Current market conditions have shown that the euphoria following formation of the Eurozone led some lenders to believe that there was no greater sovereign risk in Greece than in Germany. This led to a significant rise in exposure to weaker economies. The credit bubble has now led to where we us today.
History holds some lessons for the present.
The conditions of Latin America in the 1980s were pretty similar to what the peripheral economies in the Eurozone are now currently facing. Mexico was the first country to default on its debt. During that time, IMF and the US Treasury came in to defuse the situation by imposing austerity measures and adding to the countries debt. This only served to prolong the solvency issues of the country.
It was not until a plan was devised in 1989 for creditors to accept "haircuts" either through a principal reduction or a lowering of the interest rates that the situation began to improve.
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