When there’s a sovereign debt collapse, there’s almost always a banking collapse.
If it weren’t for that fact, letting countries like Greece and Ireland go and restructure would be much less painful.
That’s something to consider when comparing states like California and Illinois to the PIIGS. Yes, they’re in trouble and can’t print their own money, but the systemic implications seem far less severe.
The following chart compares bank holdings of muni debt, consumer and business loans, and government debt. Muni debt is the blue line at the bottom. It’s way smaller than the other two, as a chunk of bank balance sheets.
When you consider this fact, and the fact that nearly half of muni debt is owned by households, it becomes a lot easier to imagine how you could have restructuring without an out-and-out collapse.
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