The Abrahamic religions take a radical view of debt. Charging excess interest is the sin of usury, and outstanding obligations are supposed to be periodically canceled during jubilee years. The old moralists understood the dangers of insisting on the repayment of unpayable debts. But the global financial crisis has revealed that we badly need to relearn this wisdom.
A debt crisis occurs when the credit that has sustained spending suddenly dries up, making it difficult or impossible for debtors to service their debts. This is what happened to both U.S. investment banks and eurozone governments from 2008 on (as well as to many homeowners on both sides of the Atlantic): without the easy lending that had been available before the crash, they ran out of cash when their obligations fell due.
Policymakers have two options in such a crisis: they can either bail out debtors so their debts are honored,