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Supranational Government in Europe?

  • Exhibit 5: Net direct exposure to debt of Greece, Italy, Ireland, Portugal and Spain by banks participating in ECB stress test

Source: European Banking Authority, McKinsey Global Institute

The subordinated debt of French banks may not survive. But that is owned by households directly or through pension funds and insurance companies, and is mostly in French hands. If the French banks' subordinated debt is valued at zero, the French people will be poorer, but there will be no systemic consequences. French savers will be angry, but that is a matter between them and President Francois Hollande. The senior debt of the French banks, though, is viable --because the French economy is viable -- and supporting the French banks' senior obligations is required to prevent a financial crisis and economic collapse.

thumbnail image courtesy shutterstock/Daniel Alvarez