As I mentioned previously, the approach to saving Greece is very similar to what was done to bail out the broken financial system. This weekend a program was announced that lead many people to draw and analogy to TARP: they are spending almost $1 trillion dollars to try to stem the tide of sovereign defaults. At the same time, the ECB announced that it will engage in credit easing for sovereigns. The difference between credit easing and quantitative easing is that while the European Central Bank might purchase debt instruments that are selling off, they are going to buy other debt instruments to counter any monetary stimulus. This is their attempt to contain volatility. Judging from market movements, it might actually work in the first place.
However, this reform does not address the central problem of the Greek and other problematic governments: They are not currently capable of running a budget surplus even if they didn’t have interest payments. Banks were insolvent but otherwise profitable; these countries look insolvent and unprofitable. Reducing the volatility will stabilize the markets and help save Europe’s banks that own the volatile debt, but a country going bankrupt is not going to stop going bankrupt merely because volatility is reduced. Perhaps the sovereign debt should be thought of as more like the US housing market. The US government needed to stabilize the housing market (it is now 80% or 90% of the market according to Shiller) to save the banks, just like the EU needs to stabilize the problem countries. If the banks holding sovereign debt can earn their way out of the trouble they are in then a few years from now the restructuring of sovereign debt can be more of a political issue than a financial issue.