It would be Europe’s worst nightmare: after weeks of rumors, the Greek prime minister announces late on a Saturday night that the country will abandon the euro currency and return to the drachma.

Instead of business as usual on Monday morning, lines of angry Greeks form at the shuttered doors of the country’s banks, trying to get at their frozen deposits. The drachma’s value plummets more than 60 percent against the euro, and prices soar at the few shops willing to open.
Soon, the country’s international credit lines are cut after Greece, as part of the prime minister’s move, defaults on its debt.

As the country descends into chaos, the military seizes control of the government.

This scary chain of events might never come to pass. But the danger that Greece or some other deeply damaged country in the euro zone could leave the single-currency union can no longer be ruled out.

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There is a fascinating new study coming out of the Levy Economics Institute of Bard College. Its titled “$29,000,000,000,000: A Detailed Look at the Fed’s Bail-out by Funding Facility and Recipient” by James Felkerson. The study looks at the lending, guarantees, facilities and spending of the Federal Reserve.

The researchers took all of the individual transactions across all facilities created to deal with the crisis, to figure out how much the Fed committed as a response to the crisis. This includes direct lending, asset purchases and all other assistance. (It does not include indirect costs such as rising price of goods due to inflation, weak dollar, etc.)

The net total? As of November 10, 2011, it was $29,616.4 billion dollars ”” (or 29 and a half trillion, if you prefer that nomenclature). Three facilities””CBLS, PDCF, and TAF”” are responsible for the lion’s share ”” 71.1% of all Federal Reserve assistance ($22,826.8 billion).

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We Jjouranlists are probably too bleary-eyed after a sleepless night to understand the full significance of what has just happened in Brussels. What is clear is that after a long, hard and rancorous negotiation, at about 5am this… [past Friday] the European Union split in a fundamental way.

In an effort to stabilise the euro zone, France, Germany and 21 other countries have decided to draft their own treaty to impose more central control over national budgets. Britain and three others have decided to stay out. In the coming weeks, Britain may find itself even more isolated. Sweden, the Czech Republic and Hungary want time to consult their parliaments and political parties before deciding on whether to join the new union-within-the-union.

So two decades to the day after the Maastricht Treaty was concluded, launching the process towards the single European currency, the EU’s tectonic plates have slipped momentously along same the fault line that has always divided it””the English Channel.

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The positive reactions appeared to be driven by relief that leaders had reached an agreement at all, rather than enthusiasm for the deal itself. If recent history is any guide, the glow could fade fast as investors focus on the details, or on a continued lack of clarity over what role the European Central Bank will play.

“The summit was the first step toward fiscal integration, which is a problem we need to solve, but it will be a long, drawn-out process,” said Mohit Kumar, head of European rates strategy at Deutsche Bank in London….

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European leaders say 26 out of 27 EU member states have backed a tax and budget pact to tackle the eurozone debt crisis.

Only the UK has said it will not join. Prime Minister David Cameron said he had to protect key British interests, including its financial markets.

The 17 countries that use the euro have all agreed to the deal.

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The European Union suffered the most damaging split in its 54 year history after David Cameron used the British veto to block eurozone treaty change after France and Germany opposed “safeguards” to protect Britain’s economy….

The Prime Minister insisted that he had been prepared to support treaty change among all 27 of the EU’s members to allow the 17-strong eurozone to take measures to tackle its debt crisis and to enforce tough new fiscal rules for the single currency.

But after 11 hours of bad-tempered talks, Mr Cameron said that he had blocked the changes because France and Germany and refused to agree to a “protocol” giving the City of London protection from a wave of EU financial service regulations related to the eurozone crisis.

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The spectacular fall of Jon Corzine will be on display Thursday when the former New Jersey senator and governor testifies before a House panel on the bankruptcy of his former firm, MF Global.

Just months ago Corzine, a Democrat, was seen as a possible successor to Treasury Secretary Timothy Geithner.

So confident was MF Global in Corzine that its bond sale in August included a “key man” provision that gave investors an extra 1 percent in interest if Corzine left the firm “due to his appointment to a federal position by the president of the United States and confirmation of that appointment by the United States Senate prior to July 1, 2013.”

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MF Global Holdings Ltd.’s executive in charge of controlling risks raised serious concerns several times last year to directors at the securities firm about the growing bet on European bonds by his boss, Jon S. Corzine, people familiar with the matter said.

The board allowed the company’s exposure to troubled European sovereign debt to swell from about $1.5 billion in late 2010 to $6.3 billion shortly before MF Global tumbled into bankruptcy Oct. 31, these people said. The executive who challenged Mr. Corzine resigned in March.

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Standard and Poor’s has put Germany, France and 13 other eurozone countries on “credit watch” due to fears over the impact of the debt crisis.

S&P’s move means that countries with top AAA ratings would have a 50% chance of seeing their rating’s downgraded.

The news came as a surprise to investors and saw stocks fall back on early gains as the euro also fell.

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We Americans fool ourselves if we ignore the parallels between Europe’s problems and our own. It’s reassuring to think them separate, and the fixation on the euro — Europe’s common currency — buttresses that mindset. But Europe’s turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created. It’s ultimately a crisis of the welfare state, which has grown too large to be easily supported economically. People can’t live with it — and can’t live without it. The American predicament is little different.

Government expansion was one of the 20th century’s great transformations. Wealthy nations adopted programs for education, health care, unemployment insurance, old-age assistance, public housing and income redistribution. “Public spending for these activities had been almost nonexistent at the beginning of the 20th century,” writes economist Vito Tanzi in his book “Government versus Markets.”

The numbers — to those who don’t know them — are astonishing. In 1870, all government spending was 7.3 percent of national income in the United States, 9.4 percent in Britain, 10 percent in Germany and 12.6 percent in France. By 2007, the figures were 36.6 percent for the United States, 44.6 percent for Britain, 43.9 percent for Germany and 52.6 percent for France. Military costs once dominated budgets; now, social spending does.

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“Just look at my screen. It tells the story. I have one big European bank willing to lend and 40 banks wanting to borrow. And look at those names, they aren’t little regional banks. They are some the biggest banks in the eurozone and they can’t get funding in the marketplace. They have to go to the ECB.”

–A trader as quoted in this morning’s Financial Times.

Wall Street executives, in a private meeting with a top Federal Reserve official in late September, recommended a coordinated effort by central banks to remedy the European financial crisis, according to Fed documents received in an open-records request.

The meeting, led by Louis Bacon, founder of hedge fund Moore Capital Management, preceded a joint action Wednesday by the world’s major central banks, which banded together to provide liquidity to the markets through cheap U.S. dollar loans….

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So far, though, Germany is resisting calls to allow the European Central Bank to conduct unrestricted purchases of government bonds issued by ailing euro-zone countries in order to push their borrowing costs down to sustainable levels.

It also remains opposed to jointly issued euro bonds. Its arguments are that the measures would remove the incentive on high-debt nations to get their budgets in order, would stoke inflation and would end up costing Germany too much.

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Europe’s worsening sovereign debt crisis has spread beyond its banks and the spillover now threatens businesses on the Continent and around the world.

From global airlines and shipping giants to small manufacturers, all kinds of companies are feeling the strain as European banks pull back on lending in an effort to hoard capital and shore up their balance sheets.

The result is a credit squeeze for companies from Berlin to Beijing, edging the world economy toward another slump.

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Germany is the only country in Europe that can act to save the eurozone and the wider European Union from “a crisis of apocalyptic proportions”, the Polish foreign minister warned on Monday in a passionate call for more drastic action to prevent the collapse of the European monetary union.

The extraordinary appeal by Radoslaw Sikorski, delivered in the shadow of the Brandenburg Gate in the German capital, came as the Organisation for Economic Co-operation and Development called on European leaders to provide “credible and large enough firepower” to halt the sell-off in the eurozone sovereign debt market, or risk a severe recession.

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This was largely expected, and they did reaffirm their AAA overall rating. They felt “declining confidence” that Congress will agree on timely measures to bring about fiscal policies aimed at reducing indebtedness–KSH.

The dam is breaking in Europe. Interbank lending has seized up. Much of the financial system is paralysed, setting off a credit crunch just as Euroland slides back into slump.

The Euribor/OIS spread or`fear gauge’ is flashing red warning signals. Dollar funding costs in Europe have spiked to Lehman-crisis levels, leaving lenders struggling frantically to cover their $2 trillion (£1.3 trillion) funding gap.

America’s money markets are no longer willing to lend to over-leveraged Euroland banks, or only on drastically short maturities below seven days. Exposure to French banks has been slashed by 69pc since May.

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Even as the euro zone hurtles towards a crash, most people are assuming that, in the end, European leaders will do whatever it takes to save the single currency. That is because the consequences of the euro’s destruction are so catastrophic that no sensible policymaker could stand by and let it happen.

A euro break-up would cause a global bust worse even than the one in 2008-09. The world’s most financially integrated region would be ripped apart by defaults, bank failures and the imposition of capital controls….The euro zone could shatter into different pieces, or a large block in the north and a fragmented south. Amid the recriminations and broken treaties after the failure of the European Union’s biggest economic project, wild currency swings between those in the core and those in the periphery would almost certainly bring the single market to a shuddering halt. The survival of the EU itself would be in doubt.

Yet the threat of a disaster does not always stop it from happening. The chances of the euro zone being smashed apart have risen alarmingly, thanks to financial panic, a rapidly weakening economic outlook and pigheaded brinkmanship. The odds of a safe landing are dwindling fast.

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Of course, simply offering blank checks to the profligate is not a good solution either. But the current way the European Central Bank is acting may be the worst of all worlds. By buying government bonds while insisting it will soon stop, it is sending the message that bondholders had better sell quickly.

By contrast, if the bank made a promise to buy all the bonds that were offered to it ”” backed by its ability to print money ”” it might have to buy few bonds.

There is a real risk of moral hazard in central bank bailouts. The theory offered by Bagehot in the 19th century called for banks to make loans on securities that are of high quality and will be liquid when the panic passes, but not on low-quality securities. Telling the good from the bad during a panic is not always easy.

But we have until now assumed that a central bank would find bonds issued by its own government to be good paper, and investors could act accordingly.

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Ms. [Nancy] Lazar is among a group of well-connected investors and analysts with access to top Federal Reserve officials who give them a chance at early clues to the central bank’s next policy moves, according to interviews and hundreds of pages of documents obtained by The Wall Street Journal through open records searches. Ms. Lazar, an economist with International Strategy & Investment Group Inc., wouldn’t comment for this article.

The access is part of a push by hedge funds and other traders to get more information about the inner workings of government. Developments in Washington have become more important after the financial crisis in 2008 spawned new regulations and a stronger hand by lawmakers in businesses.

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In one of the least successful debt sales by Europe’s powerhouse economy since the launch of the single currency, the low returns offered – just 2pc annually over 10 years – deterred investors made uneasy by the escalating cost of the crisis to Germany.

That meant the central bank had to pick up 39pc of the €6bn (£5.2bn) of debt Germany had hoped to sell after commercial banks bought just €3.644bn of the issue.

“It is a complete and utter disaster,” said Marc Ostwald, strategist at Monument Securities in London.

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The Congressional Budget Office on Tuesday downgraded its estimate of the benefits of President Obama’s 2009 stimulus package, saying it may have sustained as few as 700,000 jobs at its peak last year and that over the long run it will actually be a net drag on the economy.

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Euro-zone leaders say they are determined to save the single currency. But the smart money is voting with its feet. First, short-term U.S. dollar-funding markets effectively closed, then the senior unsecured-bond markets shut down, then the interbank market. Now, corporate customers appear to be withdrawing their deposits from some countries’ banks. With an estimated €1.7 trillion ($2.29 trillion) of funding to roll over in the next three years, the stresses in the euro-zone banking system look doomed to get worse.

In some cases, the drop in corporate deposits has been startling. In Italy, nonretail customers withdrew €56 billion in the three months to the end of September, a fall of 12%. Intesa Sanpaolo and UniCredit saw corporate deposits decline by 16% and 10%, respectively, according to Citigroup research. Similarly, in Spain, nonretail deposits fell by 20% in the third quarter, with Santander and BBVA losing 10% and 11%, respectively. Even the French banks weren’t immune: Société Générale and BNP Paribas saw their corporate-deposit balances fall by 7% and 6%, respectively.

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Banks clamored for emergency funds from the European Central Bank on Tuesday, borrowing the most since early 2009 in a clear sign that the euro region’s financial institutions are having trouble obtaining credit at reasonable rates on the open market.

Indebted governments among the 17 members of the European Union that use the euro are also finding it harder to borrow at affordable rates as investors lose confidence in their creditworthiness.

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We haven’t had the robust democratic debate about the role of government that lies at the heart of America’s budget stalemate. The truth is that most Democrats and Republicans want to avoid such a debate because it would force them into positions that, regardless of ideology, would be highly unpopular. This does not mean that the congressional supercommittee, charged with making modest cuts in deficits, need fail. There is a basis for honorable compromise; squandering it would confirm politicians’ preference for fighting over governing.

Contrary to much press coverage, the committee’s Republicans opened the door to compromise by abandoning — as they should have — opposition to tax increases. Sen. Pat Toomey of Pennsylvania proposed a tax “reform” that would raise income taxes by $250 billion over a decade. First, he would impose across-the-board reductions of most itemized deductions and use the resulting revenue gains to cut all tax rates. Next, he would adjust the rates for the top two brackets so that they’d be high enough to produce the $250 billion. All the tax increase would fall on people in the top brackets….

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Conceding that talks on a grand budget deal are near failure, Congressional leaders on Sunday pointed fingers at each other as they tried to deflect blame for their inability to figure out a way to lower the federal deficit without having to rely on automated cuts.

The testy exchanges ”” which dominated the Sunday talk shows ”” made clear that leaders in both parties now see the so-called sequester ”” a term meaning an automatic spending cut ”” as the most likely solution to reduce the federal deficit by $1.2 trillion over 10 years, instead of a negotiated package of spending reductions and tax increases, something they have been unable to achieve over the last 10 weeks.

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Critics say Germany is falling between two stools. It has backed EMU rescues on a sufficient scale to endanger its own credit-worthiness, without committing the nuclear firepower needed to restore confidence and eliminate default risk in Spain and Italy. It would be hard to devise a more destructive policy.

There is no change in sight yet. Chancellor Angela Merkel repeated on Thursday that Germany would not accept joint EU debt issuance or a bond-buying blitz by the ECB. “If politicians think the ECB can solve the euro’s problems, they’re trying to convince themselves of something that won’t happen,” she said.

Yet she offered no other way out of the logjam, and each day Germany is sinking a little deeper into the morass.

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European banks, increasingly concerned about their ability to access funding, are devising complex and potentially risky new deals that enable them to continue borrowing from the European Central Bank.

The banks’ moves, which include behind-the-scenes swapping of assets among financial institutions, could heighten risk across Europe’s already fragile financial system, say some senior industry officials and regulators.

They also are a sign that struggling banks across Europe are preparing for a period of prolonged reliance on financial lifelines from the ECB. The Continent’s intensifying financial crisis has made it difficult for many banks to obtain funding from customary market sources.

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First it was Athens. Then Rome. Could Paris be next?

While Italy has replaced Greece as the focus of anxiety amid Europe’s worsening debt crisis, investors are increasingly concerned about the outlook for France, whose banks are among the world’s biggest and are closely linked with their counterparts in the United States.

One crucial gauge of investor sentiment, the difference between what France pays to borrow versus what Germany pays, has doubled since the beginning of October, and last week reached its widest point since the formation of the euro currency zone in 1999. Meanwhile, speculation that France could soon lose the sterling triple-A rating on its sovereign debt intensified after Standard & Poor’s mistakenly told clients on Thursday that it was downgrading France’s debt.

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Mr [Mario] Monti’s candidature was announced after President Giorgio Napolitano spent the day in 17 meetings with senior politicians.

Speaking to reporters shortly afterwards, Mr Monti said Italy should be an “element of strength and not weakness” within the EU.

“We will aim at solving the financial situation, resume the path of growth. [We want to build] a future of dignity and hope for our children.”

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