The Dangerous Myth of Risk-Free Euro Debt

Photograph by Ville Mannikko/Bloomberg, Photo Illustration by Businessweek.com

Most people don’t need to be reminded that, just a few years ago, Europe teetered on the edge of a full-blown sovereign debt crisis that nearly destroyed the common currency. But apparently European financial regulators do. In the recent “stress tests”—the European Central Bank’s assessment of European banks’ ability to withstand another financial crisis—regulators made a curious choice: They assumed all European sovereign debt is risk-free.

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