Unsustainable private debt problems must be resolved by defaults, debt reductions, and conversion of debt into equity.

The regulatory hybrid securities would have all the advantages of debt in normal times.

Rapid expansion of private debt raises other, larger concerns.

Emphasizing the important role that private sector creditors play in debt relief and debt sustainability,

The investment banks blended these securities into asset backed securities and collateralized debt obligations (CDOs) and sold them on to financial institutions throughout the world.

The financial sector has since made every effort to design instruments that protect against price fluctuations, to transform private debt into tradable financial securities, and to gain access to speculative markets.

In part, the decline was due to increased holdings of foreign public debt relative to private debt.

The dubious mortgage securities are so called mortgage backed securities.

Securing Synthetic Securities

What Europe and the IMF have essentially done is to convert a private debt problem into a sovereign debt problem.

Indeed, these private funds account for about two thirds of all new debt.

After all, private creditors hold only a minimal share of Greek debt nowadays.

Moreover, the volume of corporate debt securities almost tripled after the introduction of the Euro eliminated exchange rate risk.

Six months later, after substantial official funds had been used to pay private creditors, the outstanding private debt was substantially restructured.

While private debt as a share of GDP stabilized, public debt increased by 50 in the five years after the bust.

In effort to repay long term debt without affecting short term debt, the housing developer Homex is placing securities exchange certificates on the market for 500 million pesos.

It is an even less direct way to address the private, related debt overhang.

As a result, large and potentially unsustainable stocks of private and public debt remain.

Mortgage banks kept some claims on their books, but sold most of them to investment banks as mortgage backed securities. The investment banks blended these securities into asset backed securities and collateralized debt obligations (CDOs) and sold them on to financial institutions throughout the world.

Forcing a debt for equity swap or debt forgiveness would be no greater a violation of private property rights than a massive bailout.

Ultimately, a significant restructuring of private and or public debt is likely to be needed in all of the debt distressed eurozone countries.

With credit markets impaired, the Fed could buy more government bonds or private sector debt.

Five years on, public, private, and external debt are at record levels in many countries.

Ongoing private and public debt deleveraging has kept global demand growth below that of supply.

There, too, governments widely guaranteed private sector debt, and then proceeded to default on it.

Public debt could be reduced without fear of recession, because private demand would be stronger.

Weak Labor, Strong Securities Markets

Before Greece took any loans, it should have initiated debt restructuring and undergone a partial default on debt owed to its private sector creditors.

The stock imbalances include large and rising public and private debt as a share of GDP.

But when private creditors hold sovereign debt, organizing them creates a new challenge with each episode.

Moreover, private and public sector debt levels tend to be much lower in the emerging economies.

What if private debt represented a share so small that no haircut would restore sustainability, forcing multilateral lenders to pitch in with some debt relief?

Indeed, it is now clear that governments prevented a full scale collapse of the financial system in 2008 by transforming toxic private debt into public debt.

Private sector debt, increasingly short term, shoots up from 85 of GDP to 135 within five years.

Lending to foreign governments is in many ways inherently riskier than unsecured private debt or junk bonds.

The tax plan highlighted that Italy, like Japan, is a country of public debt and private wealth.

The result is, of course, paradoxical private funds that flow into these countries are recycled into US Treasury securities via investment of accumulated reserves.

Even so, the explosion in the quantity of collateralized debt obligations and similar securities went far beyond what was needed to sustain mortgage lending.

Indeed, the objects of such speculation astound the imagination tulip bulbs, gold and silver mines, real estate, the debt of new nations, corporate securities.

Investment banks then earn fees for re packaging these securities in tranches of collateralized debt obligations, or CDO s (and sometimes into CDO s of CDO s).

Cleaning up high private sector debt and lowering public debt ratios by growth alone is particularly hard if a balance sheet crisis leads to an anemic recovery.

By nationalizing private debts, Europe is following the path of the 1980 s debt crisis in Latin America.

Twenty years of such shortsighted policies, whatever the party in power, have fueled government debt, hindering private investment.

As we have seen in recent crises, private risk taking and debt are socialized when a crisis occurs.

In 2012, as the debt to GDP ratio skyrocketed, Greece s private creditors were given a significant 34 haircut.