Euro Update (22): The Future of the Sovereign Debt Crisis

There’s so much talk of what “should be” done that I got confused. From all that I could gather, this is what the future of the sovereign debt crisis might look like.Call it a map of the future, if you will. To simplify things, the “Immediate Crisis is Averted” is only for immediate problems, so that you can always go back one node to the previous junction and check what the answer to the same question would be at some future crisis point.

Ideally I would check the data from BIS, and from the Central banks, to support my “incentives” claims above, but I don’t have time. So here is the present debt exposure as channeled by the FT Alphaville  and by Credit Writedowns blogs and by Der Spiegel (German Banks):

In order to understand the “Eurosystem” item, it might be useful to look at the balances in the TARGET2 system, as much disussed by Wheelan, Wolf, Buiter et al and Sinn:

As we can see, even the debt owned by National central banks is borrowed from other national central banks. The default options in the Tree graphic above are not that simple and without repercussions. No one likes bailing out irresponsible banks or countries, but one way or another, at the moment, the pain is shared, and so we might as well try to find an intelligent long term solution, rather than throw unproductive populist remarks at each other. To me it seems rather unlikely that they will be able to water down their exposure in whatever “intelligent” way. So I believe we are stuck in a universe where we must indeed answer the question “What do member states want?”. Once that’s the case, do we really expect them to do nothing? I don’t.

My only fear remains that at some point in the crisis path, markets will panic (before I actually expect them to), at a rate which the member states will not be able to follow, or to put it differently that politicians’ slow pace of learning/reaction in face of quickly unfolding events will be doom of us all.

What do you think?

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