It looks like the Euro Zone may be letting the big banks get 100¢ on the dollar for bad sovereign debts:

Euro zone states may ditch plans to impose losses on private bondholders should countries need to restructure their debt under a new bailout fund due to launch in mid-2013, four EU officials told Reuters on Friday.

The possible move helped push stocks up in Europe and the U.S.

Discussions are taking place against a backdrop of flagging market confidence in the region’s debt and as part of wider negotiations over introducing stricter fiscal rules to the EU treaty.

Euro zone powerhouse Germany is insisting on tighter budgets and private sector involvement (PSI) in bailouts as a precondition for deeper economic integration among euro zone countries.

Commercial banks and insurance companies are still expected to take a hit on their holdings of Greek sovereign bonds as part of the second bailout package being finalized for Athens.

But clauses relating to PSI in the statutes of the European Stability Mechanism (ESM) — the permanent facility scheduled to start operating from July 2013 — could be withdrawn, with the majority of euro zone states now opposed to them.

The concern is that forcing the private sector bondholders to take losses if a country restructures its debt is undermining confidence in euro zone sovereign bonds. If those stipulations are removed, most countries in the euro zone argue, market sentiment might improve.

What is going on here is that the European Central Bank (ECB) was structured to eschew one of the most basic activities of a central bank, back-stopping debt sales in the presence of an investor panic.

The problem is that the ECB was structured largely in response to the German experience with hyperinflation in the 1920s, which led to the creation of the ECB as an organization committed to austerity and battling inflation to the exclusion of all other concerns.

I guess I kind of understand this, because, after all, they think that this period of extreme inflation led to the collapse of the German economy in the 1930s, and the rise of the Nazis, and WWII.

Of course, the German central bank of the 1930s was among the tightest of the central banks, and made the German depression particularly brutal, which could also tagged as leading to rise of the Nazis, and WWII.

Of course, if subscribe to the theory that roughly every century a war occurs in Europe, the parallels now, and 1914, when the Very Serious People in Europe, with the memory of the Napoleonic wars (1812), frantically tried to integrate the economies of Europe, which also sounds a lot like the entire Euro currency project.

My brother has predicted a new war in Europe, (see the comments)and this has led me to start looking at rather alarming echos of the past.