George Papandréou, prime minister of Greece, doesn’t hide that he is strong-arming the rest of Europe. “We negotiate every day to alleviate this indebtedness,” he said (Le Figaro, article in French). And he is winning. In July, holders of Greek bonds accepted a “voluntary” haircut of 21%. But as the world’s financial house of cards began to lean, strong-arming turned into extortion. By Monday, haircut expectations were at 60%—though the question of who will eat the losses remains at the center of the G-20 and Eurozone debates.

And the quick solution to the debt crisis that the financial markets were hoping for?

“The dreams to see the crisis ended by Monday couldn’t be realized,” declared Steffen Seibert, spokesman for Angela Merkel’s government, following intense discussions over the weekend at the G-20 meeting in Paris (L’Expansion, article in French). But he also warned that banks weren’t the only responsible party. Decades of living beyond our means has caused the debt crisis, he said, and current efforts to stabilize the situation must be performed not only by the banks but by “society as a whole.” Taxpayers.

Then Wolfgang Schäuble, finance minister of Germany, weighed in: “The leaders of the EU won’t come to an agreement about a definitive solution by October 23,” in time for their next summit; measures to resolve the crisis, including better regulation and changing the EU treaty, would take time.

Merkel had already lashed out at Timothy Geithner last Friday. He has been putting relentless pressure on Germany to agree to a plan that would print, guarantee, leverage, and borrow away the debt crisis—on the theory that pouring enough gasoline on a fire might actually extinguish the fire.

“There is no single beat of the drum” that would solve everything, she’d said (Handelsblatt, article in German). The solution to the debt crisis is a “long difficult process, a process of many steps and measures.” Eurobonds were no panacea either, and would not be helpful under current conditions, she’d added.

Pressured by all sides, France and Germany try hard to appear unified. During the infamous October 9 dog-and-pony show that followed their meeting, Merkel and French President Nicolas Sarkozy, practically holding hands, declared that they would have a package of global measures by the end of the month to resolve the debt crisis. It worked: the markets jumped.

Even their finance ministers, Wolfgang Schäuble and François Baroin, tried this weekend to portray themselves as the unified saviors of the Eurozone. And just before the G-20 meeting, Schäuble met with Sarkozy, a surprise, according to the Zeit (article in German). “We have a common position between Germany and France,” Schäuble said afterwards. “And we’re convinced that together we will be able to defend the euro as a stable currency.”

But behind the scene, disagreements have fermented on almost every issue. Sarkozy is under heavy political pressure at home. The election is in seven months. Unemployment is ticking up. In the second quarter, there was zero growth. A recession seems likely. France’s AAA rating is headed for a downgrade. And for the first time since 1958, the conservatives lost the majority in the senate. And yet, he caved to Merkel on several issues.

All along, he’d vociferously opposed haircuts for bondholders of Greek debt. But momentum in favor of haircuts has been building. And on Monday, when Jean-Claude Juncker, prime minister of Luxembourg and President of the Euro Group, said that haircuts of 50-60% might not be enough, Sarkozy suddenly remained silent.

For the longest time, Sarkozy had echoed the French financial establishment that French banks wouldn’t need to be recapitalized. He is feverishly trying to maintain France’s AAA rating, at least until after the election, by proposing unpopular reforms, such as an increase in retirement age. And if France had to issue more debt to recapitalize its mega-banks, multiple downgrades would be certain.

But in their October 9 declaration, bank recapitalization was at the top of their priority list. And his idea of using the European bailout fund, the EFSF, to recapitalize French banks (if they did need it) was wiped off the table this weekend.

However, they’d forgotten to ask the bankers. Who reacted with outrage.

“The French banks point out that the financial situation of some Eurozone countries, and not of the banks, is the reason for the turbulence in the markets,” declared the banking association, Féderation Bancaire Française (Zeit, article in German). And Michel Perbereau, CEO of BNP Paribas—the world largest bank whose assets of $2.8 trillion dwarf France’s $2.1 trillion economy—outright excluded a recapitalization of his bank.

Much like Josef Ackermann, CEO of Deutsche Bank, who said that the bank “will do everything it can to avoid a forced recapitalization” (FAZ, article in German). He also warned of a domino effect if there is private sector involvement in the losses on Greek bonds beyond the “voluntary” 21% agreed on last July. Sovereign bonds of other countries would crash, and bailout requirements would get much larger, he said.

That was last week. Sunday, he said that he’d go to Brussels in a few days to discuss the potential for investors to accept deeper losses.

Jean-Claude Trichet, head of the European Central Bank, warned last week on private sector involvement in losses on Greek debt—merely talking about it was bad, he said. It would threaten the solvency of banks in Greece and have dire consequences for the banking sector as a whole. But the ECB, too, will come around at the last minute.

Underlying the anxiety is not the Greek debt itself, whose magnitude is known, but credit default swaps on Greek debt. Their magnitude isn’t known. Anything beyond the 21% “voluntary” haircut would constitute a credit event that could trigger demands for payment of huge sums that would cascade through the banking system. Something the bankers failed to mention in public.

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