The fact that a formal Grexit may have been avoided for the moment is immaterial. Grexit will be back on the table when you have the slightest political accident ”” and there are still many things that could go wrong, both in Greece and in other eurozone parliaments. Any other country that in future might challenge German economic orthodoxy will face similar problems.

This brings us back to a more toxic version of the old exchange-rate mechanism of the 1990s that left countries trapped in a system run primarily for the benefit of Germany, which led to the exit of the British pound and the temporary departure of the Italian lira. What was left was a coalition of countries willing to adjust their economies to Germany’s. Britain had to leave because it was not.

What should the Greeks do now? Forget for a moment the economic debate of the last few months, over issues such as the impact of austerity or economic reforms on growth, and ask yourself this simple question: do you really think that an economic reform programme, for which a government has no political mandate, which has been explicitly rejected in a referendum, that has been forced through by sheer political blackmail, can conceivably work?

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Greece reached a deal with its European creditors Monday, pledging stringent austerity to avoid an exit from the euro and the global financial chaos that could have followed.

The deal calls for Greeks, already reeling from harsh measures and economic decline, to cut back even further in exchange for more loans without which its financial system would surely collapse. The deal, which still needs approval from Greece’s parliament, will be the country’s third bailout in five years.

To get to a deal, Greek Prime Minister Alexis Tsipras had to overcome the fundamental mistrust of many of his allies among the 18 other countries that use the euro, known as the eurozone. Just a week earlier, at his urging, Greeks had voted in a referendum to reject many of the measures he agreed to Monday, and the deal forced him to renege on many of his election promises.

“We managed to avoid the most extreme measures,” Tsipras said. “Greece will fight to return to growth and to reclaim its lost sovereignty.”

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Update: Politico also has a summary article on the deal there.

The contours of a deal on Sunday are starting to emerge.

Syriza has requested a three-year package of loans from the eurozone bail-out fund (ESM) – perhaps worth as much as €60bn ”“ and is reportedly ready give ground on tax rises and pension cuts.

Germany’s subtle shift in position comes as the United States, France, and Italy joined in a united call for debt relief, buttressed by a crescendo of emphatic statements by Christine Lagarde, the head of the International Monetary Fund.

“Greece is clearly in a situation of acute crisis, which needs to be addressed seriously and promptly. We remain fully engaged in order to find a solution to restore stability, growth and debt sustainability,” said Ms Lagarde.

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More than 100 MPs in Angela Merkel’s conservative party group have already written Greece out of the euro, even as its government scrambles to cobble together a plan acceptable to creditors.

The size of the rebellion in her own ranks ”” the Christian Democratic Union and Christian Social Union faction ”” limits the German chancellor’s ability to soften her position against Greece and all but kills off its hope of a huge debt write-off as part of the new bailout plan it needs to prevent a banking collapse.

Alexis Tsipras, the Greek prime minister, has been given until midnight tonight to submit plans justifying another multibillion-euro loan deal to keep Greece afloat or face a future outside the euro, with the EU already preparing humanitarian aid for the Greek people.

Announcing its intention yesterday to seek a three-year bailout, Greece said it wanted to make its €323 billion debt mountain “sustainable and viable over the long term”, code for the cut of 30 per cent demanded by Mr Tsipras.

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The German Red Cross said today it was willing to rush medical and other humanitarian aid to Greece as the country’s economy teetered on the brink of collapse.

“We are ready in every respect,” spokesman Dieter Schutz told Leipziger Volkszeitung newspaper. “Pensioners, the poor, the sick and refugees” have been hit hardest, he said.

Donald Tusk, the president of the European Council, who will chair the summit said: “I have no doubt that this is the most critical moment in the history of the EU. This will affect all Europe also in the geopolitical sense.”

President Hollande of France, the most optimistic of eurozone leaders on finding a solution, said: “What is at stake is the place of Greece within the EU and therefore the eurozone.”

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There are, as many European and American writers have been commenting lately, sound geopolitical reasons to prevent the worst from happening in Greece. Migration issues, NATO issues, energy issues, terrorism, Russia: an angry, inflamed, suffering and radicalized Greece on a kind of Venezuelan path to national destruction could make life much more difficult for Europeans and Americans both. These considerations should be enough to command some attention and resources from policymakers on both sides of the Atlantic sufficient to avert worst case scenarios for the Greek people.

For Grexit to be a step forward rather than a step back, Western and Greek leaders need to become more creative and forward-looking. Washington needs to stop bleating platitudes about the evils of austerity and to start thinking hard about bolstering an alliance that remains critical to its global position; Brussels and Berlin need to move beyond anger at Greek tactics to a sober calculation of Europe’s interests; the Greeks need to reflect on the cost of being represented at a grave hour of national crisis by inexperienced politicians who none of their counterparts in Europe trust or respect.

But Brussels and Berlin (and Paris, Rome and Madrid) need to realize something else. Greece’s problems under the euro have been worse than anyone else’s, but Greece is not totally unique. There are deep design flaws in the euro and the common currency has not worked nearly as well as any of its proponents hoped. The discussion over the future of Greece needs to be delinked from the discussion over the future of the euro””but that doesn’t mean that the future of the euro doesn’t need to be discussed.

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…the risks have not been eliminated. The margin for error for the major banks and other financial institutions is narrow. Because they are still not strongly capitalized, modest losses from direct defaults and indirect losses from companies with business in Greece can threaten bank equity, causing bankers to cut back on lending. A few miscalculations in a major institution could have substantial repercussions. Making matters worse, central bankers have only a limited capacity to buoy the economy, as interest rates are still near zero.

The second channel through which risk and loss can spread from Greece is other heavily indebted countries, like Spain and Italy. So far, the financial markets have not panicked over the ability of these countries to repay their bonds. But a shift in the political situation ”“ especially in Spain, where the left-wing Podemos party is doing well in the polls ”“ could change that in an instant.

Finally, a Greek default and exit from the eurozone could unleash unpredictable political forces with a knock-on effect on the European economy. After all, it was the first wave of austerity in Greece that led to the election of Syriza, a left-wing party that few had expected would ever govern.

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Greece’s prime minister has put his political clout behind the “no” camp in a referendum to decide whether the country should accept the terms of an international bailout. But the people appear to be evenly split on the issue, according to two new opinion polls.

One survey, conducted by the respected ALCO institute just 48 hours before the referendum that could decide Greece’s economic fate and future in the eurozone, gives the “yes” camp 44.8 percent against 43.4 percent for the “no” side, according to Reuters.

But a second poll, conducted by Public Issue and published in the ruling party’s newspaper, reports a 0.5-percentage-point lead for those opposed to the bailout.

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In the past few days, Prime Minister Alexis Tsipras of Greece has blown up negotiations with European creditors on staving off default, then retreated and accepted more or less the same terms, only to have European leaders tell him the offer had expired.

Greeks are supposed to vote on a referendum this weekend, but no one there or elsewhere seems sure what they will be asked, or what the consequences will be for voting yes or no.

And European leaders here and in Berlin and Paris have been saying distinct ”” sometimes directly contradictory ”” things about whether there is a bailout deal for Greece still on the table, and whether they want Greece to hold its referendum before they can renew discussions about it.

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The danger now is that, just as Greece was once a trailblazer in linking a democratic transition to the European project, so it may become an emblem of a new and dangerous process: the disintegration of the EU. The current crisis could easily lead to the country leaving the euro and eventually the union itself. That would undermine the fundamental EU proposition: that joining the European club is the best guarantee of future prosperity and stability.

Even if an angry and impoverished Greece ultimately remains inside the tent, the link between the EU and prosperity will have been ruptured. For the horrible truth is dawning that it is not just that the EU has failed to deliver on its promises of prosperity and unity. By locking Greece and other EU countries into a failed economic experiment ”” the euro ”” it is now actively destroying wealth, stability and European solidarity.

The dangers of that process are all the more pronounced because Greece is in a highly strategic location. To the south lies the chaos and bloodshed of Libya; to the north lies the instability of the Balkans; to the east, an angry and resurgent Russia.

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What is in Fed officials’ control is what they do today and tomorrow and in their policy meeting Sept. 16 and 17. So by deciding to raise rates then (or deciding not to), they are sending a more powerful signal than any speech or written statement that they believe it is time to start winding down the era of easy money.

The thing is, Ms. Yellen and her colleagues know this, and that comments like those she made Wednesday won’t do much to change it. The best they can do is try to manage expectations so that people don’t assume that a quarter-percentage point rise in the Fed’s interest rate target in September automatically translates to much higher rates in a year or two.

In other words, Ms. Yellen may be an economist, but she is well aware that her tools for managing the economy work via financial markets. So how bond traders interpret the Fed’s words and actions matter a great deal.

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US regulators are increasingly concerned about the threat that cyber attacks pose to financial stability after assaults on Sony Pictures and Target highlighted the proliferating range of techniques used by digital raiders.

In a new report on risks to the financial system, regulators also sounded the alarm on risk-taking by institutions searching for higher investment yields, as well as the threat of rising interest rates triggering market volatility.

On cyber security, the annual report from the Financial Stability Oversight Council said “the prospect of a more destructive incident that could impair financial sector operations” was even more concerning than recent breaches that have compromised financial information.

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Mario Draghi said the euro area was better equipped than it had been in the past to deal with a new Greek crisis but warned of “uncharted waters” if the situation were to deteriorate badly.

The European Central Bank president called for the resumption of detailed discussions aimed at resolving the country’s debt woes and urged the Greek authorities to bring forward proposals that ensured fairness, growth, fiscal stability, financial stability.

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Raghuram Rajan got it started. On Jan. 15, the governor of the Reserve Bank of India jolted traders on Mumbai’s Dalal Street by cutting interest rates. The surprise was the timing of the announcement: Rajan wasn’t supposed to deliver a policy statement for another 19 days.

The weirdness continued that same day””in Switzerland, of all places. For three years, the Swiss National Bank had steadily bought euros on currency markets to keep the country’s franc from surging in value relative to the euro, and thereby choking off growth. Unorthodox, yes; but global financial markets had grown accustomed to the regular renewal of the bank’s stance. Without warning, however, the Swiss cut the franc’s tether. Swiss National Bank chairman Thomas Jordan also set the benchmark Swiss lending rate at negative 0.75%. In theory, a lower rate should put downward pressure on the franc; not enough in this case, as the franc’s value shot up by 18% in the days that followed. Many hedge funds bled red.

And on it went. The Danes cut interest rates four times in the span of a few weeks. As this issue of the magazine neared deadline, China’s central bank cut rates by a quarter of a percentage point and Poland slashed them by a half point. In the first 60 days of 2015, some 20 central banks had executed stimulus measures.

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Rarely have investors lavished so much attention on a single word. After a two-day meeting, the Federal Reserve dropped the word “patient” from its monetary-policy statement. Why the fuss over this single word?

“Patient”, in Fed-speak, indicates that it will hold off increasing interest rates for at least two meetings. Now the word has been ditched, at subsequent meetings (most probably in June) we could see rates move off from rock-bottom for the first time since 2008.

The last rate-tightening cycle began over a decade ago. The Fed feels comfortable, it seems, with raising interest rates now that unemployment has moved towards 5.5%. The latest forecasts from the Fed show that it expects the economy to expand by 2.3%-2.7%, a slight fall from the projections in December but still one of the strongest in the OECD, a club of mostly rich countries.

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…look where Greece has ended up after five years of crisis resolution. It has had one of the worst performances in economic history; yet we have just concluded an extension of the same policy.

Can this be sustainable? The pragmatists in Europe’s chancelleries say they can roll over loans indefinitely at very low interest rates. Economically, this is the equivalent of a debt writedown; yet politically it is easier to deliver because you do not need to recognise losses. The equivalent statement in a military conflict would be: if you renew a ceasefire often enough, you end up with peace.

This type of argument is not only immoral and dishonest. It also does not work. While you play this game of ex­tend-and-pretend, the real economy implodes: austerity has caused a meltdown in income and employment. Monetary policy mistakes caused a fall in eurozone-wide inflation rates that made it impossible for Greece and other periphery countries to improve the competitiveness they lost in the early years of monetary union.

If the EU deals with Ukraine in the same way it dealt with Greece, you can expect to see a parallel development in a few years.

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China’s central bank cut interest rates on Saturday, just days before the annual meeting of the country’s parliament, in the latest effort to support the world’s second-largest economy as its momentum slows and deflation risks rise.

The central bank said the 25 basis point cut in the benchmark interest rate to 5.35 per cent – its second cut in just over three months – and a 25 basis point cut in the benchmark saving rate to 2.5 per cent would be effective from Sunday.

“The focus of the interest rate cut is to keep real interest rate levels suitable for fundamental trends in economic growth, prices and employment,” the People’s Bank of China (PBOC) said in a statement on its website.

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At first, Eva Christiansen barely noticed the number. Her bank called to say that Ms. Christiansen, a 36-year-old entrepreneur here, had been approved for a small business loan. She whooped. She danced. A friend took pictures.

“I think I was so happy I got the loan, I didn’t hear everything he said,” she recalled.

And then she was told again about her interest rate. It was -0.0172 percent ”” less than zero. While there would be fees to pay, the bank would also pay interest to her. It was just a little over $1 a month. But still.

These are strange times for European borrowers, as if a wormhole has opened up to a parallel universe where the usual rules of financial gravity are suspended.

Read it all from the NYTimes Dealbook.

The Obama administration is pushing eurozone leaders to compromise more with Athens as fears grow that a protracted stand-off could damage the global economy, say senior EU and US officials.

The US lobbying comes amid mounting concern in Brussels and Washington about the hardline stand taken by some eurozone governments, particularly Germany, that Greece must press on with budget-cutting commitments made under its existing €172bn bailout regardless of last month’s election, which brought anti-austerity party Syriza to power .

“This is a conversation we’re having with people,” said a senior US official involved in the talks.

“There isn’t a special initiative. I don’t think our attitude has changed but what’s changed is that suddenly the situation in Greece is looking more problematic.”

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It is easy to see why Syriza put debt repudiation at the heart of its electoral campaign. John Paul Getty once opined that “if you owe the bank $100, that’s your problem; if you owe the bank $100m, that’s the bank’s problem”. Greece’s predicament may ultimately force creditors to the negotiating table. To service its debt burden would require Greece to operate as a quasi slave economy, running a primary surplus of 5 per cent of GDP for years, purely for the benefit of its foreign creditors. Even the IMF has dropped hints in favour of some debt forgiveness.

But Greece’s EU creditors have equally strong reasons for refusing. Caving to Syriza’s demands would come at a high political cost, particularly for Germany’s Angela Merkel, who is harried by the eurosceptic AfD on her right. Other struggling countries would find their own radical parties emboldened by Syriza’s success. No country deserves to live beyond its means indefinitely.

Back in 2011, Greece posed an existential threat to the eurozone. Today, Berlin and Frankfurt are no longer as frightened by the prospect of Greece leaving the single currency. Yet for the Greek people this would be a catastrophe: a giant economic step backwards and a blow to living standards just as severe as any endured under austerity.

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The leader of the left-wing Syriza party Alexis Tsipras has said Greece is “leaving behind disastrous austerity”, after his party claimed victory in the country’s general election.

And the 40-year-old told jubilant supporters the “Troika” of the country’s lenders “is finished”.

He was speaking after the Greek Prime Minister Antonis Samaras, who heads the conservative New Democracy party, conceded defeat to Mr Tsipras.

Partial election results suggest Syriza has secured 36.5% of the vote, compared to 27.7% for the New Democracy party.

Read it all from Sky news.

The SNB was not forced to act by a speculative run. No financial crisis forced its hand, and, in theory, the SNB’s directorate could have held the exchange rate and bought foreign assets indefinitely. But domestic criticism of the SNB’s large buildup of exchange-rate reserves (euro assets) was mounting.

In particular, Swiss conservatives disliked the risk to which the SNB was exposed. Fearing that eurozone government bonds were unsafe, they agitated to require the SNB to acquire gold reserves instead, even forcing a referendum on the matter. Though the initiative to require a fixed share of gold reserves failed, the prospect of large-scale quantitative easing by the European Central Bank, together with the euro’s recent slide against the dollar, intensified the political pressure to abandon the peg.

Whereas economists have modeled financial attacks well, there has been little study of just when political pressure becomes unbearable and a central bank gives in. The SNB, for example, had proclaimed loyalty to the peg just days before ending it. As a result, markets will now hesitate to believe central banks’ statements about future policy, and forward guidance (a major post-crisis instrument) will be much more difficult.

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As 2015 begins, the global economy remains weak. The United States may be seeing signs of a strengthening recovery, but the eurozone risks following Japan into recession, and emerging markets worry that their export-led growth strategies have left them vulnerable to stagnation abroad. With few signs that this year will bring any improvement, policymakers would be wise to understand the factors underlying the global economy’s anemic performance ”“ and the implications of continued feebleness.

In the words of Christine Lagarde, the International Monetary Fund’s managing director, we are experiencing the “new mediocre.” The implication is that growth is unacceptably low relative to potential and that more can be done to lift it, especially given that some major economies are flirting with deflation.

Conventional policy advice urges innovative monetary interventions bearing an ever expanding array of acronyms, even as governments are admonished to spend on “obvious” needs such as infrastructure. The need for structural reforms is acknowledged, but they are typically deemed painful, and possibly growth-reducing in the short run. So the focus remains on monetary and fiscal stimulus ”“ and as much of it as possible, given the deadening effects of debt overhang.

And yet, the efficacy of such policy advice remains to be seen.

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The Swiss National Bank’s shock move today to stop intervening in the foreign exchange market all but guarantees the European Central Bank will finally introduce quantitative easing when it meets Jan. 22. Switzerland is surrendering before a wave of post-QE money fleeing the euro threatens to make a mockery of its currency policy. It’s also capitulating as slumping oil brings global deflation ever closer.

t’s an astonishing U-turn. Just two days ago SNB Vice President Jean-Pierre Danthine told Swiss broadcaster RTS that “we’re convinced that the cap on the franc must remain the pillar of our monetary policy.” He added, though, that it was “very possible” that QE would make defending the threshold more difficult. It seems highly probable that the ECB has winked about its policy intentions to its Swiss counterparts.

The ensuing whipsaw in the currency market is unprecedented. The franc immediately appreciated almost 30 percent against the currencies of the Group of Ten industrialized nations, and surged to a record against the euro…:

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The ruble meltdown and accompanying economic slump marks the collapse of Putin’s oil-fueled economic system of the past 15 years, said an executive at Gazprombank, the lender affiliated to Russia’s state gas exporter. He asked not to be identified because of the sensitivity of the issue.

The higher interest rate will crush lending to households and businesses and deepen Russia’s looming recession, according to Neil Shearing, chief emerging-markets economist at London-based Capital Economics Ltd.

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Russia is in the middle of a currency crisis. On December 15th its currency lost 10% of its value, having already lost about 40% this year. The central bank increased interest rates sharply, but instead of calming the market the hike was seen as a sign of desperation. The following day the rouble was at one point down a further 20% (and ended the day 10% lower). The central bank reckons that GDP could fall by 5% in 2015. Inflation is currently at 10% but is expected to accelerate rapidly. Russians are panic-buying; banks are running out of dollars. What’s gone wrong with Russia’s economy?

The problems were long in the making. Russia is highly dependent on oil revenues (hydrocarbons contribute over half the federal budget and two-thirds of exports) and over the past decade it has failed to diversify its economy. It is horribly corrupt, has weak institutions and no real property rights. The Kremlin distributes oil money via state banks to firms and projects which it selects on the basis of their political importance and their pro-Putin stance, rather than trusting the market to allocate capital to the most efficient firms. If you look at wealth, Russia is the world’s second-most unequal country. Its working-age population is shrinking fast.

Western sanctions imposed in response to Russia’s meddling in Ukraine have dealt a blow to the economy. But the proximate cause of the turmoil of the last few days is concern about Russia’s corporate sector. During 2015 Russia’s firms must repay $100 billion-worth of foreign debt. But as the rouble falls, paying back dollars becomes more difficult.

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Russia has lost control of its economy and may be forced to impose Soviet-style exchange controls after “shock and awe” action by the central bank failed to stem the collapse of the rouble.

“The situation is critical,” said the central bank’s vice-chairman, Sergei Shvetsov. “What is happening is a nightmare that we could not even have imagined a year ago….”

Lars Christensen, from Danske Bank, said the Kremlin’s actions have led to the “absolutely worst possible outcome” since the botched move is enough to do grave damage, without solving anything. “They should have let the currency go rather than killing the economy. Investment is in freefall, and I fear this shock is going to be even bigger than in 2008-2009. Nothing suggests that oil is going to rebound quickly this time,” he said.

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The danger of stimulus-induced bubbles is starting to play out in the market for energy-company debt.

Since early 2010, energy producers have raised $550 billion of new bonds and loans as the Federal Reserve held borrowing costs near zero, according to Deutsche Bank AG. With oil prices plunging, investors are questioning the ability of some issuers to meet their debt obligations. Research firm CreditSights Inc. predicts the default rate for energy junk bonds will double to eight percent next year.

“Anything that becomes a mania — it ends badly,” said Tim Gramatovich, who helps manage more than $800 million as chief investment officer of Santa Barbara, California-based Peritus Asset Management. “And this is a mania.”

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German bond yields are to fall below Japanese levels and plumb depths never seen before in history as Europe becomes the epicentre of global deflationary forces, according to new forecast from the Royal Bank of Scotland.

“We are seeing `Japanification’ setting in across Europe,” said Andrew Roberts, the bank’s credit strategist. “We expect 10-year Bund yields to cross the 10-year Japanese government bond and we are amply positioned for such an outcome.”

Mr Roberts said it is a “weighty win-win” situation for investors. If the European Central Bank launches full-blown quantitative easing, it will almost certainly have to buy large amounts of German Bunds, and these are becoming scarce.

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The much heralded asset-backed securities purchase programme will only yield about €250bn-€450bn in assets over the next two years. More LTRO (or the newer targeted LTRO) will prove a challenge as sovereign bond yields in Europe are so low that a large balance sheet expansion through this means seems impractical. Perhaps there is another €500bn-€750bn to do over the next year or two. Outright purchases of sovereign debt would prove politically difficult, as many would interpret such purchases as violating the ECB’s mandate and the matter would probably end up in the European courts.

The bottom line is that none of the tools currently on the table will get the job done. There are not enough assets to purchase or finance and the timetable to get anything done is too long. Policy makers do not have the luxury of a year or two to figure this out. The ECB balance sheet shrinks virtually daily and as it shrinks, the monetary base of Europe is contracting and putting downward pressure on prices. Europe is clearly in danger of falling into the liquidity trap, if it is not already there. The likelihood of a “lost decade” like that experienced in Japan is rapidly increasing. The ECB must act and act quickly.

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