A front-page news article in today's New York Times takes a look at Europe's sovereign debt woes and places the blame firmly on regulators, not bankers. From the article: "How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany."
Regulators bear much of the responsibility. Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development, a club of developed nations that includes the United States and most of Europe.
"There was encouragement from European authorities for banks to load up on more debt, because it was seen as safe," said Nicolas Véron, a senior fellow at Bruegel, a research firm in Brussels. "In hindsight, it was unwise risk management."....
...amid the subprime mortgage crisis, Europe's regulators added to the problem by demanding that banks hold more safe assets, much of it sovereign debt.
This is similar to America, where banks were encouraged by regulators to hold mortgage-backed securities that were AAA rated by a government-approved rating agency. The minute that the government endorses something as safe, the buyers start to lose interest in exercising their own independent judgment. It's something to consider for those who say the fix for a more stable banking sector is more strict government-imposed capital requirements. It was clumsy government bank regulation that helped create these problems in the first place. Kudos to the Times for departing from the blame-the-bankers-not-the-government left-wing line and for getting this alternative out there in a front-page news article.