Is the Eurozone Insolvent?

Is the eurozone insolvent? In the past few weeks, we have all focused on the solvency of Greece, Spain and Portugal. But we never seriously questioned the solvency of those who actually guarantee all those southern European debts.

The first thing to note is that you cannot answer that question with a cursory reference to the debt-to-gross domestic product ratios of eurozone countries. This macro perspective is of little use here. Those numbers tell us that the eurozone is in a better position than the US, the UK or Japan. The problem is that those headline numbers exclude contingent debt and the interconnectedness of financial flows.