Germany Seeks ‘Orderly’ Insolvency Option for Euro Members
(Bloomberg) Germany is proposing that the European Union create the option of an “orderly state insolvency” for countries using the euro, according to a Finance Ministry document. That would set incentives for governments to follow “solid” fiscal policies and for “responsible” behavior by investors, the document said.
This is a very critical issue. Germany doesn’t want to have to write the check for other euro member’s debt.
An ‘orderly state insolvency’ would mean the lenders would lose their investment rather than get bailed out.
The main problem with this is that by making insolvency a viable option, euro members become subject to increased liquidity risk. And, in the case of actual insolvency and legal debt write downs, euro bank assets are written down as well, subjecting them to increased liquidity risk as well.