How Bad Ideas Worsen Europe’s Debt Meltdown
http://www.bloomberg.com/news/2011-12-22/bad-ideas-worsen-europe-s-debt-meltdown-commentary-by-john-h-cochrane.html
I admit I have not been following the European debt situation that closely (it took me days to figure out what PIIGS stood for) and have thought up to this point that in order to resolve the situation they needed to combine their governments into a US of Europe. Yes, that would mean countries giving up substantial control over their internal operations, but it would make them much more competitive. However, this article makes what I feel are excellent points that indicate that the real problem is that lenders are not required to carry collateral against sovereign debt, thus are incredibly over leveraged in the event of a default. If lenders were required to treat sovereign debt the same as corporate debt (meaning they have to assume some level of default and protect themselves by having cash reserves in the event of default) then while it would still suck to own the debt of the sovereign that defaulted, there would be no other ripples and life would go on. So clear the solution, so politically impossible to implement.
