This would solve the cross-holding problem...

...but would cause more damage to the EU system. A puzzling idea. As things go from bad to worse removing default risk free status is not something debt holders want to hear.

From Risk Online:

European policymakers and regulators are considering dramatic changes to the capital treatment for government bonds

Regulators and policymakers in the European Union (EU) are weighing three measures that would strip government bonds of their default-risk-free status, making them more costly for banks to hold in capital terms. That might seem a rational response to fears of restructuring or default of Greece, Ireland and Portugal, but it begs the question of whether - and how - a new capital regime would differentiate between issuers whose yields have fanned out across a 900 basis point spectrum.

More fundamentally, regulators would need to consider driving a wedge between eurozone member states, which have a limited guarantee in the form of the European Financial Stability Facility (EFSF), and non-eurozone states, which have the unlimited ability to print money to avoid default.

The idea is anathema to some. "We don't even want to think about it. We are all in the same space - our bonds have all been treated the same. That isn't something we accept could change, and it doesn't make much sense if a stability fund has been created to guarantee us," says Manuela Athayde Marques, head of the Center for Financial Research at Portugal's banking association, the Associação Portuguesa de Bancos, in Lisbon