The default option

20 May 2010 By Neil Unmack Follow @unmack1

Angela Merkel has some barmy ideas, such as unilateral short selling bans, but her call for a euro zone sovereign insolvency mechanism sounds sensible. For some European politicians, default is anathema. But there are good reasons to put a mechanism in place.

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German Chancellor Angela Merkel has called for a insolvency mechanism for euro zone states. "Above all, what's necessary is to develop a process for orderly state insolvency," Merkel told German lawmakers on May 19.

Germany will propose setting up a mechanism to allow for state insolvency at the first meeting of a working group to strength the euro zone on May 21. The task force is chaired by Herman Van Rompuy, President of the European Council.

Euro zone countries and the International Monetary Fund agreed May 2 to lend Greece up to 110 billion euros over the next three years after it was shut out of the capital markets. Default is "not an issue" for Greece, European Central Bank president Jean Claude Trichet told reporters April 8. Greek finance minister George Papaconstantinou said on April 4 a Greek debt restructuring is "out of the question".

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