Moody’s Calls Europe on the Greek Fraud

…Greece and the EU screwed creditors out of 75% plus of their investment...that is a de facto default


Moody's declares Greece in default of debt
AFP


Moody's declared Greece in default on its debt Friday after Athens carved out a deal with private creditors for a bond exchange that will write off 107 billion euros ($140 billion) of its debt.


Moody's pointed out that even as 85.8 percent of the holders of Greek-law bonds had signed onto the deal, the exercise of collective action clauses that Athens is applying to its bonds will force the remaining bondholders to participate.
Overall the cost to bondholders, based on the net present value of the debt, will be at least 70 percent of the investment, Moody's said.


"According to Moody's definitions, this exchange represents a 'distressed exchange,' and therefore a debt default," the US-based rating firm said.


For one, "The exchange amounts to a diminished financial obligation relative to the original obligation.”


Secondly, it "has the effect of allowing Greece to avoid payment default in the future.”


Ahead of the debt deal, Moody's had already slashed Greece's credit grade to its lowest level, "C," and so there was no impact on the rating.


Moody's said it will revisit the rating to see how the debt writedown, and the second eurozone bailout package, would affect its finances.


However, it added, at the beginning of March "Moody's had said that the risk of a default, even after the debt exchange has been completed, remains high."

Spain says: “NEIN" to the Germans

Spain's sovereign thunderclap and the end of Merkel's Europe

By Ambrose Evans-Pritchard TELEGRAPH

The Spanish rebellion has begun, sooner and more dramatically than I expected.
As many readers will already have seen, Premier Mariano Rajoy has refused point blank to comply with the austerity demands of the European Commission and the European Council (hijacked by Merkozy).


Taking what he called a "sovereign decision", he simply announced that he intends to ignore the EU deficit target of 4.4pc of GDP for this year, setting his own target of 5.8pc instead (down from 8.5pc in 2011).


In the twenty years or so that I have been following EU affairs closely, I cannot remember such a bold and open act of defiance by any state. Usually such matters are fudged. Countries stretch the line, but do not actually cross it.


With condign symbolism, Mr Rajoy dropped his bombshell in Brussels after the EU summit, without first notifying the commission or fellow EU leaders. Indeed, he seemed to relish the fact that he was tearing up the rule book and disavowing the whole EU machinery of budgetary control.


He is surely right to seize the initiative. Spain’s economy will contract by 1.7pc this year under his modified plans and unemployment will reach 24pc (or 29pc under the 1990s method of counting). To compound this with manic fiscal tightening – and no offsetting devaluation – is intellectually indefensible.


There comes a point when a democracy can no longer sacrifice its citizens to please reactionary ideologues determined to impose 1930s scorched-earth policies. Ya basta.
What is striking is the wave of support for Mr Rajoy from the Spanish commentariat.
This one from Pablo Sebastián left me speechless.


My loose translation:


"Spain isn’t any old country that will allow itself to be humiliated by the German Chancellor.”


"The behaviour of the European Commission towards Spain over recent days has been infamous and exceeds their treaty powers… these Eurocrats think they are the owners and masters of Spain.”


"Spain and other nations in the EU are sick and tired of Chancellor Merkel’s meddling and Germany’s usurpation – with the help of Sarkozy’s France and their pretended "executive presidency" that does not in fact exist in EU treaties.”


"Rajoy must not retreat one inch. The stakes are high and the country is in no mood to suffer humiliations from a Chancellor who is amassing all the savings of Europe and won’t listen to anybody, as if she were the absolute ruler of the Union. Merkel and the Commission should think hard before putting their hand into the sovereignty of this country – or any other – because it will be burned.”


This then is the fermenting mood in the fiercely proud and ancient nation of Spain in Year III of depression, probably the worst depression the country has seen since the 1640s – or have I missed a worse one?


As for the "Fiscal Compact", it is rendered a dead letter by Spanish actions.
Gracias a Dios. If the text were enforced, the consequences would be ruinous. It enshrines Hooverism in EU law, and imposes contractionary policies without the consent of future parliaments – including any future Bundestag. Indeed, it probably violates the German constitution.


But it won’t be enforced in any meaningful sense because the political realities of the EU are already intruding, and will intrude further. A president François Hollande of France will rip it up.
The Latin Bloc is awakening.

As Goes Greece?

The Greeks Should Tell the Germans and the French, "No, No, No!"

Eurozone's ultimatum to Greece: put up or get out

France and Germany insist referendum must be held within six weeks, as Greeks told that all EU financial aid will be cut off unless they vote 'yes'

INDEPENDENT

France and Germany gave Athens a stark warning last night: we will switch off your financial life-support machine unless Greek voters decide to stay in the euro within six weeks.

The Greek government was reported to be scrambling to accommodate this ultimatum. Sources in Athens said that the planned referendum on the eurozone bailout, which stunned European capitals earlier this week, would now take place in mid-December, not the new year.

The sources also claimed that the referendum question would be phrased in broad or cataclysmic terms. Greeks would not be asked whether they approved the terms of the EU and IMF bailout package negotiated in Brussels last week. They would be asked, Yes or No, whether they wanted to stay in the European Union and the euro. But, adding to the sense of chaos surrounding the latest crisis, that suggestion was contradicted by a government spokesman, Angelos Tolkas, who said: "No, this will not be the issue. It will be the bailout plan." The wording of the referendum question would be crucial to the outcome of the vote: polls indicate that most Greeks are hostile to the terms of the deal but also want to stay in the euro.

It was the eurozone question that the French and German leaders were expected to put to the Greek Prime Minister, George Papandreou, in emergency talks over dinner ahead of the G20 summit in Cannes last night.

French sources said if Greece delays the referendum or if Greeks vote against the terms of the bailout, the EU and the IMF will refuse to hand over the next €8bn (£7bn) instalment of the aid that has been propping up Greek state spending. The effect would be to plunge Greece into default and force it to leave the eurozone.

This is a calamity that President Nicolas Sarkozy and Chancellor Angela Merkel have fought to avoid for almost two years. They now believe that a Greek "train crash" is preferable to a prolonged period of market uncertainty that could increase speculation against Italian and French debt, destroy the euro and plunge the world into a recession.

The French Prime Minister François Fillon told his parliament yesterday: "Europe cannot be kept waiting for weeks for the outcome of the referendum. The Greeks must say quickly and without ambiguity whether they choose to keep their place in the eurozone or not."

French and German officials said that Mr Sarkozy and Ms Merkel would be demanding two things at last night's crisis talks with Mr Papandreou. First, his promise of a referendum, which took the whole of Europe by surprise on Monday night, must be organised by mid-December. Second, the phrasing of the referendum vote must make clear that it is not a matter of improving the terms of the deal, but of defaulting on the national debt. Reports from Athens that Mr Papandreou had been authorised by his cabinet to concede both demands appeared less clear-cut after the spokesman's denial. Mr Papandreou did gain some authority earlier yesterday when, after a six-hour meeting that wrapped up at 3am, his cabinet decided unanimously to back his plans for a referendum, even though its own party has shown scant appetite for the proposal. But it was reported that several ministers voiced their opposition to the decision.

The parliamentary debate in Athens on the confidence motion began yesterday afternoon amid open hostility to the plan from the media and many politicians.

The Conservative opposition leader Antonis Samaras said Mr Papandreou had "put the country in the centre of a global storm". On its front page, the left-leaning newspaper Eleftherotypia described the Prime Minister as "the Lord of Chaos". Mr Papandreou's hopes of prevailing in the confidence vote hang by a thread. With the nominal support of 152 of 300 seats, it would take only a small rebellion to thwart his plans and force elections.

The minds of Greek legislators were concentrated by the news that the EU and IMF may hold back €8bn of aid due to be paid to Greece this month. Brussels believes that Greece has enough funds to struggle on until December. An EU official told Reuters: "The sooner Greece holds the referendum, the sooner the sixth tranche will be paid. But right now, it isn't going to be paid."

Opposition fury over Greek army chiefs' sacking

Greek opposition leaders reacted with outrage yesterday to the sacking of the country's military chiefs, calling it a bid to stack the armed forces with party loyalists before a possible government collapse over Greece's debt crisis.

Late on Tuesday, the socialist government replaced the heads of the army, navy and air force and the leader of the joint chiefs-of-staff. Officials said the move was planned long ago and unrelated to political turmoil. But the main opposition, the conservative New Democracy party, said: "We won't accept this decision."

Greek governments have kept a tight rein on the armed forces since a seven-year military junta collapsed in 1974. Army chiefs are often selected on the basis of their party loyalty. The outgoing military leadership was appointed in August 2009 by the previous conservative administration, just before national elections were called. REUTERS

The Fight Over the Euro and the Increasing Deficit in Washington

I think I am with Rufus, somewhat bewildered by what happened in Washington in the last two days. Boiled down we have a new stimulus plan that will add at least another $1 trillion to the deficit, the same deficit that was ending the world two weeks ago.

The stock market loved it till about lunch time and then took another look at Europe and lost its courage. Obama gave one of his bizarre talks and may have helped the downturn. Oil keeps going up as Obama keeps shutting oil wells down. No surprise there. What is also no surprise is the depth of their stupidity. Let me see if I have this straight.

WE have added another trillion to the deficit in a coordinated effort to create employment. At the same time we are shutting down high paying energy jobs in the gulf area by restricting oil drilling. The restriction is driving up the cost of imported oil which adds to the trade deficit. The higher price of oil is in fact a foreign tax on the American consumer and is another net job killer. This is being done for environmental reasons but foreign drilling in the same waters off Cuba continues.

rufus said...

Well, the votes are in. It's Overwhelming. A Landslide. I'm an idiot. The dumbest asshole in America. The Dumbest Asshole in the world!

I haven't a clue what's going on in DC. This is like a trip to "The Twilight Zone."

I'm not "sad." I'm not "glad." I'm bemused. I feel like I've gone to sleep, and awoke in the middle of a "Chinese Metaphysics" class.

Either I'm having a nervous breakdown, or the rest of the world is.

I feel like I'm watching that goofy Kenny Rodgers flick where the guy folds a Royal Flush (and, the rest of the world is standing around going, "that's all he could do." Huh?

Maybe I'll think about it in the morning. And, maybe not.

Mensa Ain't Us.

Dummer'n Doornails is Us.

Tue Dec 07, 10:05:00 PM EST

Meanwhile the fight between international financiers and the European Central Bank continues. The Euro goes down, the dollar goes up and the market gets depressed. Where this leads is very clear to someone, I hope.

_______________________________


Central Bank and Financiers Fight Over Fate of the Euro
By GRAHAM BOWLEY and JACK EWING
Published: December 7, 2010
NY Times

On one side is the European Central Bank, which is spending billions to prop up Europe’s weak-kneed bond markets and safeguard the common currency.

On the other side are hedge funds and big financial institutions that are betting against those same bonds and, by extension, against the central bank, that mighty symbol of Europe’s monetary union.

The war keeps escalating as traders position themselves for what some believe is inevitable: a default by Greece, Ireland or perhaps even Portugal.

The strains grew Tuesday, when European finance ministers made no pledge to increase the emergency fund that the European Union has put in place to help protect the euro. The head of the International Monetary Fund, meantime, urged Europe to take broader action to fend off speculators.

“The game now is one now of cat and mouse,” said Mohamed A. El-Erian, chief executive of the bond giant Pimco.

Since May, when the Greek debt crisis exploded, the European Central Bank has bought an estimated $69 billion of Greek and other government bonds. It has also indirectly injected hundreds of billions dollars into weak banking systems in Greece and Ireland.

But the speculators keep coming back. After the bond purchases fell to zero in October, the central bank waded back into the market aggressively last week, buying about $2 billion of debt securities, mostly Irish and Portuguese securities, traders said. The bank, based in Frankfurt, has yet to disclose the size and scope of the purchases late last week, when its intervention was the most intense.

While the bank appears to have backed off this week, traders are waiting for the official accounting of its latest purchases. The data are due Monday — and will provide some idea of just how aggressive the central bank has been.

Already, the central bank owns about 17 percent of the combined debt of Greece, Ireland and Portugal, Goldman Sachs estimates. Yet in the bank’s mano a mano with the bond market, psychology could be more important than money. No single hedge fund, after all, can hope to outgun the central bank.

The bank also has the element of surprise. By emphasizing that the central bank is “permanently alert,” Jean-Claude Trichet, its president, has raised the risk for speculators who might try to profit by selling short Greek, Portuguese or Irish bonds.

But the amount of intervention so far is far smaller than many investors and economists think is necessary to calm markets. These people assert that the central bank, its assurances aide, is concerned about taking on so many bonds of peripheral European countries — and being forced into what would be a de facto bailout of overextended government borrowers and the banks that bought their bonds.

And the markets continue to probe that discomfort. Pimco, for example, sold the vast majority of its holdings of Greek, Irish, Portuguese and Spanish government bonds late last year and early this year, although it continues to hold German bonds, considered Europe’s safest.

Pavan Wadhwa, head of European rates strategy at JPMorgan Chase, one of the main dealers in European government debt, said many clients had been eager to sell bonds of peripheral European nations to the central bank and would do more if the bank continued to buy, reflecting a belief that one or more countries were headed for insolvency.

“If the E.C.B. wants to buy, I would still be recommending to sell into the demand,” he said.

Mr. Wadhwa said in its latest operations the central bank had hoped investors would hold onto their bonds, encouraged by its presence in the markets. Instead, many had taken the opportunity to sell.

The chief investment officer of a large New York-based hedge fund, who spoke on the condition of anonymity because he was not authorized to comment publicly, said his fund and others had shorted Portuguese and Irish government bonds during the summer. They had done so by selling bonds in the cash market directly but mainly by buying protection against default in the market for credit-default swaps, a type of derivative.

“That trade was profitable,” this money manager said. But he said the fund had closed its position because the trade had no further to run — the market was now discounting a strong likelihood that Ireland would be forced to restructure its debt in four or five years.

Even after the central bank’s intervention last week, speculators have been maintaining large positions in credit-default swaps on Spanish bonds and on the debt of Spanish banks.

According to JPMorgan’s calculations, the credit-default swaps market implies around a 15 percent probability in any year of a Spanish default for the next five years.

Still, traders and analysts say the central bank is a sophisticated market actor. It conducts many trades via the Bundesbank and other national central banks, which in turn act through a circle of commercial dealer banks.

Mr. Trichet is known to keep a data terminal on his desk and speak frequently with the bank’s 20 in-house bond traders. He also occasionally visits them on a lower floor of the bank’s headquarters.

For the central bank, the timing of the latest flare-up was, in a way, convenient. Bond trading typically tapers off at the end of the year as fund managers close out their positions. So trading was thin and the bank was able to move the market with relatively small sums, traders said.

“It may be that the E.C.B. could have moved spreads a long way without buying that many bonds,” said Steven J. Major, global head of fixed income research at HSBC in London.

By placing a lot of orders with numerous banks, the central bank also created buzz in the market, which helped exaggerate the effect of its bond buying.

But according to many traders, the bank has so far not intervened in the markets for Spanish or Italian debt, which would be harder to influence because of their relatively large size.

Stephen Castle contributed reporting.

Greece Gets What Greece Does Not Deserve, $146 Billion

And it is not all German money. It is all to prove that the Euro itself is not a failed idea. Angela Merkel said there was no alternative to the bailout. What does that say?

Obviously, there was no alternative for Merkel and Germany as the Euro was the construct of German Progressives and Germany is stuck with the Euro (for now). Germany committed itself to a bad idea but it has worked for Germany industry.

It has not worked so well for ordinary Germans.

Most Germans were dead set against giving up the German Mark. The DM was an amazingly stable currency and it was inconceivable to most Germans that it was to be given up for a currency that would tether Germany to countries such as Italy and Greece. Today, most Germans are still against the Euro. Too bad for them.

The Greeks had one hell of a party with the Euro. They lied about their being ready to join the Euro. They were not ready. They covered up their true situation and probably still are. So many numbers have been bandied about as to what this will cost, and with each passing week the number has gone up.

Tough times ahead for Greece's Prime Minister Papandreou? Oh yea. The Greek unions are already rioting in the streets and calling a national strike to protest the fact that they have to give anything up. The socialist mobs like spending German money and have built their unsustainable life style on it. The trouble is, it is now IMF money propping up Greece and that is American money, money we do not have to throw around.

A lesson here? Oh yea again. Progressive German politicians, big business and big banks ignored the majority wishes of the German people constructing the Euro. Greek socialists created a majority class of people that take more from the system than they put in. Sound familiar? It smells familiar, the whiff of the wildly popular Obama Eau de Cologne. It smells great when first put on, but lingers and decays to something far less happy to the nostrils.

________


ECONOMY | 02.05.2010 DW
Eurozone agrees unprecedented multi-billion euro bailout for Greece

Eurozone finance ministers have endorsed a record 110-billion-euro bailout for Greece. The aid package requires that Athens implement tough austerity measures.

Eurozone finance ministers, in an emergency session on Sunday, approved a loan package to save Greece from defaulting on its debt. Eurogroup head Jean-Claude Juncker said a total of 110 billion euros ($146 billion) would be spread out over three years. Up to 30 billion euros will be ready to be disbursed in 2010.

Euro states are expected to give 80 billion euros while the rest is to be provided by the International Monetary Fund (IMF).

It is by far the largest bailout ever assembled for a country.

Juncker announced a fresh EU summit for May 7 to officially approve the bailout. He stressed the help for Athens was conditional on the Greek government implementing strict financial reforms.

He also said that at Germany's insistence, all ministers would discuss with their national banking sector the possibility of voluntary bank contributions to the aid package.

International support

EU President Herman Van Rompuy welcomed the agreement.

"I am convinced that this sound and ambitious program will enable Greece to put right its economic and financial situation as well as its competitiveness," he said in a statement.

In exchange for financial aid from both the EU and the IMF, Athens has promised further austerity measures to get the country's budget back into shape.

Greek Prime Minister George Papandreou said the he would "do anything to avoid the country going bankrupt."

"It is an unprecedented support package for an unprecedented effort by the Greek people," a somber Papandreou, wearing a dark purple tie, the color used for funerals in Greece, told a televised cabinet meeting.

EU Commissioners for Economic and Monetary Affairs Olli Rehn welcomed Athens' latest austerity efforts as a "very convincing and comprehensive program."

US President Barack Obama told Papandreou in a telephone interview late on Sunday that he welcomed Greece's ambitious reform programs and the support from the EU and the IMF.

Germany's Merkel backs bailout

Much of Sunday's talks depended on the attitude of Germany, which is expected to foot the largest chunk of the bill - around 22 billion euros.

German Chancellor Angela Merkel had been hesitant about rushing aid to Greece because it is unpopular among Germans.

On Sunday however, Merkel got fully behind the measure, calling the Greek austerity program very ambitious and saying there was no choice but to save Greece.

"I think this is the only way we can restore the stability of the Euro," Merkel said. "I'm going to work for the Greece program and its passage."

German Finance Minister Wolfgang Schaeuble said the German cabinet would meet Monday to work on a draft legislation for the aid. He said the bill would then be approved in the German parliament by Friday.

To ensure the stability of the euro, Schaeuble told German public television ARD late on Sunday, "we, as well as the German people and the taxpayer, have to take on this difficult decision [to approve the aid deal]."

He also warned Greece that "the smallest deviation [from the austerity plan] would have consequences, that much is clear," he told ARD.

Widespread protests across Greece

But Athen's plans for painful wage and pension cuts have already triggered widespread protest in Greece with unions planning a nationwide strike on Wednesday.
The austerity measures are deeply unpopular in Greece

The fresh round of cuts aims at saving 30 billion euros ($40 billion) over the next three years with civil servants and pensioners bearing the brunt of the effort.

"These sacrifices will give us breathing space and the time we need to make changes," Papandreou said, defending the measures.

"I want to tell Greeks very honestly that we have a big trial ahead," he said.

ai/ng/dpa/AFP/Reuters
Editor: Nigel Tandy

Screw the Greeks

In 2007 The BBC did a poll to get a view as to how certain countries viewed the US and Israel. When I see these things, I always pay attention to how the polls go in certain countries.

One of my favorites over the years has been Greece.

I worked for an agency of the US Government and served in an official capacity in Greece in late 1967. Through a bizarre set of circumstances I was on the wrong side of King Constantine's aborted and incompetent counter-coup in January of 1968 and I was declared "persona non grata" and given 48 hours to get out of the country.

That did not particularly bother me, because the January weather of 1968 was quite unpleasant and I was personally appalled at the degree of anti-Americanism in Greece especially from the intellectuals and elite. I was pleased to leave.

That anti-Americansism led to the assasination of CIA station chief, Richard Welch in 1967, and many other terrorist incidents since that time. Not much changed over the years and in 2007 a BBC poll showed that Greece had an 11% positive opinion and a a 68% negative view of the USA.

The USA owes nothing to Greece. If the socialists in Greece go broke, that is their doing and their problem. The US public should know that Greece is no friend of the US and has never been.

US taxpayers should do nothing for Greece. Give them nothing. They deserve even less.

Lehmanopolis? Greece Bans Short-selling. Panic Spreads.

ECB may have to turn to 'nuclear option' to prevent Southern European debt collapse

The European Central Bank may soon have to invoke emergency powers to prevent the disintegration of southern European bond markets, with ominous signs of investor flight from Spain and Italy.

By Ambrose Evans-Pritchard, International Business Editor Telegraph
Published: 7:09PM BST 27 Apr 2010

Greece’s fortunes were dealt yet another blow as Standard & Poor’s slashed its credit rating to junk status - BB+ - the first time that has happened to a euro member since the single currency was created, pushing yields on 10-year Greek bonds up to a record 9.73pc.

The credit-rating agency also cut Portugal’s sovereign debt ratings by two notches to A-, as the swirling storm hit the country with full-force.

“We have gone past the point of no return,” said Jacques Cailloux, chief Europe economist at the Royal Bank of Scotland.“There is a complete loss of confidence. The bond markets are in disintegration and it is getting worse every day.

“The ECB has been side-lined in the Greek crisis so far but do you allow a bond crash in your region if you are the lender-of-last resort? They may have to act as contagion spreads to larger countries such as Italy. We started to see the first glimpse of that today.”

Mr Cailloux said the ECB should resort to its “nuclear option” of intervening directly in the markets to purchase government bonds.

This is prohibited in normal times under the EU Treaties but the bank can buy a wide range of assets under its “structural operations” mandate in times of systemic crisis, theoretically in unlimited quantities.

Mr Cailloux added: “This feels like the banking crisis in late 2008 post-Lehman, though it has not yet spread to other asset classes. The ECB will have to act it if does.”

Yields on 10-year Portuguese bonds spiked 48 basis points to 5.67pc, replicating the pattern seen as the Greek crisis started.

Portugal’s public debt will be just 84pc of GDP by the end of this year, far lower than that of Greece, at 124pc. However, its private debt is much higher and data from the IMF shows that its external debt position is worse.

Interest payments on foreign debt will be 8pc of GDP this year. Portugal’s net international investment position is minus 100pc of GDP, the worst in the eurozone.

The interest rate on a €9.5bn (£8.2bn) issue of Italian notes jumped to 0.814pc, up from 0.568pc in March. The bid-to-cover ratio was wafer-thin, falling to 1.02. Italy has the world’s third biggest debt in absolute terms.

The issue of the ECB buying bonds is a political minefield. Any such action would inevitably be viewed in Germany as a form of printing money to bail out Club Med debtors, and the start of a slippery slope towards in an “inflation union”.

But the ECB may no longer have any choice. There is a growing view that nothing short of a monetary blitz — or “shock and awe” on the bonds markets — can halt the spiral under way.

The markets are already looking beyond the €40bn to €45bn joint rescue for Greece by the IMF and the EU, questioning whether some form of debt restructuring or managed default can be avoided over the next year or two, or even whether the rescue plan can work at all in a country trapped in debt deflation with no way out through devaluation.

Professor Willem Buiter, a former member of Britain’s Monetary Policy Committee and now global economist for Citigroup, said there may need to be a “voluntary restructuring” of debt.

“It is quite likely that a haircut of, say, 20pc to 25pc will be imposed on creditors as parts of the deal,” he said.
The bond markets are already “pricing in” a default of some kind in Greece, where rates on 2-year debt spiked close to 15pc in panic trading yesterday.

The European Commission and the International Monetary Fund both insist that restructuring is out of the question but investors have become cynical after months of EU rhetoric and foot-dragging by Berlin.

The ECB cannot lightly risk a second sovereign crisis erupting, with dangers of a spillover into Spain.
The exposure of Spanish-based banks to Portuguese debt exceeds $80bn, according to the Bank for International Settlements. There were early signs of strain in the Spanish banking system yesterday.

Banks were forced to pay a premium in the domestic “repo” market on fears of counterparty risk, although the Bank of Spain has so far won plaudits for ensuring that banks have large safety buffers.

It is unclear why the markets are becoming skittish over Italian bonds. Public debt is 115pc of GDP but this is offset by very low household debt.

Italian citizens are among the most frugal savers in the OECD club of rich states. Moreover, the government has weathered the financial crisis with a budget deficit in remarkable good health.

Beware of Greeks Looking for Gifts

Euro dithering of the first order. German angst as to what to do. Greek labor intransigence. The Russians and Chinese bailing Greece out, and now talk of shifting it to the IMF which means more US bailouts.

Folks, forget the nonsense you hear about the Greeks being the birthplace of democracy. They may have invented it but have rarely practiced it and then only in short spurts. Greece has been ruled by tyrants and Turks and since the early seventies, socialists under the dreadful Papandreou family.

The current Papandreou has been a lifelong Socialist and is the president of Socialist International, a grouping of national Socialist parties.

His father, the late Andreas Papandreou, founded the Pasok party. His grandfather was prime minister in the 1960s before he was thrown out by a military coup.

They have been ardent anti-Americans. Greek intellectuals are the worst of the US haters.

Greece has yet to learn the lesson about socialism and the US may not be far behind, but this is a European and Greek problem of their own causing.

No gifts to Greece.

Germany and Greece Getting Nasty

Greece's Foreign Ministry has called in the German Ambassador in Athens over an article in the German magazine Focus.

German Focus magazine cover with Venus draped in blue and white Greek flag, flips the bird to Germany. The German weekly magazine devoted its lead story to Greece.

Translating the German to English: "The Liars in the Euro Family"
_________________________________

DIPLOMACY | 27.02.2010 DW
Plan for Germany to buy Greek bonds dismissed as 'nonsense'

A German MEP says Germany, France and the Netherlands will buy Greek bonds to help Athens deal with its debt. A senior German official has dismissed the claims.

A German member of the European Parliament announced Saturday that Germany, France and the Netherlands are planning to buy Greek bonds to help Athens cope with its debt crisis.

The claim, backed by a leading Greek newspaper, was made by MEP Jorgo Chatzimarkakis on Greek television, despite reports that a senior German official, who declined to be named, had dismissed the comments as "nonsense."

"Germany is planning to buy 5-7 billion euros ($6.8 - 9.5 billion) [of bonds] immediately," said Chatzimarkakis, a German of Greek heritage. He added that Germany's state-owned development bank KfW and France's state-owned Caisse des Depots would contribute. Earlier, big German banks Deutsche Postbank, Eurohypo and Hypo Real Estate said they would not be buying any more Greek government bonds.

Athens plans to issue its second round of bonds this year, possibly in early March, in order to make good on debt payments due in April and May. Greece needs about 20 million euros to prevent a default, which could have potentially catastrophic effects on other eurozone economies.

The Greek finance ministry and the European Commission declined to comment on the report, and there was no immediate comment from France's government.

Further tensions

On Friday, both Germany and Greece sought to downplay rising tensions as Athens said it would not seek World War II reparations from Germany.

Several government officials and opposition politicians have pressured Prime Minister George Papandreou to renew demands that Germany compensate Greece for Hitler's occupation of the country. Germany claims it has already paid Greece billions of euros in reparations.

German Foreign Ministry spokesman Stefan Bredohl said Berlin and Athens had had a "slight disagreement," but that the German ambassador and the Greek parliamentary speaker had recently had an "amicable" meeting.

The rehash of the decades-old war reparations dispute came as the German government announced a March 5 meeting in Berlin between Papandreou and German Chancellor Angela Merkel. Greece may soon be in need of a government bailout, in which Germany would likely play a central role, and which many Germans strongly oppose.

Speaking to parliament, Papandreou said his government could not wait to address the deficit, and that he was optimistic the European Union would lend its support.

"We are asking the EU for its solidarity and they are asking us to meet our obligations," he said. "We will meet our obligations... We will demand European community solidarity, and I believe we will get it."

A Focus cover sparked much controversy
Calls for boycott

Parallel to the spat over war reparations, the Greek and German press have exchanged mocking words and images. The latest issue of German news magazine Focus featured an image of the Venus de Milo raising her middle finger on the cover. A Greek newspaper responded by printing an image of the statue atop the Victory Column in Berlin holding a swastika.

The Venus image led George Lakouritis, president of Greece's oldest consumer group INKA, to call on Chancellor Merkel to condemn the magazine. The group also distributed leaflets in central Athens and in front of the German-owned electronics store Media Markt calling for a boycott of German goods.

"The distortion of a statue of Greek history, beauty and civilization, from a time when there (in Germany) they were eating bananas on trees is impermissible and unforgivable," the group said.

acb/cmk/dpa/AFP/Reuters
Editor: Andreas Illmer

The Euro, Past, Present and Future

Bernanke wants answers on Goldman role in Greece
Thu Feb 25, 2010 12:09pm EST
Related News
Greece not alone in exploiting EU accounting flaws
Mon, Feb 22 2010
Reuters

* Bernanke says SEC also 'interested' in Goldman role

* Shouldn't use derivatives to destabilize countries

* Bernanke says US economy weak, job losses a worry

* Congress needs to agree to get deficits down, now

By Glenn Somerville and Pedro da Costa

WASHINGTON, Feb 25 (Reuters) - U.S. regulators are looking into how Wall Street firms like Goldman Sachs (GS.N) helped debt-stricken Greece arrange derivatives deals that critics say were used to disguise the size of its budget deficits.

Federal Reserve Chairman Ben Bernanke made the disclosure on Thursday and suggested securities regulators also wanted the information.

"We are looking into a number of questions related to Goldman Sachs and other companies in their derivatives arrangements with Greece," Bernanke said in response to a question from U.S. Senate banking Committee Chairman Sen. Christopher Dodd before testifying to the group for a second day on the state of the U.S. economy.

Bernanke said the Securities and Exchange Commission similarly was "interested" in Wall Street's activities in helping Greece do derivatives deals.

He stopped short of saying an official inquiry of Goldman Sachs' activities was under way by either the Fed or SEC. The SEC had no immediate comment when contacted.

"Obviously, using these instruments in a way that potentially destabilizes a company or a country is counterproductive," Bernanke said. "We'll certainly be evaluating what we learn from the activities of the holding companies that we supervise here in the U.S."

Goldman Sachs spokesman Michael DuVally said, "As a matter of policy, we don't comment on legal or regulatory matters."

FED HAS STRONGER HAND NOW

In the midst of the severe financial crisis that swept the U.S. economy from 2007 to 2009, Goldman and other Wall Street firms converted to bank holding companies, putting supervision of them more firmly in the Fed's hands.

Goldman Sachs has come under scrutiny for deals it did with Greece before it staggered into a debt crisis that has raised fears of a sovereign debt default and forced the European Union to say it will help if necessary to avert one.

The Greek crisis has pressured the euro and EU partners fear it may spread to weaker euro zone economies like Portugal and Spain.

Goldman Sachs entered into currency swaps with Greece, which critics say helped it disguise its debt, and has defended them as neither uncommon at the time nor inappropriate.

Cross-currency derivatives that Goldman Sachs conducted for Greece in 2001 helped reduce the size of its debt at a time when the country was keen to meet criteria for entering the EU and adopting the euro.

Goldman Sachs has a particularly high profile in Washington, having produced numerous alumni including former Treasury Secretary Henry Paulson, many of whom still play active roles in key agencies like Treasury.

It also has attracted a heavy share of public anger over gold-plated banker pay packages, not helped by comments such as chief executive Lloyd Blankfein's assertion last November that the bank was doing "God's work."

The bulk of Bernanke's testimony was a repeat of remarks he made on Wednesday when he told the U.S. House of Representatives that a weak U.S. job market means interest rates must stay low for a long time to try to spur activity.

A key uncertainty is whether the economy can grow fast enough in future to bring unemployment down at an acceptable rate, Bernanke said, a particularly poignant remark in view of a Labor Department report on Thursday that showed unemployment insurance benefit claims rising for a second straight week.

FINANCIAL SERVICES TOO BIG

With the Senate working toward a bill on financial regulatory reform, expected to be unveiled by Dodd early next week, Bernanke said in response to questions that he hoped it would lead to a downsizing in the importance of the financial services sector, which he said has become too big.

He appeared to pour cold water on the idea of a "Volcker rule" that would ban banks from engaging in so-called proprietary trading -- using government-guaranteed capital to make bets for their own account -- as the Obama administration had advocated but Congress seemed to be moving away from.

"We all agree that we don't want excessive risk-taking, particularly not on a 'tails I win, heads you lose basis,' certainly, "Bernanke said, but added there could be "unintended consequences" from such a rule.

He has said that banking regulators should get more powers to monitor and stop some bank trading activities if they deem it necessary to protect financial stability.

One key theme that Bernanke turned to repeatedly during a question-and-answer session was the need for lawmakers to come to agreement on measures for shrinking soaring U.S. budget deficits.

Republicans are reluctant to raise taxes and Democrats have measures before Congress, including healthcare reform, that would at least initially raise deficits, leaving the two sides stalemated on a wide range of fiscal issues and making progress on deficit reduction next to impossible.

"It could become a problem tomorrow if bond markets are not persuaded that Congress is serious about bringing down the deficit over time," Bernanke warned. Big deficits can erode confidence in a country's ability to repay debt, in turn driving the value of currency down and push inflation up.

(Editing by Andrew Hay)

Wishful Thinking in Greece

The minister is essentially saying that the only hope in saving Greece and the euro is for Europe to become a political union, not just an economic union. Should that happen, that will be a major political earthquake, a threat to personal liberties and the beginning of a new wave of immigration from Europe to the US.

Many experts think the € may tumble on the back of the Greek debt crisis

Something very ugly is happening with currencies and to this observer, it looks like the beginning stages of competitive devaluation.

The problem's roots are in the unsustainable amount of government debt, borrowing and spending. We hear about Greece, by any measure a very small country, but Greece does not stand alone with some very bleak statistics, discussed in the video and article. Those statistics are not that far of from those of The United States.

In the most optimistic reading of events, Greece is said to have to cut spending and reduce their budget deficit by 4%. Easily said, but dangerously difficult to do. Greece, like all members of the euro zone, has another problem. It cannot devalue its currency. It uses the euro.

Either at the top, the Germans or French people are going to get tired of bailing out the lesser members of the European Union, or the smaller members will take the easy way out, drop the euro and return to their own currencies.

Unfortunately for the United States, we have a president in Barack Obama who sees nothing but increasing the size of government as the answer to every problem. He is probably the least fit person to fill that office at this time.

We are in trouble, big trouble, but at least we control our own printing presses.

__________________________



Can anyone fix the euro puzzle?

A crisis-strewn week has left the single currency on the edge of a precipice, write Edmund Conway and Bruno Waterfield

Published: 12:14AM GMT 14 Feb 2010
Telegraph

The summit started as it meant to go on – in chaos, confusion and unintended farce. The big moment – the heads of state meeting which is supposed to be the centrepiece of every European summit – was scheduled to begin at 10am in the wood-panelled Bibliothèque Solvay in Brussels' European quarter, but as the hour approached, it became clear that nothing was doing. As more time passed, it became clear that something was wrong. Eventually, Herman van Rompuy – the new European president, in charge of his first big set-piece – explained that a snowstorm had held up a number of the participants. The meeting would be delayed by two hours.

It was a poor excuse. Everyone knew what was really holding up the summit. Behind the scenes, in ill-tempered exchanges in private conference rooms nearby, the grand European plan to help prevent Greece sliding into economic collapse was unravelling – and fast. In a radical move, the leaders – from President Nicolas Sarkozy of France and Chancellor Angela Merkel of Germany to the European Central Bank (ECB) president Jean-Claude Trichet – had already agreed to throw out the usual European Council agenda and replace it with one topic: Greece's economy. The problem was that no one could agree on what to do about the stricken nation.

By now, the story will be painfully familiar. The southern European nation was having trouble raising money. Never the most sensibly-run economy, Greece had seen its budget deficit balloon to terrifying proportions in the wake of the recession sparked by the financial crisis. To make matters worse, the incoming government, led by Prime Minister George Papandreou, had uncovered the fact that their predecessors had hidden billions of euros worth of borrowing outside their official statistics. The combined effect was to cause a sudden sharp increase in the country's borrowing rates and its default insurance spreads, as investors speculated that it was entering a fiscal debt trap from which it could no longer escape.

In such circumstances, a country would devalue its currency, but this is not an avenue open to a member of the euro like Greece. With investors pulling their money out of the country at such a rapid rate that the interest rate spread between Greek and German government bonds hit its highest level since the creation of the euro, it became clear that someone was going to have to step in and help.

It wasn't merely that Greece, a relatively small economy, was close to collapse; it was that, left unchecked, the panic could spread to Spain, Portugal, Italy or Ireland – all of whom suffer the same ballooning budget deficits and overburdened consumers.

For a whole swathe of euro members to be allowed to crumble would beg questions about the entire euro project. Indeed, as Papandreou pointed out at the World Economic Forum at Davos last month, the attack could be seen as a speculative assault on the euro, targeted at first through its "weakest link". As if to bear out his point, figures from the Chicago Mercantile Exchange released on Monday indicated that speculators had amassed their biggest positions against the currency since its foundation more than a decade ago.

So it was that a week before Thursday's summit, in a bilateral meeting in Paris, Sarkozy told Merkel that France and Germany would have to mastermind some kind of plan to protect Greece. His broad proposal was that the northern European nations should at the least issue a statement promising to stand behind Greece, and perhaps go so far as to spell out how much they would put into a potential lifeboat. Merkel was not convinced. For one thing, she was well aware that Sarkozy had his own political motivations for such a move: the alternative, an International Monetary Fund (IMF) bail-out, would enable IMF chief Dominique Strauss-Kahn, Sarkozy's most likely opponent at the next French election, to ride in and "save the euro".

But, more fundamentally, by organising a bail-out Germany would be seen as providing unfair support for a country which had proven itself incapable of fiscal rectitude. Such a move would not only be hideously unpopular with German taxpayers, it would potentially encourage poorer countries to follow Greece's lead. Moreover, under the German constitution, such moves were legally tricky to organise.

And so the battlelines were drawn prior to a week of frantic behind-the-scenes negotiations as the French and Germans tried desperately to find common ground.

Finally, it seemed as if the ministers had patched together a deal. Some kind of bail-out package – a "firewall" provided by a "coalition of the willing", according to insiders – would be revealed at the summit.

Then came van Rompuy's excuse about the snow. But it wasn't ice and water that delayed the summit. That morning, the key players – Merkel, Sarkozy, Papandreou, Jean-Claude Juncker, head of the euro group of nations, and Trichet – held a last-minute meeting. According to insiders, voices were raised with Trichet and Merkel banging fists on the table as Sarkozy and Juncker tried to push for a bail-out plan. The statement that emerged from the meeting was a thinly-disguised compromise. Three-quarters of it seemed to be focused only on insisting that the Greeks cut their budget deficit by 4pc this year; the final paragraph, which appeared to be specifically aimed at appeasing the French, said: "Euro area Member states will take determined and coordinated action, if needed, to safeguard financial stability in the euro area as a whole," before adding: "The Greek government has not requested any financial support."

The hope was that the statement alone would be enough to reassure markets that in the event of a proper "sudden stop" in funding to Greece, the rest of the euro area would step in. However, the financial crisis has proven that without concerted plans to back them up, statements of broad intent are pretty useless at containing market concerns.

Within moments of the statement, the euro dropped to a nine-month low against the dollar and share prices in the euro area stalled. The rot continued on Friday and, according to economists, will persist unless finance ministers meeting tomorrow provide any detail on what a rescue package might involve.

What makes any hopes for clarity appear forlorn is that the euro has no mechanism for dealing with crises of this sort. It is monetary rather than fiscal union. As Martin Feldstein, a Harvard professor, puts it: "There's too much incentive for countries to run up big deficits as there's no feedback until a crisis."

The ECB could offer the country extra liquidity support, but there is a sense that unless other euro nations dip into their pockets the suspicions over Greece will linger – and those about the rest of the euro's debt recidivists. Juncker's plan would involve a web of bilateral loans from euro members, perhaps being made not directly but through state-owned banks, so as to circumvent those German constitutional obstacles.

However, it is an open question as to how the populations of those donor countries will take the proposal that they once again come to the rescue of their misbehaving neighbours. Nor indeed how the Greeks will take it when it emerges that their coruscating deficit cuts and public sector wage cuts are being overseen by the Germans. Although the political will is clearly still strong in Brussels to fight off any talk about a euro crisis, it is clear even to fans of the single currency that this is its single greatest test. According to Albert Edwards of Société Générale (himself not, it should be pointed out, a fan), "any 'help' given to Greece merely delays the inevitable break-up of the eurozone". The problem, he adds, is a "lack of competitiveness within the eurozone – an inevitable consequence of the one-size-fits-all interest rate policy.

"Even if the PIGS [Portugal, Ireland, Greece and Spain] could slash their fiscal deficits, as Ireland is attempting, to maintain credibility with the markets in the short term, the lack of competitiveness within the eurozone needs years of relative [and probably absolute] deflation."

This problem – that under eurozone rules Germany is able to pursue an entirely divergent economic strategy to its Mediterranean counterparts – suggests that the best course of action may be for Germany to pull out of the currency union, according to former Bank of England policymaker David Blanchflower.

"That might be the only solution," he says. "At the moment it simply isn't working. And the imbalance makes it almost impossible for countries like Greece or Ireland to escape from this situation."

It is not merely economists who have clocked on to this inherent weakness. According to Simon Derrick, of Bank of New York Mellon, the mood among investors feels not dissimilar to the time the Exchange Rate Mechanism faced speculative attack in the early 1990s.

Back then the targets were currencies; this time they are government bonds. But the objective is the same – to test whether governments really have the political will to persevere with a system plagued by inherent economic weakness and illogicality.

Has any hedge fund put its head above the parapet in this destructive trade, as George Soros did back then, owning up to shorting the pound before successfully "breaking" the Bank of England? Not yet, though the rumours are that John Paulson, the man who made billions betting against the US housing market, has significant positions against some of the weaker euro members. But a currency union is rather more difficult to break than an exchange rate agreement. Betting against the Europeans' political will to further integration remains a gamble.
Still, the difficulties have at least offered Gordon Brown a rare opportunity for genuine self-satisfaction. After all, he decided in 2003 – against Tony Blair's wishes – not to join the single currency, and only now is it clear how wise that decision was. Britain, though marred with similar fiscal difficulties as Greece, has at least had the luxury of being able to devalue the pound.

Business Secretary Lord Mandelson, the arch europhile, still clings on to the dream, saying last week: "I think in the longer term it would be in Britain's interests to be part of the eurozone."

Even with sterling, the UK can hardly rest easy. For one thing, British banks have a large balance sheet exposure to the troubled Club Med nations – estimated by the Bank for International Settlements to be around £240bn – so any collapse there would trigger a secondary crisis in London.

Second, the Greek crisis serves as a reminder that no country is immune to a sudden investor exodus. And if one runs one's finger down the list of leading nations, no prizes for guessing which country has a Greek-style combination of rocketing budget deficits, high current account shortfalls and rising national debt.

China tightens, The Germans bore no gifts to Greece, The World turns

Will markets call EU bluff on Greek rescue?

Greek bail-out accord lacks substance and finance's poker players may soon call its bluff.

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:49PM GMT 11 Feb 2010
Telegraph

The white smoke has at last emerged from the Bibliotheque Solvay in Brussels, but global markets do not like its odour. The Greek rescue plan agreed by EU leaders after a week of leaks is strangely thin, raising suspicions that Germany, Holland and the creditor states of Northern Europe still cannot agree on the terms of any bail-out.

The euro tumbled 1pc to a nine-month low of $1.36 against the dollar and Club Med debt yields jumped as investors read the summit text, searching in vain for details of debt guarantees or bilateral loans, or guidance on an EU eurobond. All they found was an expression of "political will".

"Euro area member states will take determined and co-ordinated action, if needed, to safeguard financial stability in the euro area as a whole. The Greek government has not requested any financial support," it read.

The 27 leaders never even discussed how they might shore up Greece or the rest of Club Med. German Chancellor Angela Merkel said she was not willing to broach the subject at all. The only relevant topic was whether Greece was complying with Treaty obligations, and how the country would slash its budget deficit from 12.7pc to 8.7pc this year – in a slump.

"They offered nothing," said Jochen Felsenheimer, a credit expert at Assenagon in Frankfurt. "It was just words without any concrete measures, hoping to buy time."

Whether the EU has time is an open question. Credit Suisse says Greece must raise €30bn (£26bn) in debt by mid-year, mostly in April and May. Greek banks have been shut out of Europe's inter-dealer markets, forcing them to raise money at killer rates. They are suffering an erosion of deposits as rich Greeks shift money abroad. This could come to a head long before April.

"Economically, we are in a very risky situation. Greece is close to default. We face systemic risk like the Lehman collapse and unless there is a bail-out for Greece, there will have to be a bail-out for the whole European banking system within two or three months," he said.

Yet they are damned if they don't, and damned if they do. "A Greek bail-out increases the risk of EMU break-up, because monetary union can only work if everybody sticks to the rules," Mr Felsenheimer said.

French banks have $76bn of exposure to Greece, the Swiss $64bn, and the Germans $43bn. But this understates cross-border links. There are large loans between vulnerable states. The exposure of Portuguese banks to Spain and Ireland equals 19pc of Portugal's GDP. Interlocking claims within the eurozone zone are complex. Contagion can spread fast.

Marc Touati, of Global Equities in Paris, said the "haemorrhage of Greece" must be stopped to prevent a domino effect. "We have to move fast, above all to keep Greece in the eurozone. If not, Spain, Portugal, and Italy will be next. It could reach France," he said.

French President Nicolas Sarkozy drew an explicit parallel with Lehman Brothers in his press conference with Chancellor Merkel, saying EU leaders had given a cast-iron pledge that no eurozone member would be allowed to fail, just as they promised during the financial crisis that no big bank would be allowed to fail.

Details can be thrashed out later, in this case by finance ministers next week. The talk is of a "coalition of the willing", a group of states acting outside the EU Treaty structure. Britain would not be obliged to help. The IMF would bring "expertise" but not set policy.

Each country will choose its own way of helping, perhaps using state banks or sovereign wealth funds to buy Greek debt. In Germany's case this might be KFW: for France in might be Caisse des Depots. The arm's-length solution is elegant but it does not hide the fact that such action amounts to a debt guarantee for a serial violator of EMU rules. It implicitly opens the door to bail-outs for a string of countries in crisis.

BNP Paribas said any rescue confined to Greece is doomed to fail. "The market would only concentrate on its next 'victim', which would be Portugal," it said. Put another way, investors will demand a similar guarantee for Iberian debt.

It is this worry over open-ended liability that made Germany hesitate. Such help would need approval by the German Bundestag – and some other national parliaments. If Germany finances an unpopular rescue that merely puts off the day of reckoning, or if Athens squanders the aid, the deal will come back to haunt Mrs Merkel.

There was an element of bluff in Thursday's accord, as if the EU leaders hope to muddle through with "constructive ambiguity", fingers crossed that their vague political pledge will never be tested. Bluff is a valid tool of statemanship, but in this case their bluff could be called very soon.

Greece, who cares? Perhaps you!

Do you think AFSME and the NEA will act differently?



The Greek budget deficit is now 12% of GDP. It has a bloated public sector and huge unfunded liabilities to entitlement programs and government labor unions. Does that sound familiar? It should, the US federal deficit is forcast to be 11% of GDP this year.

Some say the US federal unfunded liabilities are $53 trillion. Others say don't worry. California recently released this bit of good news for Californians:

Unfunded pension liabilities for CalPERS and CalSTRS are $49 billion and a new accounting rule going into effect next year will result in an accounting for the first time of liabilities for retiree health benefits. A February 2006 Legislative Analyst Office (LAO) report estimates that the state's unfunded liabilities for retiree health care benefits and their dependents is between $40 billion and $70 billion and recommends that, in addition to current expenditures now reaching $1 billion per year, up to $6 billion per year be set aside to retire that unfunded liability. Also expected to be in the billions is the unfunded liability for retiree health benefits at local governments and school districts.

The annual cost to California's state budget for pensions rose from $160 million in 2001 to $2.6 billion in 2006, reducing funds available for other purposes. A large portion of that $2.6 billion payment went toward paying off previous pension commitments that had gone unfunded.

California.gov

A 'Lehman-style' tsunami hits Spain and Portugal

Fears of 'Lehman-style' tsunami as crisis hits Spain and Portugal

The Greek debt crisis has spread to Spain and Portugal in a dangerous escalation as global markets test whether Europe is willing to shore up monetary union with muscle rather than mere words.

By Ambrose Evans-Pritchard Telegraph
Published: 7:29PM GMT 04 Feb 2010

Julian Callow from Barclays Capital said the EU may to need to invoke emergency treaty powers under Article 122 to halt the contagion, issuing an EU guarantee for Greek debt. “If not contained, this could result in a `Lehman-style’ tsunami spreading across much of the EU.”

Credit default swaps (CDS) measuring bankruptcy risk on Portuguese debt surged 28 basis points on Thursday to a record 222 on reports that Jose Socrates was about to resign as prime minister after failing to secure enough votes in parliament to carry out austerity measures.

Parliament minister Jorge Lacao said the political dispute has raised fears that the country is no longer governable. “What is at stake is the credibility of the Portuguese state,” he said.

Portugal has been in political crisis since the Maoist-Trotskyist Bloco won 10pc of the vote last year. This is rapidly turning into a market crisis as well as investors digest a revised budget deficit of 9.3pc of GDP for 2009, much higher than thought. A €500m debt auction failed on Wednesday. The yield spread on 10-year Portuguese bonds has risen to 155 basis points over German bunds.

Daniel Gross from the Centre for European Policy Studies said Portgual and Greece need to cut consumption by 10pc to clean house, but such draconian measures risk street protests. “This is what is making the markets so nervous,” he said.

In Spain, default insurance surged 16 basis points after Nobel economist Paul Krugman said that “the biggest trouble spot isn’t Greece, it’s Spain”. He blamed EMU’s one-size-fits-all monetary system, which has left the country with no defence against an adverse shock. The Madrid’s IBEX index fell 6pc.

Finance minister Elena Salgado said Professor Krugman did not “understand” the eurozone, but reserved her full wrath for the EU economics commissioner, Joaquin Almunia, who helped trigger the panic flight from Iberian debt by blurting out that Spain and Portugal were in much the same mess as Greece.

Mrs Salgado called the comparison simplistic and imprudent. “In Spain we have time for measures to overcome the crisis,” she said. It is precisely this assumption that is now in doubt. The budget deficit exploded to 11.4pc last year, yet the economy is still contracting.

Jacques Cailloux, Europe economist at RBS, said markets want the EU to spell out exactly how it is going to shore up Club Med states. “They are working on a different time-horizon from the EU. They don’t think words are enough: they want action now. They are basically testing the solidarity of monetary union. That is why contagion risk is growing,” he said.

“In my view they underestimate the political cohesion of the EMU Project. What the Commission did this week in calling for surveillance of Greece has never been done before,” he said.

Mr Callow of Barclays said EU leaders will come to the rescue in the end, but Germany has yet to blink in this game of “brinkmanship”. The core issue is that EMU’s credit bubble has left southern Europe with huge foreign liabilities: Spain at 91pc of GDP (€950bn); Portugal 108pc (€177bn). This compares with 87pc for Greece (€208bn). By this gauge, Iberian imbalances are worse than those of Greece, and the sums are far greater. The danger is that foreign creditors will cut off funding, setting off an internal EMU version of the Asian financial crisis in 1998.

Jean-Claude Trichet, head of the European Central Bank, gave no hint yesterday that Frankfurt will bend to help these countries, either through loans or a more subtle form of bail-out through looser monetary policy or lax rules on collateral. The ultra-hawkish ECB has instead let the M3 money supply contract over recent months.

Mr Trichet said euro members drew down their benefits in advance -- "ex ante" -- when they joined EMU and enjoyed "very easy financing" for their current account deficits. They cannot expect "ex post" help if they get into trouble later. These are the rules of the club.