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As another European country edges toward a multibillion-dollar bailout, a number of economists say there is only one way to make creditors share the pain: default. So far, Germany's guarantees of Irish and Greek debt have been cost free. German yields remain very low. But come the inevitable Greek and Irish defaults, Germany's bond market will also start to suffer. In Dublin, officials from the International Monetary Fund, European Union and United Kingdom are negotiating a rescue package that is likely to require the Irish government to further squeeze pensions and paychecks but pay off bondholders of Irish banks, whose debts the government guaranteed. Such a lopsided outcome—which has been repeated since the Latin America debt crises of the 1980s—enrages many voters and signals to investors that there is no price to pay for risky lending because international institutions will always bail them out. Instead, say economists, lenders should be required to take hits on their investments as a way to reduce a government's bills and to force lenders to be more careful about where to invest their money next time because they will realize the IMF and others won't guarantee they will be paid in full. "The most important effect is that (a country's) debts won't build up so much," said Harvard economist Kenneth Rogoff, who has chronicled centuries of sovereign defaults.
