James Saft is a Reuters columnist. The opinions expressed are his own.
Call it the Merkozy Plan – there shall be no more losses.
German Chancellor Angela Merkel and French President Nicolas Sarkozy unveiled on Monday yet another final plan to save the euro, this time calling for new treaty provisions to ensure members maintain fiscal discipline as well as an all-too-predictable move to hold monthly meetings of EU heads, seemingly an attempt to revive Europe by providing business for its caterers.
Perhaps most importantly, the two agreed to scrap a previous agreement to make private sector creditors share in the losses in all future bailouts. Bondholders still face a 50 percent write-down on their holdings of Greek debt, but that’s it, from here on out it’s all going to come out of the hide of taxpayers.
Of course there is the (slim) possibility that future bailouts will include burden sharing by banks and others who hold European government bonds, but given how poorly it was received this time it is best not to hold your breath. The policy U-turn is wise, reckless and deeply depressing all at the same time.
Wise because there is a direct line of causation between the imposed Greek writedown and the subsequent massive sell-off in Italian bonds. Investors are capable of imagining the future, and in the future they saw no guarantee for toxic Italian bonds (as well as others).
“It was a terrible mistake,” European Central Bank Governing Council member Athanasios Orphanides said on Monday. “By forcing the impairment of any state bond we have triggered concern internationally of all state bonds in the euro zone and that’s one of the key reasons we have a problem,” the Cypriot central banker said.