Time is running out to rescue the economies of Portugal, Ireland, Italy, Greece, and Spain.

Policymakers should also consider innovations used to help debt-burdened developing countries in the 1980s and 1990s. For example, bondholders could be encouraged to exchange existing bonds for GDP-linked bonds, which offer payouts pegged to future economic growth. In effect, these instruments turn creditors into shareholders in a country's economy, entitling them to a portion of its future profits while temporarily reducing its debt burden.

Reducing the face value of mortgages and providing the upside—in case home prices were to rise in the long run—to the creditor banks is another way to convert mortgage debt partly into shareholder equity. Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis.

Europe cannot afford to continue throwing money at the problem and praying that growth and time will bring salvation. No one will descend from the heavens, deus ex machina, to bail out the IMF or the EU. The creditors and bondholders who lent the money in the first place must carry their share of the burden—for the sake of the PIIGS, the EU, and their own bottom lines.

This article comes from Project Syndicate.

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