Amid the financial crisis, Europeans see their banks' biggest problem as rooted in their sovereign debt exposure. As a rule the largest purchaser of the debt of any particular European government will be banks located in the particular country. However, much debt remains for outsiders to own, so when states crack, the damage will not be held internally. Half or more of the debt of Greece, Ireland, Portugal, Italy and Belgium is in foreign hands, but like everything else in Europe the exposure is not balanced evenly — and this time, it is Northern Europe, not Southern Europe, that is exposed. When Europeans speak of the need to recapitalize their banks, creating firebreaks between cross-border sovereign debt exposure dominates their thoughts — which explains why the Europeans belatedly have seized upon the IMF’s original 200 billion-euro figure. The Europeans are hoping that if they can strike a series of deals that restructure a percentage of the debt owed by the Continent’s most financially strapped states, they will be able to halt the sovereign debt crisis in its tracks. This plan is flawed. The figure, 200 billion euros, will not cover reasonable restructurings. The 50 percent writedowns or “haircuts” for Greece under discussion as part of a revised Greek bailout would absorb more than half of that 200 billion euros. A mere 8 percent haircut on Italian debt would absorb the remainder. Moreover, Europe’s banking problems stretch far beyond sovereign debt.
