EuroZone Crisis Update: The Plot Thickens as Sovereigns Set to lose Sovereignty

To understand the developments in the Eurozone crisis, one must first understand the yearnings of each separate interest group. These interest groups are the citizens of Eurozone member countries, the governments that lead them, and the international banks/bankers that own their sovereign debt.

Let us begin with the bankers who own the sovereign debts. Sovereign debts are loans taken by countries to finance their budgets and other fiscal needs which their revenue (taxes and other sources of income) cannot accommodate.

Over the past few years, sovereigns/countries have been borrowing money at an alarming rate, the bankers have been willing to lend money to these sovereigns because they make commissions and fees based on their lending activity. In fact the more money they borrow to sovereigns, the more commissions they earn. How is that possible you might ask? Well it’s because, a lot of money the banks lend out to the sovereigns doesn’t really belong to the banks, it belongs to the pension funds, fund managers, high net worth individuals and other classes of investors that keep their money with international investment banks.

The rationale behind the fees is this, the clients give them money to invest and pay them a fee for taking, presumptuously, smart investment decisions on their behalf. The sovereigns then approach the bankers and ask them to invest in their debt, this debt is rated highly by credit rating agencies such as Moodys, and so the bankers invest in the debt. The sovereigns then pay them a commission for buying (on-selling their debt to the clients they advise).

It is a profitable venture for the banks and the countries and even the clients until the bubble bursts like it has now in the Eurozone. These countries have borrowed so much, they cannot continue to meet their interest rate payments on the loans they took. To give you an idea of how much these countries are borrowing. Let’s take Italy for example. Italy’s debt was over $ 2.4 trillion in 2010. That is $ 2,400,000,000,000.

The bankers that bought Eurozone debt and/or sold it to their clients are being asked to take a huge write-down of 50% of the face value of the debt . The losses will be huge and could cause a systemic shock in the banking system and more importantly affect the income/fees that these banks usually enjoy. They are adverse to this, as the businessman’s mantra is profit maximization.

Therefore the powerful global bankers are pressuring the governments and leaders of the Eurozone and Central banks worldwide to adopt more draconian measures that will cause citizens and governments of the regions to lose benefits held dear by both groups. The citizens are being asked to embrace austerity measures that will cost them their social benefits such as increasing the age of retirement, causing them to work longer years, take less vacations, introduction of new taxes, mass retrenchment of civil servant workers, reduction of pension benefits and more.

The major blow to the sovereigns will be well a reduction in their sovereignty. A new treaty being drafted for Eurozone members calls for greater central oversight on the budgets and fiscal plans of the Euro member countries.

“It’s a very good outcome for the euro area, very good,” ECB President Mario Draghi said of the treaty in Brussels. “It is going to be the basis for much more disciplined economic policy for euro-area members. And certainly it is going to be helpful in the present situation.”

British Prime Minister David Cameron stated, “What was on offer is not in Britain’s interest so I didn’t agree to it, we’re not in the euro and I’m glad we’re not in the euro. We’re never going to join the euro and we’re never going to give up this kind of sovereignty that these countries are having to give up.”

Governments participating in the new treaty agreed to have balanced budgets, calculated as an annual “structural” deficit of no greater than 0.5 per cent of gross domestic product. An unspecified “automatic correction mechanism” will punish countries that break the rules.

To prevent excessive deficits, countries will have to submit their national budgets to the European Commission, which will have the authority to request that they be revised.

 Source: Global News

Governments participating in the new treaty agreed to have balanced budgets, calculated as an annual “structural” deficit of no greater than 0.5 per cent of gross domestic product. An unspecified “automatic correction mechanism” will punish countries that break the rules.
To prevent excessive deficits, countries will have to submit their national budgets to the European Commission, which will have the authority to request that they be revised.