European Debt Crisis

Europe’s sovereign debt crises are changing daily, yet are making little progress toward long-term solutions. The only questions are when, how and who will be left holding the bag?

Why is it that drops in asset values associated with impaired debt undermine economic activity far more than larger drops in equity values do? For example, during the tech bubble and the subsequent crash, $5 trillion in economic value disappeared over 30 months on the U.S. stock markets. This dwarfs the decline in asset values associated with impaired debt during the financial crisis, which are perhaps $1-2 trillion. Yet the real economy quickly regained its balance even after trillions of dollars were wiped out on the stock market, while far smaller losses via impaired debt have constipated economies across the globe. No clearer example exists than Japan over the past 21 years. And now Europe is following suit.