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Thursday, Jan. 12, 2012
A way out of the debt crisis
Loss of confidence in the financial conditions of eurozone countries with mounting debts has destabilized financial markets, and the uncertainty now threatens to put the global economy in jeopardy. Amid the crisis, Chancellor Angela Merkel of Germany and President Nicolas Sarkozy of France met in Berlin on Monday, searching for ways to end the crisis.
It is hoped that Germany and France, the strongest countries in the eurozone, will exercise leadership so that Europe will come up with a grand program to overcome the crisis or at least a road map to work one out at an early date.
To make up for losses caused by the sovereign debt crisis, European banks holding a large amount of bonds of problem eurozone countries are withdrawing funds used for investment in emerging economies. This will cool these economies, which underpin the global economy.
Fears of default have caused selling of bonds, making bond prices fall and interest rates rise. High interest rates are increasing the cost of issuing refinancing bonds by debt-ridden eurozone countries, further worsening their financial conditions.
Declining confidence in problem countries has weakened the euro currency. At one point on Monday, the euro fell to ¥97.28, the lowest level against the yen in almost 11 years.
Mr. Sarkozy called the situation faced by the euro "very tense." Ms. Merkel expressed her determination to make utmost efforts to prevent the erosion of confidence in the euro, saying "Our intention is that no country must withdraw from the euro area."
The crisis deepened because many European countries violated a rule that requires European Union members to keep their budget deficit below 3 percent of their gross domestic product. Mr. Sarkozy said that a new "fiscal compact," which will include automatic sanctions against a country that breaks the rule, is expected to be signed on March 1. The EU countries except Britain are ready to sign it. If it includes effective sanctions against rule breakers, the eurozone countries can seriously consider the next step of jointly issuing bonds using their combined strength.
They need to quickly work out a scheme in which the European Central Bank will give direct financial help to countries facing a financial crisis by utilizing jointly issued bonds as collateral.