The never-ending euro zone crisis has been described as both tedious and terrifying. But it is worth looking at the end game, what will happen if it all goes wrong. Right now, we are waiting for the European Central Bank to step in and assume its lender of last resort responsibilities. That is to say, that it boldly enters the financial markets and buys enough Greek, Italian, Spanish, Portuguese, Irish bonds to drive their yields down to affordable levels. The ECB, for some reason still scarred by the Weimar hyperinflation of 1923, is loath to bail out the profligate southern European nations and requires the political cover of believable pledges that the PIIGS will restrain their spendthrift ways before it will open up its wallet.
Let us imagine it does not believe their promises and stops buying their bonds. Private investors, already fleeing PIIGS sovereign debt, would find no buyers. Everyone would be selling, no one would be buying, yields would go through the roof. Nations roll over their debt all the time. Imagine if you had to pay off your entire mortgage tomorrow and no bank was willing to extend you a credit line. Unless you had lots of other liquid assets stashed away, you would not be able to avoid default. So it is with Italy and Spain. Without the ability to sell new bonds, they cannot repay maturing bonds as they come due.