(Washington Post) In Europe, bonds deemed risk-free fueled debt crisis, analysts say

Posted by Kendall Harmon

Before the euro zone, individual countries issued bonds in their local currency and could print more of it, whether it be francs, lire or drachmas, if a crisis was making it difficult to pay off the loans.

Today, with the European Central Bank in charge of euros, governments in Athens, Rome and elsewhere no longer control the “printing press.” Yet even as individual governments lost the power to pay off debts by printing money, the politics and regulations of the euro zone encouraged banks, insurance companies and other financial firms to load up on government bonds — and countries to issue them.

The “persistence in sustaining risk-free status . . . has, in our view, directly contributed to the development and severity of recent market turmoil,” Achim Kassow, a member of the board of managing directors of Germany’s Commerzbank, wrote in a recent study of the bank rule for the European Parliament. “Both the course and the severity of the crisis can clearly be tied to incentives set by current regulation.”

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Filed under: * Economics, PoliticsEconomyCredit MarketsCurrency MarketsEuroEuropean Central BankThe Banking System/SectorThe Credit Freeze Crisis of Fall 2008/The Recession of 2007--* International News & CommentaryEngland / UK--IrelandEurope--European Sovereign Debt Crisis of 2010FranceGermanyGreeceItalyPortugalSpain

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