Greek demonstrators took over the Finance Ministry building in central Athens and blocked streets in the city center as union groups stepped up protests against government wage cuts and tax increases to curb the deficit.

Ugh–read it all.

…Germany’s Chancellor, Angela Merkel, is not ready to sign off on a rescue, officials said, before Greece has pushed through further cuts.

One European official, speaking on condition of anonymity because of the sensitivity of the subject, said that Greek officials appeared to be briefing journalists on the prospect for an big rescue package in the hope of pushing the European Union into a quick solution, or of convincing the markets that help is at hand.

“The Germans will not put a euro on the table until there is a credible austerity package,” the official said.

Simon Tilford, chief economist at the Center for European Reform, said that France and Germany recognize that some form of bailout is inevitable, but that, to enable a bailout to be sold to a skeptical German public, the Greeks first “have to be seen to be suffering.”

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Bets by some of the same banks that helped Greece shroud its mounting debts may actually now be pushing the nation closer to the brink of financial ruin, Nelson D. Schwartz and Eric Dash report in The New York Times.

Echoing the kind of trades that nearly toppled the American International Group, the increasingly popular insurance against the risk of a Greek default is making it harder for Athens to raise the money it needs to pay its bills, according to traders and money managers.

These contracts, known as credit-default swaps, effectively let banks and hedge funds wager on the financial equivalent of a four-alarm fire: a default by a company or, in the case of Greece, an entire country. If Greece reneges on its debts, traders who own these swaps stand to profit.

“It’s like buying fire insurance on your neighbor’s house ”” you create an incentive to burn down the house,” said Philip Gisdakis, head of credit strategy at UniCredit in Munich.

Read it all from the front page of today’s NY Times.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not “save” us half so much as monetary policy ”“ zero interest rates plus quantitative easing ”“ did. First, the impact of government spending (the hallowed “multiplier”) has been much less than the proponents of stimulus hoped. Second, there is a good deal of “leakage” from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

For the world’s biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the “safe haven” of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase “safe haven”. US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House’s new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years’ time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That’s right, never.

Read it all.

Last year it was banks; this year it is countries. The economic crisis, which seemed to have eased off in the latter part of 2009, is once again in full swing as the threat of sovereign default looms.

Europe’s leaders are struggling to avert the biggest financial disaster in the euro’s 11-year history…. This week all eyes have been on Greece. If it defaults, it will be the first EU member to do so. As The Economist went to press EU leaders were meeting to discuss what to do, and there was talk of a German-led rescue scheme. If it happens, other European candidates may be queueing up. Bond markets are worried about the capacity of Spain (see article), Ireland and Portugal to repay their debts, forcing these countries to increase taxes and cut spending, even as they remain mired in recession.

Europe’s troubles have given investors good reason to worry; but they are not the only cause for concern.

Read it all.

Wall Street tactics akin to the ones that fostered subprime mortgages in America have worsened the financial crisis shaking Greece and undermining the euro by enabling European governments to hide their mounting debts.

As worries over Greece rattle world markets, records and interviews show that with Wall Street’s help, the nation engaged in a decade-long effort to skirt European debt limits. One deal created by Goldman Sachs helped obscure billions in debt from the budget overseers in Brussels.

Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning. In early November ”” three months before Athens became the epicenter of global financial anxiety ”” a team from Goldman Sachs arrived in the ancient city with a very modern proposition for a government struggling to pay its bills, according to two people who were briefed on the meeting.

The bankers, led by Goldman’s president, Gary D. Cohn, held out a financing instrument that would have pushed debt from Greece’s health care system far into the future, much as when strapped homeowners take out second mortgages to pay off their credit cards.

Read it all from the front page of today’s New York Times.

Even following Thursday’s EU summit, an orderly resolution of these problems seems unlikely. The Germans will push for draconian cuts to Greece’s government spending and public sector wages but they won’t budge on relatively tight monetary policy and the overly strong euro””and they definitely won’t agree to loosen their own (German) fiscal policy.

Ireland is already cutting hard. Such fiscal austerity leads to double-digit declines in GDP, and risks massive political revolts. Ireland’s banks are today probably insolvent. Who can afford to repay their mortgages when wages are falling and unemployment rising? Irish house prices continue to speed downward. This is not an example of a “careful” solution””it is a nation in a financial death spiral.

Other EU countries will lobby for a continuation of the status quo. They would prefer the ECB keep lending to the periphery, and the problems be pushed off for another day. This too is no solution.

For now Europe will try to muddle through. Greece will promise a pound of flesh, hoping not to pay, and other nations will be spared with promises of continued financing””but just for now.

Financial markets know that this makes no sense, hence the “largest ever” short euro positions, betting on a further decline of the currency. If one country must make a substantial and painful fiscal adjustment, eventually the rest will follow.

Read it all.

EU leaders say they are ready to act to shore up Greece’s finances and ensure stability in the eurozone – but they have made no specific promise of aid.

Greece must take further measures to tackle its huge debts and cut its budget deficit by 4% this year, the EU leaders said after a Brussels summit.

The statement did not spell out what was meant by “determined and co-ordinated action, if needed”.

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As the eurozone’s dominant economy, Germany would be expected to take the lead in marshalling financial support for a Greek bail-out. There are fears the crisis could spread to other eurozone states with big deficits such as Spain and Portugal.

“We’ve had to face up to the fact that what is now a Greek problem could turn into a European one,” the official said.

”We’re thinking about what we should do if the crisis spills from Greece into other euro countries. So it’s more about finding firewalls, containing the problem, than principally about helping the Greeks.” He added there were ”no concrete plans” as yet.

Read it all.

European nations are discussing various ways to help troubled Greece cope with its mountain of government debt, officials indicated Tuesday, as conflicting reports sent markets on a roller coaster ride, bolstering the faltering euro and contributing to a stock market rally that later pulled back from its heights.

The specifics of any bailout remained unclear and officials played down reports that Germany and France had already agreed on a rescue plan for Greece.

“This will be further discussed in the coming days,” Olli Rehn, who is about to take over as European economic affairs commissioner, said in an interview in Strasbourg. “We are talking about support in the broad sense of the word. I cannot specify it now. Solidarity goes both ways.”

Read it all.

And…the unemployment rate fell 0.3% to 9.7%. This of course means that more people are dropping out of the labor pool, and it also means they will at some point come back.

On the negative side, a loss of 22,000 jobs is nowhere close to the 100,000 new jobs that are needed just to hold unemployment steady. 41% of those unemployed have been so for over 6 months.

And quoting David Rosenberg:

“While there will be many economists touting today’s report as some inflection point, and it could well be argued that we are entering some sort of healing phase in the jobs market just by mere virtue of inertia, the reality is that the level of employment today, at 129.5 million, is the exact same level it was in 1999. And, during this 11-year span of Japanese-like labour market stagnation, the working-age population has risen 29 million. Contemplate that for a moment; fully 29 million people competing for the same number of jobs that existed more than a decade ago. That sounds like pretty deflationary stuff from our standpoint.

“Not only that, but consideration must be taken that in 2009, we had a zero policy rate, a $2.2 trillion Fed balance sheet and an epic 10% deficit-to-GDP ratio. You could not have asked for more government stimulus. Yet employment tumbled nearly 5 million in 2009.”

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What began with worries about the solvency of Greece in the face of high deficits, fake budget figures and low growth has quickly become the most severe test of the 16-nation euro zone in its 11-year history.

Anxieties about the health of the euro, which have spread from Greece to Portugal, Spain and Italy, are not simply a crisis of debts, rating agencies and volatile markets. The issue has at its heart elements of a political crisis, because it goes to the central dilemma of the European Union: the continuing grip of individual states over economic and fiscal policy, which makes it difficult for the union as a whole to exercise the political leadership needed to deal effectively with a crisis.

A policy of muddling through may be comfortable in political terms, but experts warn it can have dire economic consequences. Jean-Paul Fitoussi, professor of economics at the Institute of Political Studies in Paris, said that European leaders had “handled this crisis very badly,” feeding market speculation and greed.

Read it all.

Nations which join the Euro are meant to prove their worth by sticking to rules on the size of their budget deficit and national debt.

But as the BBC’s Ed Butler reports from Athens, it is clear that Greek statistics have been unreliable for years.

So should Greece have been refused entry to the Euro back in 2001? Lesley Curwen talks to one of the Euro’s principal architects, Dr. Otmar Issing, founding member of the Executive Board of the European Central Bank, who wrote a book about the ‘Birth of the Euro.’

He says the jury is still out on whether Greece should have been allowed to join the single currency. And he warns against any bailout, saying that Greece must undergo economic reforms that bring ‘blood and tears’.

Listen to it all (about 20 minutes).

“Our immersion in the details of crises that have arisen over the past eight centuries and in data on them has led us to conclude that the most commonly repeated and most expensive investment advice ever given in the boom just before a financial crisis stems from the perception that ‘this time is different.’ That advice, that the old rules of valuation no longer apply, is usually followed up with vigor. Financial professionals and, all too often, government leaders explain that we are doing things better than before, we are smarter, and we have learned from past mistakes. Each time, society convinces itself that the current boom, unlike the many booms that preceded catastrophic collapses in the past, is built on sound fundamentals, structural reforms, technological innovation, and good policy.”

– This Time is Different (Carmen M. Reinhart and Kenneth Rogoff)

When does a potential crisis become an actual crisis, and how and why does it happen? Why did most everyone believe there were no problems in the US (or Japanese or European or British) economies in 2006? Yet now we are mired in a very difficult situation. “The subprime problem will be contained,” said now controversially confirmed Fed Chairman Bernanke, just months before the implosion and significant Fed intervention. I have just returned from Europe, and the discussion often turned to the potential of a crisis in the Eurozone if Greece defaults….
Greece is running a budget deficit of 12.5%. Under the Maastricht Treaty, they are supposed to keep it at 3%. Their GDP was $374 billion in 2008 (about €240 billion). If they can cut their budget deficit to 10% this year, that means they will need to go into the bond market for another €25 billion or so. But they already have a problem with rising debt. Look at the following graph on the debt of various countries….

When Russia defaulted on its debt and sent the world into crisis in 1998, they had total debt of only €51 billion. Greece now has €254 billion and added another €8 billion this week, and needs to add another €24 billion (or so) later this year. That’s a debt-to-GDP ratio of over 100%, well above the limit of the treaty, which is 60%.

Read it all.

This week the European Commission begins studying Greece’s latest plan for extracting itself from its financial crisis. But although the deployment of the Brussels machinery has taken the edge off the drama, any sense that the problem is now contained would be an illusion. The possibility that a country within the eurozone will get to the brink of defaulting on its sovereign debt remains real.

The new Greek Government’s plan remains incredible, based on a cut in the budget deficit from nearly 13 per cent to under 3 per cent in three years. That implies that Greece would, in one coherent sweep, push through profound reforms of the public and private sectors that it has not yet been able to tackle.

It remains likely, then, that Greece is headed for a crisis that tests the stability of the eurozone. The burden of Europe’s most difficult decision this year would fall on Angela Merkel, the German Chancellor, who would have to decide whether to rescue Greece to forestall a crisis throughout the currency club.

Read it all.