How European sovereign debt became the new "sub-prime"?

Sovereign debt has been at the center of the Eurozone crisis. In the aftermath of the US sub-prime mortgage meltdown, European banks fled to what they saw as safety - bonds issued by countries in Europe’s seemingly ironclad monetary union. As Europe tethers on the brink, even triple-A rated sovereign bonds of the peripheral economies have been exposed for their true colors.

The Times has this nice summary of how European sovereign debt became the new sub-prime,

"How European sovereign debt became the new subprime is a story with many culprits, including governments that borrowed beyond their means, regulators who permitted banks to treat the bonds as risk-free and investors who for too long did not make much of a distinction between the bonds of troubled economies like Greece and Italy and those issued by the rock-solid Germany.

Banks had further incentive to overlook the perils of individual euro zone countries because of the fees they earned for underwriting sovereign debt sold to other investors... As the subprime crisis peaked on Wall Street, banks sharply increased their underwriting of European sovereign debt. In 2007, the world’s big banks made $113.9 million in underwriting fees; by 2009, that number had more than doubled to $273 million...

Their special relationship with governments sometimes also presented a unique dilemma: it gave banks little incentive to publicize red flags even if they were suspicious about sovereign debt...

For most of the last decade, bond yields among Germany, Greece, Portugal, Ireland, Italy and Spain traveled in a tight pack. That meant investors buying and selling those bonds acted as if the countries were almost equally safe simply because they were members of the euro zone, despite shaky finances in Greece, real estate bubbles in Ireland and Spain and high debt in Italy...

Regulators bear much of the responsibility. Before 1999, when Europe forged its monetary union, regulators permitted banks to treat as risk-free the debt of any country that belonged to the Organization for Economic Cooperation and Development, a club of developed nations that includes the United States and most of Europe."

The graphic below illustrates the foreign debt exposures to various Eurozone countries and the contagion dangers of European sovereign debts.



And the graphic below has the summary of the latest Eurozone sovereign debt exposures.