EU Debt Problem Revisited

The sovereign debt crisis in the European Union has been taking a back seat to problems in Japan and the Middle East. While attention has been elsewhere, however, sovereign credit spreads in Portugal, Spain, and elsewhere have continued to widen.

Today Ireland said it wants senior bond holders of Irish banks take a hit as part of any debt restructuring plan. Seems reasonable. After all, in an unhampered market, these bondholders would take a hit, up to and including total loss of their investment if Irish banks went bankrupt.

But other EU countries oppose the idea, claiming that smacking bondholders in Ireland might cause a contagion of debt selling in other countries by skittish investors.

Europe faces an intractable problem with 'domino effect' potential. While other issues around the world currently seem more urgent, investors ignore the increasingly volatile situation in the EU at their own peril.

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