Will Greece default? Should Greece default? What will happen to the Eurozone? What will happen to the EU?

It seems as if almost every day the debt problems of one or more of the PIIGS threatens to unravel the European Union and sink financial markets worldwide. But let me look at the debt crisis from a different perspective.

If banks and other financial institutions in the EU are subject to mark-to-market rules, then all of them that hold the debt of any of the PIIGS already have written down the value of their holdings of this debt. Their balance sheets and income statements have taken the hits – the haircuts. Thus, a default by one or more of the PIIGS should cause limited further damage to the European financial institutions.

In this case, why don’t they voluntarily exchange their existing debt for new debt with significantly lower face values (reflecting current market prices)? This would reduce the outstanding debt of the PIIGS and greatly reduce their annual interest costs, hence ameliorating their fiscal problems. Why is the European Central Bank (ECB) adamant in rejecting this option and insisting that the debt eventually be paid in full with no change in the terms (interest rates and maturity dates)? Why does the ECB prefer that each of the PIIGs bears the brunt of the costs in resolving the debt crisis?

One possible explanation is that if the European financial institutions holding the debt are paid in full, each one will recover its past losses and record enormous profits in the near future. Who will benefit if this happens? The shareholders and the CEOS who will be richly rewarded for the stellar profits will be the beneficiaries, while the people in the PIIGS will endure even greater economic hardships.

On the other hand, if the European financial institutions are not subject to mark-to-market rules, then it is easier to understand the concerns of the ECB. Any default would lead to significant losses and write-downs of the capital of these institutions, thus jeopardizing their solvency.

I do not know what the rules are in the EU, but the absence of mark-to-market rules would be a travesty and raise serious concerns about the quality of accounting rules and financial statements in the EU. Moreover, the absence of such rules would have produced enormous profits in the past, as financial institutions would have been able to ignore the mounting losses on their holdings of the debt of the PIIGS. This in turn would have enabled the CEOs of these companies to reap handsome bonuses for phantom profits. And we think that Bernie Madoff is the only person to have pulled off a massive fraud.

Whether or not there is a mark-to-market rule in the EU, the European Commission should set up a commission to investigate all of the issues related to the debt crisis and come up with proposals to effectively solve the problems. Unless this is done, the European financial institutions might follow in the footsteps of the Japanese banks and become zombies for long periods of time.

The commission should consist of people who are independent of all financial institutions and countries in the EU. I would be pleased to offer my services to chair such a commission.

The opinions expressed in this blog are personal and do not reflect the views of either Global Brief or the Glendon School of Public and International Affairs.