Is the system really bust?

The euro zone, if you hadn't noticed, is in big big trouble. The sad fact is that there are very few ways of improving the situation. Let's just recap how we got to where we are now. The 2007/8 banking crisis entailed significant impairments of mortgage backed investments across the world. So much so that governments believed they were forced to 'bail out' the banks by injecting new capital into their balance sheets. However, the countries were themselves in trouble because the financial squeeze and the effective closure of the capital market meant that credit became as scarce as dragon's teeth and national economies went into recession. Shortfalls in tax revenues and increased welfare demands meant that the sovereigns had to borrow. But who could lend to them? Well of course the banking sector. But the sovereign debt problems started to emerge when the ratings agencies and the market began to question their ability to repay. So yield rose and the value of sovereign debt carried by the banks had to be impaired. So, governments found themselves compelled to bail out their banks. You get the idea: spirals like this do not have a happy ending.