What is it about EU countries that makes their bonds worthless?
Worthless is a bit too strong (but the same is true of US mortgage backed securities). What makes European sovereign debt worth-less is the combination of very slow growth and fairly high interest rates, and the justifiable belief that the people don’t want to pay a large fraction of their GDP just to cover the interest on their debt. Their governments don’t want to be punished by the voters, so they have a strong incentive to default.
This is especially true of Italy, which runs a primary surplus, but has to borrow more money to cover the interest payments on their debt. If Italy defaulted, they wouldn’t have to worry about their credit rating tanking, because they can cover their expenses just on their tax revenue, without implementing tough (unpopular) austerity measures.
Worthless is a bit too strong (but the same is true of US mortgage backed securities). What makes European sovereign debt worth-less is the combination of very slow growth and fairly high interest rates, and the justifiable belief that the people don’t want to pay a large fraction of their GDP just to cover the interest on their debt. Their governments don’t want to be punished by the voters, so they have a strong incentive to default.
This is especially true of Italy, which runs a primary surplus, but has to borrow more money to cover the interest payments on their debt. If Italy defaulted, they wouldn’t have to worry about their credit rating tanking, because they can cover their expenses just on their tax revenue, without implementing tough (unpopular) austerity measures.