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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A temporary fix to the U.S. debt problems could be a sign that Washington’s final budget agreement will not be enough to meaningfully cut the nation’s deficit, Moody’s main analyst for the United States warned on Wednesday.

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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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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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Much of the public focus is on the nation’s public debt, which is $14.3 trillion. But that doesn’t include money guaranteed for Medicare, Medicaid and Social Security, which comes to close to $50 trillion, according to government figures.

The government also is on the hook for other debts such as the programs related to the bailout of the financial system following the crisis of 2008 and 2009, government figures show.

Taken together, Gross puts the total at “nearly $100 trillion,” that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won’t find a solution overnight.

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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 health insurance program for seniors is the nation’s biggest financial challenge.

The first of 77 million Baby Boomers turn 65 this year and qualify for Medicare. Enrollment will grow from 48 million in 2010 to 64 million in 2020 and 81 million in 2030, according to Medicare actuaries. That 33-million increase in the next 20 years compares with 13 million in the last 20.

This demographic burst ”” combined with the addition of a prescription drug benefit in 2006 and rising health care costs generally ”” has created an unfunded liability of nearly $25 trillion over the lifetime of those now in the program as workers and retirees. That is the taxpayers’ obligation, beyond what Medicare taxes will bring in or seniors will pay in premiums for Medicare Part B ”” also called supplemental coverage ”” that helps pay for doctor visits and other expenses outside the hospital.

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As an interviewer, Mr. Haines was acerbic and skeptical, known for taking the wind out of the sails of over-optimistic executives.

Eastman Kodak Co.’s CEO George Fisher in a 1998 interview denied rumors of an impending film price war. Days later, Kodak kicked off a discount campaign. Mr. Haines repeatedly ran the soundbite on subsequent shows, denouncing Mr. Fisher.

“Rule one is don’t lie,” Mr. Haines said in a 2001 interview with Investor Relations Business magazine. “If you do, I’ll kill you.”

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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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The problems of old age (chronic illness, outliving savings, loneliness) are real, but age by itself is not an indicator of need. The blanket defense of existing Social Security and Medicare isn’t “liberal” or “progressive.” It’s simply a political expedient with ruinous consequences. It enlarges budget deficits and forces an unfair share of adjustment ”” higher taxes, lower spending ”” on workers and other government programs. This is the morality of the ballot box.

People do not lose their obligations to the larger society by turning 65. We need to refocus these programs on their original purposes. Social Security was intended to prevent poverty, not finance recipients’ extra cable channels. Medicare provides peace of mind as well as health insurance; wealthier recipients can afford to pay more for their peace of mind. Burden-sharing needs to include the elderly. This is the crux of the budget problem.

Facing it is both a moral and financial imperative. With the 2012 election looming, major overhauls of these programs seem unlikely. Still, more modest changes (slow increases in eligibility ages, added taxation of Social Security benefits, costlier Medicare for upscale beneficiaries) could produce significant savings. If even these are absent, the meaning will be plain: Old stereotypes continue to trump new realities.

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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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The federal government will not run short of money to pay its bills on May 16, when the federal debt reaches the legal maximum of $14.3 trillion.

Even after Aug. 2, the deadline the Treasury Department set this week for Congress to lift the borrowing limit, the government might be able to delay a crisis, perhaps even for a few months, through extraordinary measures such as asset sales.

But with every passing week of stalemate over the debt ceiling, the risk increases that investors will start to fret that the United States will not pay its debts, and demand higher interest rates for loans to the federal government.

Should that happen, the cost could be vast and the damage difficult to reverse.

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…while President Obama has presided over an unprecedented federal spending spree, he’s far from the first White House occupant to run up big debt numbers while insisting that he’s moving toward lowering them — eventually.

He’s also not the first politician caught between contradictory public demands of lower spending and higher benefits. A Washington Post-ABC News poll released last week reports that 78 percent of Americans oppose cutting Medicare spending, and 69 percent oppose cutting Medicaid.

Yet even most liberal Democrats, including the president, concede this indisputable point: America’s long-term debt crisis will never be solved without containing the soaring costs of Medicare and Medicaid.

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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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China needs to guard against volatility in US Treasury prices should investors demand higher returns from US government debt, a researcher at the Chinese central bank said on Monday.

Zhang Jianhua, a head of research at the People’s Bank of China, said worries that the heavily indebted US government may not repay its debt could drive Treasury yields higher and cause US debt prices to fluctuate.

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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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“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures….”

–S&P credit analyst Nikola Swann in a statement today explaining why S and P shifted its outlook on America’s credit to “negative”

This is a timely reminder of the seriousness of America’s fiscal issues, for the country and for the rest of the world.

The continued failure to come up with a credible medium-term fiscal reform program would increase borrowing costs for all segments of US society, thereby undermining investment, employment and growth. It would also curtail foreigners’ appetite to add to their already substantial holdings of US assets. And it would weaken the dollar.

The US also risks eroding its standing at the core of the global monetary system.

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Shares on Wall Street opened sharply lower and Treasury prices fell on Monday after the Standard & Poor’s rating firm lowered the outlook for the United States to negative, saying that there was a risk that lawmakers might not reach agreement on how to address the country’s fiscal issues.

“More than two years after the beginning of the recent crisis, U.S. policymakers have still not agreed on how to reverse recent fiscal deterioration or address longer-term fiscal pressures,” a credit analyst with Standard & Poor’s, Nikola G. Swann, said. At the same time, the firm affirmed the government’s AAA rating.

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S&P sees a “material risk that U.S. policymakers might not reach an agreement on how to address medium- and long-term budgetary challenges by 2013; if an agreement is not reached and meaningful implementation is not begun by then, this would in our view render the U.S. fiscal profile meaningfully weaker than that of peer ‘AAA’ sovereigns.”

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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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