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Martin Hutchinson,  November 22, 2011

The euro-zone crisis, which could have been defused initially by allowing Greece to depart the euro, has now taken on a much more serious aspect. 

If, as seems possible, Italy, Spain and even France lose the confidence of the international debt markets and are forced to write down debt, then government debt of prime countries will no longer be considered a risk-free asset.

That will take markets back beyond the traumas of the 20th century, beyond the relatively serene 19th century, beyond even the institution-forming 18th century. It will undo the 1751 triumph of the forgotten financier Samson Gideon in forming the immortal Consols, will undo the sterling if self-serving 1721 work of Sir Robert Walpole in preventing the South Sea crash from destroying the British government bond market as the Mississippi crash did the French one, and will even undo the 1694 foundation of British credit, the formation of the Bank of England.

Life for government bond dealers will revert to a primitive Hobbesian state of nature, nasty, brutish and short.

The level of market panic about Italian and Spanish debt indicates that the comforting parameters of 19th and 20th century sovereign debt finance no longer hold.

The principal reason for this is the determination by the eurozone authorities to break the rules by which debt markets have traditionally been governed. Instead of allowing Greece to default or rescuing it completely, they arranged an inadequate debt-financed bailout that simply postponed Greece’s inevitable exit from the euro and increased its debt.

Then they arranged a “voluntary” writedown of Greek private sector debt, which was subordinated in repayment to the monstrous institutional and government debt created by the bailout.

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