In reply to SARS:
I'll echo andy regarding NR. They screwed up because they were expanding very fast and were reliant on the wholesale markets for funding. This was reasonable at the time as the wholesale markets appeared reliable, and had been for years.
Basically they originated a shedload of mortgages, securitised them, then lent a shedload more, securitised them, etc. Plenty of banks were doing the same.
Trouble was NR were expanding so fast their dependence on the wholesale markets was greater than most. When because of unwarrented poor confidence (mainly driven by the US situation) demand for securitised products dried up they were left with no funding and went to the BOE.
Even this wouldn't have been a problem until some twit printed in the mass media that NR were going bust, causing the run. At this point their position went from bad but tenable, to utterly untenable as £4bn was withdrawn by savers more or less overnight.
As to the current crisis, first of all I'll point out that I know quite a lot about retail bank funding, but very little about soveriegn debt. Hence the following could be rubbish.
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As I understand it, governments across the world vastly increased their borrowing as they bailed out the banks. This was fine at the time - it was needed to stop the banks running out of cash and also to prop up market confidence, but it obviously left the governments owning more (though this was backed by collateal, they still had to make the interest payments).
For some countries this left them quite close to a situation where they could not pay the interest.
Normally, not a problem. Governments have a permanent supply of interest-paying subjects who are not going anywhere, and all they needed to do was refinance over a longer timescale and problem solved.
In this case it became a problem for two reasons:
1) The rating agencies hold a hell of a lot of power, and used this to force certain governments to make large changes to their finances in order to keep their high credit rating, without which they couldn't refinance, without which they couldn't solve the problem. Trouble is the changes being forced were deeply unpopular with the electorates, so countries (i.e. the politicians at the top) delayed and made the minimum cuts they could get away with.
This wasn't enough for the rating agencies, so they got downgraded, which set off a vicious circle. They needed to refinance to lower their interest payments, but they couldn't refinance without paying a higher rate of interest, as their rating had been downgraded. Which would increase their interest payments. Which they couldn't afford. Which would result in their rating dropping further. Catch-22.
2) For countries in the Eurozone, they had a lot less leeway to play with their individual finances and also to use the main get-out clause available - devalue the currency.
Hence the countries involved were stuck. They couldn't pay the interest, they couldn't refinance, and they couldn't devalue. The only option left was drastic internal cuts, which would only make an actual difference in the long run, but *might*, if they were lucky, persuade the rating agencies to up their rating, at which point they could get out of the hole by refinancing.
Unfortunately drastic cuts also has the effect of bu@@ering the economy, meaning less tax revenues, and even less ability to pay the interest. Catch-22 again.
The whole situation is nicely wound up into a bit of a mess. Like I say, I don't know a right lot about it, but I'd guess that either
a) the rating agencies will break, and get ignored, and other countries will led to the worse ones anyway at sensible rates.
b) the euro will break and some countries will leave the euro, followed by devaluation.
c-z) dunno?