Greece has approved an austerity bill that helps pull the debt-ridden country back from the brink of an immediate default. After days of public unrest and impassioned debate, the Greek parliament voted 155-138 on Wednesday in favor of the controversial bill, which authorizes $40 billion in brutal budget cuts and tax hikes over the next several years for a nation already reeling from previous belt-tightening measures.

The tense legislative showdown came as the country continued to squirm in the grip of a 48-hour nationwide strike and as tens of thousands of angry protesters thronged downtown Athens in noisy opposition to the austerity package. Police in riot gear scuffled with some demonstrators and tried to contain the kind of violence that on Tuesday left dozens of people injured, shop windows smashed and tourists running to escape tear-gas fumes.

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There are two ways the responsible parties can rectify their mistakes. One is to recognize that Greece should never have joined the euro. If it can’t or won’t swallow austerity measures, let it leave and default on its debts.

But the risks of allowing Greece to fail are similar to what the U.S. faced with the 2008 Lehman Brothers Holdings Inc. bankruptcy. Uncertainty about losses would very likely undermine confidence in European banks and in the governments that would have to bail them out. If Greece’s failure led to a credit freeze, that would threaten banks with insolvency and cause losses for institutions that hold those banks’ debts, including the money-market mutual funds entrusted with $2.7 trillion in U.S. savings….

The alternative path is only slightly less ugly and unfair. It would require the euro area, led by Germany and France, to assume much of Greece’s $495 billion (345 billion euros) in debt indefinitely and be prepared to take on the debts of Portugal and Ireland as well….

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…we all know that the EU’s statistical scrutiny [of Greece] failed. More pertinent is the role that Brussels played in its failure. Upon joining the euro, the Greek government was like a child in a candy store. Credit was available to it at 4% interest rates, when previously it had paid as much as 18%. But which irresponsible adult gave Athens the keys to the store?

Back in January 1999 when the euro was born, Greece was not able to join because it didn’t meet the euro zone’s budgetary and inflationary standards. By June 2000 though, Greece was admitted to the club””despite press reports throughout that year that Greece had qualified by “limbo dancing,” or making great efforts to meet euro-zone standards only to let things slide as soon as it was past the barrier.
The European Central Bank similarly expressed its concern prior to Greece’s euro entry, noting that its debt levels were far above the prescribed limit. A respected Bonn University economics professor, Jürgen von Hagen, told the New York Times that at the time, there were already “clear indications that the Greeks were forging the data.”

So where was the European Commission during this time?….

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The European Union seems to have adopted a new rule: if a plan is not working, stick to it….But their strategy of denial””refusing to accept that Greece cannot pay its debts””has become untenable…

An orderly restructuring [for which the Economist advocates] would be risky. Doing it now would crystallise losses for banks and taxpayers across Europe. Nor would it, by itself, right Greece. The country’s economy is in deep recession and it is running a primary budget deficit (ie, before interest payments). Even if Greece restructures its debt and embraces the reforms demanded by the EU and IMF, it will need outside support for some years. That is bound to bring more fiscal-policy control from Brussels, turning the euro zone into a more politically integrated club. Even if that need not mean a superstate with its own finance ministry, the EU’s leaders have not started to explain the likely ramifications of all this to voters. But at least Greece and the markets would have a plan with a chance of working.

No matter what fictions they concoct this week, the euro zone’s leaders will sooner or later face a choice between three options: massive transfers to Greece that would infuriate other Europeans; a disorderly default that destabilises markets and threatens the European project; or an orderly debt restructuring. This last option would entail a long period of external support for Greece, greater political union and a debate about the institutions Europe would then need. But it is the best way out for Greece and the euro. That option will not be available for much longer. Europe’s leaders must grab it while they can.

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Investors are withdrawing cash from money market funds heavily exposed to short-term debt issued by European banks out of fear that a Greek default could spark contagion across the region’s financial sector.

At the same time there is increasing reluctance among US banks to lend to their European counterparts in the past two weeks because of growing worries over Greece, according to brokers and bank traders.

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They are the crown jewels of Greece’s socialist state, and they are now likely to go to the highest bidder: the ports of Piraeus and Thessaloniki; prime Mediterranean real estate; the national lottery; Greek Telecom; the postal bank and the national railway system.

And then comes the mandated deeper round of austerity measures, which will slash the wages of police officers, firefighters and other state workers who are protesting in Athens, and raise the taxes of citizens already inflamed by a recession-plagued economy and soaring joblessness.

After winning a pivotal confidence vote on his new cabinet on Tuesday, Prime Minister George Papandreou now has an even tougher task: to carry out a radical remedy of forced auctions and fiscal austerity for a sickened economy already in a deep slump.

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The question about the prospects for Greece is not whether the country will default. That is, in my view, as near to a certainty as any such thing can be. The question is whether a default would be enough to return the economy to reasonable health. I strongly doubt it. The country seems too uncompetitive for that. A default is a necessary, but not a sufficient, condition for a return to economic health….

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Dozens of U.S. cities and towns are being bruised by the deepening Greek debt crisis even though they are thousands of miles away and don’t own any of the country’s bonds.

From a skating rink in Everett, Wash., to New York City’s schools to Chicago’s O’Hare International Airport, interest rates on some bonds have soared since late May and could rise even further because money-market investors are less willing to buy some of the $17 billion in municipal bond deals backed by Dexia SA, a Belgian-French bank shaken by its exposure to government debts in Greece.

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Now, as…[Prime Minister George Papandreou] comes back to Greece’s foreign creditors asking for the next $16.8 billion installment of aid ”” predicated on persuading Greeks to accept more tax hikes, wage cuts and the privatization of more than $71 billion in state assets before 2015 ”” doubts have emerged about the government’s ability to implement and enforce the measures it has already passed.

“The main problem is that he’s only been able to deliver on the parts of the austerity package that are easily enforceable and transparent and irrevocable,” such as cuts to public sector salaries and pensions, said Spyros Economides, a political scientist who co-directs the Hellenic Observatory at the London School of Economics. “Unfortunately, the rest of it is a complete mess.”

“It’s very easy to legislate,” Mr. Economides added. “The problem is to enforce legislation. There’s no enforcement mechanism. It’s all done for the eyes of the public.”

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EU commissioners have a “profound sense of foreboding” about Greece and the future of the eurozone, a leaked account of a meeting has suggested.

The document, seen by BBC News, said this was in reaction to the “damning failure” of eurozone ministers to agree a new bail-out for Greece last night.

The internal memo was written by an official who attended Wednesday’s gathering of commissioners in Brussels.

The author warned that the markets would now “smell blood”.

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Billionaire investor George Soros has criticised international authorities for “not providing a solution” for the European debt crisis as Greek sovereign bond yields were pushed to record levels again.

Mr Soros, who spoke out as European finance ministers met …[Tuesday] to discuss the crisis, said the officials were “basically buying time” rather than tackling the problems. He added: “This is the normal thing for authorities to do. In this case, I’m afraid they are making a mistake.”

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…the comparisons between Greece and Lehman grew more frequent last week as global markets reeled, spurred in part by the view that Germany’s insistence that private investors participate in a second rescue package for Athens would overcome the objections of the European Central Bank.

“It is a valid concern,” said David Riley, head of sovereign ratings at Fitch. “The Rubicon would be crossed ”” we would have a sovereign default event and that can be quite a shock, not just for the peripheral countries but for Spain and beyond.”

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The new plan’s biggest shortcoming, however, is its attitude to Greece’s debt. The original rescue plan assumed that, starting in 2012, Greece would issue new bonds to pay off maturing ones. With such market access now out of the question, the new bail-out envisages more loans from the EU and IMF, along with some “voluntary” participation by private bondholders. Germany would like the maturities of all Greek bonds to be stretched by seven years. The European Central Bank has long resisted any such debt “reprofiling”, though it seems to be warming towards an informal promise by some creditors, such as Greek banks, to buy more government bonds when their existing ones mature.

The practicality of such an informal promise is doubtful. And it won’t solve the debt problem. When the new plan ends Greece will still owe more than it can possibly pay. More of that debt will be to official creditors, especially if the private bondholders play only a token role now. Restructuring at that point will be more costly for other governments and the IMF.

The rescuers think buying time reduces the risk of contagion from a Greek debt restructuring to other euro-zone countries. But the pall of an unsolved Greek mess will continue to hang over the euro zone, just as it has done for the past year…

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France remains steadfast in its opposition to a restructuring of Greece’s debt under any terms, the government’s spokesman said on Wednesday, showing a divergence of opinion with Berlin.

German Finance Minister Wolfgang Schaeuble raised the prospect of a restructuring, saying in a letter to EU partners this week that private bondholders should bear some of the burden of a debt relief deal, preferably via a bond swap and a rescheduling.

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Niall Ferguson, a history professor at Harvard University and a Bloomberg Television contributing editor, discusses the European sovereign-debt crisis. Ferguson speaks with Erik Schatzker on Bloomberg Television’s “InsideTrack.”

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From 2001-07, he argues, the dollar underwent a long, steady decline against the euro, tacitly encouraged by U.S. monetary authorities. In response to the dollar’s decline, investors diverted capital into inflation hedges, notably real estate, leading to the subprime bubble. By mid-2007, the real-estate bubble had burst. In response, the Fed reduced short-term interest rates rapidly, which lowered the dollar further. The subprime crisis was severe, but with looser money, the economy appeared to stabilize in the second quarter of 2008.

Then, in summer 2008, the Fed committed what Mr. Mundell calls one of the worst mistakes in its history: In the middle of the subprime crunch””exacerbated by mark-to-market accounting rules that forced financial companies to cover short-term losses””the central bank paused in lowering the federal funds rate. In response, the dollar soared 30% against the euro in a matter of weeks. Dollar scarcity broke the economy’s back, causing a serious economic contraction and crippling financial crisis.

In March 2009, the Fed woke up and enacted QE1, lowering the dollar against the euro, and signs of recovery soon appeared. But in November 2009, QE1 ended and the dollar soared against the euro once again, pushing the U.S. economy back toward recession.

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Derek Halpenny at Bank of Tokyo-Mitsubishi UFJ said probably the most worrying development for the euro was the surge in Italian government bond yields in response to S&P’s move.

He said: “Italy has the largest government bond market in the eurozone and continued rising yields there over the coming weeks would have a very destabilising impact on the eurozone debt markets.

“With the authorities still seemingly divided over how to proceed with the debt crisis there remains considerable short-term risks for the euro.”

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Keeping debt under control, Merkel said in a speech at an event held by her party, the conservative Christian Democratic Union, in the western German town of Meschede, isn’t the only priority. “It is also important that people in countries like Greece, Spain and Portugal are not able to retire earlier than in Germany — that everyone exerts themselves more or less equally. That is important.”

She added: “We can’t have a common currency where some get lots of vacation time and others very little. That won’t work in the long term.”

There are indeed significant differences between retirement ages in the two countries. Greece announced reforms to its pension system in early 2010 aimed at reducing early retirement and raising the average age of retirement to 63. Incentives to keep workers in the labor market beyond 65 have likewise been adopted. Germany voted in 2007 to raise the retirement age from 65 to 67 over the next several years.

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Richard McGuire, a bond strategist at Rabobank in London, said there was a risk of a “domino effect” through the financial system reminiscent of the aftermath of Lehman if the crisis was mishandled.

He said: “The implications of a Greek default are nightmarishly complicated and would affect Britain through a number of channels.

“It is only when Greece defaults and the rug is pulled from under this complex web of cross-border relationships that we see where the risk really lies.”

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A group of the largest US banks and fund managers stepped up the pressure on Congress and the Obama administration to reach a deal to increase the country’s debt limit, saying that even a short default could be devastating for the financial markets and economy.

The warning over the debt limit is the strongest yet to come from Wall Street, highlighting growing nervousness among investors about the US political system’s ability to forge a consensus on fiscal policy.

The most pressing budgetary issue confronting Congress and the Obama administration is the need to raise the US debt ceiling, which stands at $14,300 billion.

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The U.S. dollar’s downward slide is accelerating as low interest rates, inflation concerns and the massive federal budget deficit undermine the currency.

With no relief in sight for the dollar on any of those fronts, the downward pressure on the dollar is widely expected to continue.

The dollar fell nearly 1% against a broad basket of currencies this week, following a drop of similar size last week. The ICE U.S. Dollar Index closed at its lowest level since August 2008, before the financial crisis intensified.

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Members of the International Monetary Fund emerged from their huddle in Washington last weekend resolved to keep every option open to slow the flood of dollars pouring into their countries, including capital controls. That’s a dangerous game, given the need for investment to drive economic development. But it’s also increasingly typical of the world’s reaction to America’s mismanagement of the dollar and its eroding financial leadership.

The dollar is the world’s reserve currency, and as such the Federal Reserve is the closest thing we have to a global central bank. Yet for at least a decade, and especially since late 2008, the Fed has operated as if its only concern is the U.S. domestic economy.

The Fed’s relentlessly easy monetary policy combined with Congress’s reckless spending have driven investors out of the United States and into Asia, South America and elsewhere in search of higher returns and more sustainable growth. The IMF estimates that between the third quarter of 2009 and second quarter of 2010, Turkey saw a 6.9% inflow in capital as a percentage of GDP, South Africa 6.6%, Thailand 5%, and so on….

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The University of Texas Investment Management Co., the second-largest U.S. academic endowment, took delivery of almost $1 billion in gold bullion as the metal reaches a record, according to the fund’s board.

The fund, whose $19.9 billion in assets ranked it behind Harvard University’s endowment as of August, according to the National Association of College and University Business Officers, last year added about $500 million in gold investments to an existing stake, said Bruce Zimmerman, the endowment’s chief executive officer. The holdings reached about $987 million yesterday, as Comex futures closed at $1,486 an ounce….

“Central banks are printing more money than they ever have, so what’s the value of money in terms of purchases of goods and services,” [Kyle] Bass said today in a telephone interview. “I look at gold as just another currency that they can’t print any more of.”

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Portugal’s admission that it will probably need a financial bailout raises a question that will shape the outcome of the euro zone’s debt crisis: Is Spain next?

The cost of saving Spain, a €1.1 trillion ($1.56 trillion) economy, would dwarf previous bailouts and could test the financial strength of Europe as a whole.

But if Spain can continue to repair investors’ trust, as in recent weeks, then Europe stands a chance of containing the debt crisis to three countries, Greece, Ireland and Portugal, whose combined economies are half the size of Spain’s.

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Moody’s downgraded its credit rating on Spain Thursday, citing worries over the cost of the banking sector’s restructuring and the government’s ability to achieve its borrowing reduction targets.

The agency said it was reducing its rating by one notch to Aa2 and warned that a further downgrade could be in the offing if there are indications that Spain’s fiscal targets will be missed and if the public debt ratio increases more rapidly than currently expected, or if the funding requirements for the so-called savings banks””the cajas””are greater than anticipated.

Though noting the government’s resolve in dealing with its problems and that Spain’s debt sustainability is not under threat, Moody’s said that “Spain’s substantial funding requirements””not only those of the sovereign, but also those of the regional governments and the banks””make the country susceptible to further episodes of funding stress.”

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The greenback…is not just America’s currency. It’s the world’s.

But as astonishing as that is, what may be even more astonishing is this: The dollar’s reign is coming to an end.

I believe that over the next 10 years, we’re going to see a profound shift toward a world in which several currencies compete for dominance.

The impact of such a shift will be equally profound, with implications for, among other things, the stability of exchange rates, the stability of financial markets, the ease with which the U.S. will be able to finance budget and current-account deficits, and whether the Fed can follow a policy of benign neglect toward the dollar.

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The longer this dual crisis drags on, the more radical, and improbable, any solutions would have to be. In my view, the crisis is insoluble without a Europeanisation of the banking sector, common labour and product market rules that prevent inflation stickiness in southern Europe, and a minimal fiscal union with a single European bond. This is not a complete list.

Europe’s political establishment is of the opinion that such a radical response is unwarranted and politically infeasible. The first assessment is wrong. As the world comes out of its Christmas stupor, it discovers the second may well be right.

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Brussels has called for sweeping powers for regulators to seize failing EU banks, sack board members, and impose haircuts on senior bank debt, aiming to ensure that taxpayers are never again held hostage by high finance.

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A better known real estate debacle is a sprawling development in Seseña, south of Madrid, one of Spain’s “ghost towns.” It sits in a desert surrounded by empty lots. Twelve whole blocks of brick apartment buildings, about 2,000 apartments, are empty; the rest, only partly occupied. Most of the ground floor commercial space is bricked up.

The boom and bust of Spain’s property sector is astonishing. Over a decade, land prices rose about 500 percent and developers built hundreds of thousands of units ”” about 800,000 in 2007 alone. Developments sprang up on the outskirts of cities ready to welcome many of the four million immigrants who had settled in Spain, many employed in construction.

At the same time, coastal villages were transformed into major residential areas for vacationing Spaniards and retired, sun-seeking northern Europeans. At its peak, the construction sector accounted for 12 percent of Spain’s gross domestic product, double the level in Britain or France.

But almost overnight, the market disappeared….

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