The most intense behind-the-scenes bargaining that took place this week in European capitals to save the Euro zone’s faltering economies happened between German Chancellor Angela Merkel, French President Nicolas Sarkozy and a number of banks that hold Greek sovereign debt. According to reports, these two politicians persuaded banks to write off up to 50 percent of their loans to Greece, up from the earlier agreed 21 percent.
In financial argot, these write offs are called ‘haircuts’. The necessity for European and American private sectors to chip in by accepting huge haircuts was evident from the start. But the bankers fought tooth and nail to be made whole on all the sovereign debts owed to them. How Germany and France managed to convince these creditor banks to accept the haircuts remains to be revealed.
I had argued in a recent op-ed (http://www.asiasentinel.com/index.php?option=com_content&task=view&id=3787&Itemid=590) that only Western corporations sitting over trillions of dollars of combined profits can save the Euro by buying emergency sovereign bonds or contributing more firepower to the European Financial Stability Fund.
The problem with my prescriptions is that they are too radical for capitalistic economies. Forcing corporations to bear more burdens for bailouts is the demand of the Occupy Wall Street protests across the world today, but few governments would risk the wrath of the markets by doing so.
That Merkel and Sarkozy finally found the guts to do so to some extent with European banks is a step in the right direction, but given the fragility of highly indebted Greece, Italy and Spain, the haircuts may have to become full tonsures for the Euro zone to survive in piece!!
It is time for concerted international action to deepen the haircuts so that taxpayers and the average Janes and Joes get some relief from the austerity medicine that is being forced down their throats relentlessly.
“99 percent” of the advanced world- you have nothing to break but your chains!!