German Chancellor Angela Merkel likes to emphasize, rightly, that one should not speak of a euro crisis, but of a debt crisis. If she had added that this is a crisis of both sovereign and bank debt, she would have been even more right.

The financial and economic crisis is morphing into a sovereign debt crisis in advanced countries.

The eurozone debt crisis has worsened, and financial strains are rising.

But the stimulus measures transformed a banking crisis into a fiscal and sovereign debt crisis.

Initially a financial crisis, it morphed into a classic public debt crisis after governments stepped in to guarantee banks obligations.

If she had added that this is a crisis of both sovereign and bank debt, she would have been even more right.

German Chancellor Angela Merkel likes to emphasize, rightly, that one should not speak of a euro crisis, but of a debt crisis.

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

That was not a good idea, as it led to a massive (for the time) debt crisis in 1982.

But any manufactured debt crisis now would deeply antagonize the corporate sector and most of the electorate.

And, if a debt crisis is near, exceptions will be found, waivers will be issued, and buyers for the additional debt will be lined up.

And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.

So far, the country has not experienced a debt crisis, and interest rates remain exceptionally low, at around 1 .

Otherwise, China might already have experienced its own localized sovereign debt crisis and, perhaps, hyper inflation.

The alternative is either a sovereign debt crisis, followed by a destructive spike in borrowing costs, or a growing burden for subsequent generations of taxpayers.

The question of debt sustainability analysis is also key to the resolution of the debt crisis of other low and middle income countries.

Of course, some believe that the Fed s mass purchases of US debt poses an even bigger risk than Europe s sovereign debt crisis.

In some countries, fiscal policy is crippled by legitimate fears that more deficit spending will trigger government debt crises.

Ironically, it is the German government s loose talk that has brought Europe to the brink of another debt crisis.

Given this, in the event of a crisis, China would most likely have to begin selling off its massive store of US debt.

A public debt crisis in Japan (as the combination of recession, deflation, and high deficits drove up the debt GDP ratio).

But if we are to avoid winding up in another debt crisis, some, perhaps much, of the money will have to be given in grants.

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.

The European Central Bank s announcement of its outright market transactions program has reduced the risk of a sovereign debt crisis in the eurozone periphery and a breakup of the monetary union.

The endgame is far more likely to entail a wave of debt write downs, similar to the one that finally wound up the Latin American debt crisis of the 1980 s.

Eternal Debts

WASHINGTON, DC The eurozone crisis unfolded primarily as a sovereign debt crisis mostly on its southern periphery, with interest rates on sovereign bonds at times reaching 6 7 for Italy and Spain, and even higher for other countries.

Indeed, a German proverb to the effect that trust is good, but control is better has been the basis of eurozone leaders policy since the developed world s debt crisis engulfed the single currency s system of governance.

CAMBRIDGE Now that the European Union and the International Monetary Fund have committed 67.5 billion to rescue Ireland s troubled banks, is the eurozone s debt crisis finally nearing a conclusion?

Debt Without Drowning

If European banks had enough capital, a reduction in the value of Greek and other debt would reduce shareholder equity and disappoint investors, but it would not cause a banking crisis.

Deficits have to fall within a time horizon of 5 10 years. The alternative is either a sovereign debt crisis, followed by a destructive spike in borrowing costs, or a growing burden for subsequent generations of taxpayers.

Bank bonds could also be reduced and converted into equity, which would both avert a government takeover of banks and prevent socialization of bank losses from causing a sovereign debt crisis.

To avoid such an internal sovereign debt crisis, China s Budget Law, adopted in 1994, forbade local governments from borrowing autonomously, either by issuing bonds to the public or by getting credits from banks.

Latin America had a big debt crisis that broke out in 1982, but in fact there were almost no defaults (with the exception of Peru and, for a few months in late 1987, Brazil).

Yet no likelihood of inflation can be seen when tracking price indexes or financial market readings of forecast expectations. And no approaching government debt crisis in the core economies can be seen when tracking government interest rates.

Innovation Crisis or Financial Crisis?

Paris Club debt reschedulings

While the Syrian Arab Republic welcomed the Group of Eight's decision to cancel the debts of the poorest countries, it felt that the debts of all the less developed countries should be cancelled, and that the debts of the middle income countries should be substantially reduced.

Mortgage debts, too, must be written down.

Both Europe and America can learn a lesson hidden in American history, for, lost in the haze of patriotic veneration of America s founders is the fact that they created a new country during and largely because of a crippling debt crisis.

This is needed to prevent even more private debt being put on government balance sheets, causing a fiscal blowout.

Government debt must be restructured. Bank debts have to be converted into equity and, where banks are insolvent, written off.

On the other hand, if policymakers maintain the stimulus for too long, runaway fiscal deficits may lead to a sovereign debt crisis (markets are already punishing fiscally undisciplined countries with larger sovereign spreads).

Ireland has thrown Europe into its second sovereign debt crisis this year, and capital markets have become schizophrenic, with investment rushing back and forth across the Atlantic in response to contagion risk in Europe and quantitative easing in the United States.