal” madein 2012 to provide further debt relief to his country once itsbudget—excluding interest payments—reaches surplus. He will need todo a lot more insisting now that European leaders and markets havelost their sense of urgency. And they will look for him to do a lotmore domestically.

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Mohamed El-Erian is the former CEO ofPacific Investment Management Co. (PIMCO). He now serves as chiefeconomic adviser to Allianz SE.

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