Europe should share burden of debt

Today, the world is threatened with a repeat of the 2008 financial meltdown but on an even more cataclysmic scale. This time, the epicenter is in Europe, rather than the United States. And this time, the financial mechanisms involved are not highly complex structured financial products, but one of the oldest financial instruments in the world: government bonds.

While governments and central banks race frantically to find a solution, there is a profound psychological dynamic at work that stands in the way of an orderly debt workout: our aversion to recognizing obligations to strangers.

The impulse simply to cut the Gordian Knot of debt by defaulting on it is much stronger when creditors are remote and unknown. In 2007-2008, it was homeowners who could not keep up with payments; now it is governments. But, in both cases, the lender was distant and anonymous. US mortgages were no longer held at the local bank, but were repackaged in esoteric financial instruments and sold around the world; likewise, Greek government debt is in large part owed to foreigners.