Axel Merk, president of Merk Investments, says Europe is going about it all wrong: Banks, not countries, should be saved.
"If the eurozone is to survive, policymakers will have to stop trying to save European nations and save European banks instead," Merk writes in The Christian Science Monitor. "Member nations may default," he wrote.
"Government defaults are nothing new. However, the eurozone should take great care that a default does not lead to an implosion of its financial system, as it would cripple the real economy."
Banks have one major advantage over nations, Merk explains: They can use their central banks.
"Banks employ a business model that uses substantial leverage," notes Merk. "While the leverage makes banks vulnerable, central banks can keep even a technically insolvent banking system afloat."
"Still, in Europe, the focus must be on making eurozone banks strong enough to stomach sovereign defaults."
Bank runs need to be avoided, thus making the sovereign default more digestible for the economy as a whole, Merk notes.
"You can't avoid losses, but you can avoid a financial meltdown," he says. "This is a global financial crisis."
"Simply put, there is no such thing anymore as a safe asset. Investors may want to take a diversified approach to something as mundane as cash. Just as China diversifies its reserves into a basket of currencies, individuals may want to consider doing the same."
Business Week reports that European finance ministers pushed bondholders to provide greater debt relief for Greece, denting newfound confidence in Europe’s strategy for coping with the two-year-old debt crisis.
© 2014 Moneynews. All rights reserved.