Europe’s leaders endorsed plans for a new fund to rescue indebted euro-zone countries, and proposed treaty changes to make that possible, but failed to resolve deepening disagreements over whether more radical action is needed to quell a debt crisis that has raged on the region’s fringe for more than a year.

Meeting in Brussels for the final 2010 summit, European Union leaders agreed to replace the region’s emergency rescue fund, which ends in 2013, with a permanent crisis-finance program.

But the crisis gripping the weaker governments of the euro zone showed no signs of abating. On Thursday, Spain was forced to offer significantly higher interest rates at a debt auction Thursday than it paid just a month ago. Bond markets fell across Europe.

Read it all.

European Union finance ministers agreed late Sunday on more than just an €85 billion bailout for Ireland. They also turned the currency union into a de-facto debt union by choosing to turn May’s €750 billion rescue fund into a permanent feature of the euro zone. What’s more, they promised that no sovereign creditor would face a haircut on their debt holdings until 2013, and that’s at the very earliest….

….here is what the EU has done: In the name of combating speculation against the debt of euro-zone members, the EU has now insured all those speculators against loss for three years at least. Meanwhile, in creating a permanent crisis-management mechanism, the EU has succeeded only in making permanent crisis more likely.

Read it all.

Check it out.

Europe’s challenge is no longer just economic. It’s also social and political. Cherished values and ideals are under assault. The euro, intended to nurture unity, has bred discord, as countries assign blame and argue over sharing costs. The social contract is being rewritten, with government benefits and protections being cut. In Ireland, the governing coalition seems doomed; one minority party has withdrawn its support.

The rescue of Ireland, as with Greece before, represents a gamble that Europe can arrest growing doubts and win the patience of bondholders and voters: persuading the investors not to continue dumping bonds (those of Ireland and other countries) in panic, which raises interest rates and could precipitate a self-fulfilling financial collapse; and persuading ordinary citizens to tolerate austerity (higher unemployment, lower social benefits, heavier taxes) without resorting to paralyzing street protests or ineffectual parliamentary coalitions. Whether the gamble will succeed is unclear, as are the potentially chaotic consequences if it doesn’t.

Read it all.

Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”

The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.

Read it all.

Irish Central Bank governor Patrick Honohan has said he expects the Irish Republic to accept a “very substantial loan” as part of an EU-backed bail-out.

Mr Honohan told RTE radio he expected the loan to amount to “tens of billions” of euros.

The final decision will be up to the Irish government, which has yet to comment.

Mr Honohan’s comments come as a team of international officials meet in Dublin for further talks on the debt crisis.

Read it all.

There will be sovereign defaults in the eurozone, with a default by Greece now inevitable. Ultimately the thing that underpins any country’s debts is its ability to raise enough tax to service and eventually repay them. Greece cannot hope to do that. Ireland will be pushed to do so but probably can. I would, however, worry about the long-term credit-worthiness of Portugal, Spain and Italy.

So then you have to ask whether a default of a eurozone state breaks up the eurozone. I don’t think we know the answer to that yet. We do know that the Germans, who hold the cards, will do absolutely everything they can to stop such a default, even if they have to grit their teeth as they do so. My instinct is that a country defaulting would not of itself lead to that country leaving the euro, but if its costs and prices were totally out of line, that probably would be the least painful way of extracting itself. If that is right in the short-term, things will be patched up and the euro will come through this downturn intact. But the next downturn, in five or 10 years’ time? Surely not.

Read it all.

Austria threatened to block its share of the next transfer of aid funds to Greece unless the government meets deficit-cutting goals agreed upon six months ago with the European Union and International Monetary Fund.

Austrian Finance Minister Josef Proell said in Vienna that he lacked assurances from Greece to commit to the payment. He toned down his remarks later, telling journalists in Brussels that Austria was prepared to meet its pledge to Greece and that Greece was “on a good path.”

“We are getting indications that the Greeks can’t stick to their plan in a sufficient manner, in particular on the revenue side,” Proell said according to a government e-mail that confirmed remarks made after a Cabinet meeting today. “The data we have at the moment doesn’t give any reason to approve the December tranche from the Austrian point of view.”

Read it all.

“It seems difficult for Ireland to avoid tapping the fund unless they have new rabbits to pull out their hat,” said Julian Callow, chief European economist at Barclays Capital in London.

It is very likely Ireland will seek support from the 750- billion-euro ($1 trillion) fund, Reuters reported, citing euro- zone sources it didn’t name. The Finance Ministry in Dublin denied talks were under way. Amelia Torres, a spokeswoman for the EU’s Economic and Monetary Affairs Commissioner Olli Rehn, called the report “pure speculation.”

Read it all.

Ireland’s financial troubles loomed large Wednesday as investors – betting that the country soon could join Greece in seeking an EU bailout – drove the interest rate on the country’s 10-year borrowing to a new high.

The yield on 10-year bonds rose above 8 percent for the first time since the launch of the euro, the European Union’s common currency, 11 years ago.

The cost of funding Irish debt has risen steadily since September, when the government admitted its bailout efforts of five banks would cost at least euro45 billion, equivalent to euro10,000 for every man, woman and child in Ireland. That gargantuan bill, in turn, has made the projected 2010 deficit rise to 32 percent of GDP, the highest in post-war Europe.

Read it all.

The Fed is essentially lending enough money to the government to fund its operations for several months, something called “monetizing the debt.” In normal times, this is one of the great taboos of central banking because it is seen as a step toward spiraling inflation and because it risks encouraging reckless government spending.

Read it all (my emphasis).

The Federal Reserve’s push toward easier monetary policy is the “wrong way” to stimulate growth and may amount to a manipulation of the dollar, German Economy Minister Rainer Bruederle said.

Fed Chairman Ben S. Bernanke yesterday gave Group of 20 finance ministers and central bankers meeting in Gyeongju, South Korea an overview of the U.S. central bank’s efforts to jumpstart the world’s largest economy. His strategy, which investors expect will soon include greater asset purchases, drew criticism at the talks, said Bruederle.

“It’s the wrong way to try to prevent or solve problems by adding more liquidity,” Bruederle told reporters yesterday, saying that emerging-market officials were among the critics. Bruederle, a member of the Free Democratic Party, the junior partner in Chancellor Angela Merkel’s government, stepped in for hospitalized Finance Minister Wolfgang Schaeuble at the meeting.

Read it all.

Is this a currency war or what?

Fast-growing nations like Thailand are trying to devalue their exchange rates to bolster their export-driven economies.

In Washington, where “strong dollar” has been the mantra for years, policy makers are taking steps that could make the already weak dollar weaker still.

European policy makers worry that a resurgent euro will threaten growth in their own backyard. And the entire world, it seems, is jawboning China to level the playing field and let its undervalued currency, the renminbi, appreciate. It is a step that Beijing, by all accounts, does not want to take.

With so many economies struggling, it suddenly seems as if it is every nation for itself in the currency markets….

Read it all.

Police and youth have clashed in a dozen cities reports the Independent, and the country has been forced to tap its crisis fuel supply says the New York Post.

Yet what’s most shocking about the strikes is the modest pension reform they are opposed to. The French government is merely increasing the age of retirement to 62 from 60, by 2018, which is nothing compared to the far harsher austerity measures people are protesting in places such as Greece and Spain.

Read it all.

The former chief economist of the World Bank and a Nobel prize winner also predicted that short-term speculators in the market could soon start putting pressure on Spain, which is struggling with a large deficit and high unemployment. Last week, Moody’s cut the country’s credit rating from AAA to Aa1.

The former adviser to President Bill Clinton also says that the banking sector has gone back to “business as usual” too quickly and that there are still risks of another financial crisis despite some improvements in regulation.

Read it all.

Anti-austerity protests erupted across Europe on Wednesday ”” Greek doctors and railway employees walked out, Spanish workers shut down trains and buses, and one man even blocked the Irish Parliament with a cement truck to decry the country’s enormous bank bailouts.

Tens of thousands of demonstrators poured into Brussels, hoping to swell into a 100,000-strong march on European Union institutions later in the day and reinforce the impact of Spain’s first nationwide strike in eight years.

Read it all.

While some withdrawals point to capital flight by wealthy Greeks, it is clear that households and companies are running down savings to make ends meet. The Athens Chamber of Commerce warned yesterday that its members are in “dire straits”, with a majority facing a liquidity threat.

Simon Ward from Henderson Global Investors said Greek lenders are covering their funding gap through loans from the European Central Bank (ECB), which reached a record €96bn in July. “The question is how much eligible collateral they have left to take to the ECB. It must be nearing the limits,” he said.

“What is worrying is that this is not just Greeks. Portuguese banks borrowed €50bn in July compared to €41.5bn in June. Together with Ireland and Spain they have borrowed €387bn from the ECB,” he said.

Read it all.

The austerity measures that were supposed to fix Greece’s problems are dragging down the country’s economy. Stores are closing, tax revenues are falling and unemployment has hit an unbelievable 70 percent in some places. Frustrated workers are threatening to strike back.

The feast of the Assumption of Mary on Aug. 15 is the high point of summer in the Greek Orthodox world. Here in one of the country’s many churches, believers pray to the Virgin for mercy, with many of them falling to their knees.

The newspaper Ta Nea has recommended that the Greek government adopt the very same approach — the country’s leaders have to hope that Mary comes up with a miracle to save Greece from a serious crisis, the paper writes. Without divine intervention, the newspaper suggested, it will be a difficult autumn for the Mediterranean state.

Read it all.

Seldom does the United States look at Europe with economic envy. The past few weeks, however, have been one of those rare phases. Concern about America’s stumbling recovery has been rising, just as anxieties about the euro area’s economy have faded. The dollar is the weakling among rich-world currencies…. But Americans should take a little heart: it is too soon to despair about their economy. And Europeans should show a little caution: it is too soon to be sure that theirs is firmly back on its feet.

Read it all.

The world’s rich countries are now conducting a dangerous experiment. They are repeating an economic policy out of the 1930s ”” starting to cut spending and raise taxes before a recovery is assured ”” and hoping today’s situation is different enough to assure a different outcome.

In effect, policy makers are betting that the private sector can make up for the withdrawal of stimulus over the next couple of years. If they’re right, they will have made a head start on closing their enormous budget deficits. If they’re wrong, they may set off a vicious new cycle, in which public spending cuts weaken the world economy and beget new private spending cuts.

On Tuesday, pessimism seemed the better bet. Stocks fell around the world, over worries about economic growth.

Longer term, though, it’s still impossible to know which prediction will turn out to be right. You can find good evidence to support either one.

Read it all.

Kevin Rudd may be happy about at least one thing: he can avoid Toronto this weekend.

Nothing against Canada’s business capital, but by stepping down suddenly as Australia’s premier, Rudd got himself out of a much-hyped gathering with virtually no chance of putting the world economy on a more even keel.

Why is that? We are suffering from a chronic leadership vacuum, one starkly underlined by Rudd’s untimely departure. The Group of 20 will go through the motions and consider the burning issues of our day. Yet the list of pressing problems is a daunting one….

Read it all.

Debt is as powerful a drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber’s famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.

For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame….

Rich-world countries now face two sets of problems. The most pressing is how to pay off their debts. Many people who have cut back their credit-card spending and firms which have seen their credit lines slashed would be horrified to see how little the rich world’s overall burden has fallen. Much of the debt has merely moved from the private to the public sector as governments have correctly stepped in to support banks and save the economy from falling into depression. And in the future, even more money will have to be raised, because of governments’ lavish promises of pensions and health care for the retiring baby-boom generation.

Read it all.

So far, European leaders have tried to deal with this spreading disaster by ruses. Existing European treaties ban bail-outs of member states. So the “European Stabilisation Mechanism”, recently set up precisely to provide these illegal bail-outs, does so under Article 122.2 of the Lisbon Treaty. This article gives emergency assistance to a member state “threatened with severe difficulties caused by natural disasters or exceptional circumstances beyond its control”.

Natural disasters! We are experiencing a totally unnatural disaster, one brought about by the artificial structure of the European project. Exceptional circumstances beyond its control! It was this system that every eurozone member state proudly (though usually without asking their electorates) voted for.

The situation is not funny for the people of Greece, Portugal, Spain, and so on, because their governments have run up dreadful public debts while sacrificing their power to devalue to become competitive. They cannot cut their exchange rate, so they must cut wages and jobs. Unemployment in Spain is already 20 per cent ”“ and 40 per cent among young people.

It is not funny for Germany, either. German banks are overcommitted in the southern countries now afflicted. The German people are fed up with paying for the profligacy of their poorer neighbours and furious at the suggestion that the only solution is that they should pay even more.

Read it all.

The rebellion against the 1930s fiscal and monetary policies of the Euro-complex is gathering pace.

Il Sole has published a letter by 100 Italian economists warning that the austerity strategy imposed by Brussels/Frankfurt risks tipping Europe into a self-feeding downward spiral. Far from holding the eurozone together, it will cause weaker countries to be catapulted out of EMU. Others will leave in order to restore sovereign control over their central banks and unemployment policies.

At worst it will blow the EU apart, leading to the very acrimony that the European Project was supposed to prevent.

Read it all.

Spain has upped the ante in a high-stakes poker game with Germany, pushing for the release of EU stress test results for major banks in a move that risks precipitiating a dramatic escalation of Europe’s financial crisis.

“We’re not afraid of transparency,” said the Spanish Banking Association (AEB), saying the full truth would put an end to rumours battering Spain’s instutitions. El Pais reported that the government backs the initiative, putting it on a collision course with Germany which insists on secrecy.

Josef Ackermann, head of Deutsche Bank, warned last week that it would be “very dangerous” to publish the results of each bank, fearing that it would trigger flight from weak lenders and set off a chain reaction.

Read it all.

Democracy could ”˜collapse’ in Greece, Spain and Portugal unless urgent action is taken to tackle the debt crisis, the head of the European Commission has warned.

In an extraordinary briefing to trade union chiefs last week, Commission President Jose Manuel Barroso set out an ”˜apocalyptic’ vision in which crisis-hit countries in southern Europe could fall victim to military coups or popular uprisings as interest rates soar and public services collapse because their governments run out of money.

The stark warning came as it emerged that EU chiefs have begun work on an emergency bailout package for Spain which is likely to run into hundreds of billions of pounds.

Read it all.

French and German banks have lent nearly $1 trillion to the most troubled European countries and are more exposed to the debt crisis than the banks of any other countries, according to a new report that is likely to add pressure on institutions to detail their holdings.

French banks had lent $493 billion to Spain, Greece, Portugal and Ireland by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks.

Read it all.

“The collapse of the financial system as we know it is real, and the crisis is far from over,” Soros said today at a conference in Vienna. “Indeed, we have just entered Act II of the drama.”

Soros, 79, said the current situation in the world economy is “eerily” reminiscent of the 1930s with governments under pressure to narrow their budget deficits at a time when the economic recovery is weak.

Concern that Europe’s sovereign-debt crisis may spread sent the euro to a four-year low against the dollar on June 7 and has wiped out more than $4 trillion from global stock markets this year. Europe’s debt-ridden nations have to raise almost 2 trillion euros ($2.4 trillion) within the next three years to refinance, according to Bank of America Corp.

“When the financial markets started losing confidence in the credibility of sovereign debt, Greece and the euro have taken center stage, but the effects are liable to be felt worldwide,” Soros said.

Read it all.

From here:

The Dow spent much of Wednesday’s session in the black but turned lower in the final hour after Chancellor Angela Merkel defended Germany’s EUR80 billion austerity package for the next four years, saying that the time to withdraw stimulus has come and lessons from the debt crisis must be learned.

“If she’s basically saying that it’s time to withdraw stimulus, what’s that going to do to Europe’s strongest economy?” asked Michael Shea, managing partner at Direct Access Partners. “What it’s doing is just creating more and more uncertainty.”

Heavy rain hampered an evening rally through the city’s streets.

Spanish unions said 75-80% of public sector workers had joined the day-long strike.

The labour ministry, however, put the figure at 16%.

“We are very angry because this is not only an attack to our rights and to our salaries – there is an attack to the welfare,” protester Elisia Deoran told the BBC.

“It’s an attack on all the public services.”

Read the whole thing.