1. how some banks and funds have apparently specifically bet on Greek debt (through CDSs) and have a vested interest in things happening with that debt (altough what exactly is not necessarily clear);

2. how financial players that we bailed out (analysts in investment banks), or that caused the earlier crisis by their incompetence (ratign agencies) are allowed to lead the narrative on economic policies today;

3. how everybody accepts as a fact that Greece defaulting would cause a crisis for the euro. Why should Greece defaulting be embarrassing for Germany? (see point 2) above again);

4. how the economic debate on recovery (not really happening yet as jobs are still being lost) has been hijacked by the debate on public debt and deficits;

5. how somehow the only way to cut debt and deficits is to cut social services or spending, and not to increase taxes or change economic policies.

EU president Herman Van Rompuy has announced a deal has been reached to help Greece cope with its deficit crisis.

Mr Van Rompuy emerged from two hours of intense negotiations in Brussels to say, alongside German Chancellor Angela Merkel and French President Nicolas Sarkozy, that they were joining a full summit of EU leaders 'to announce the deal that we have reached'

Mr Sarkozy and European Commission President José Manuel Barroso nodded but refused to expand when pressed on the detail of their accord.

The euro zone will take coordinated action if necessary to safeguard the financial stability of the single currency area, President Herman Van Rompuy said.(RTÉ)

Meanwhile, I find this graph shows the limited correlation between the level of debt and the markets' actors opinion (as seen through the CDS spread).

(click to enlarge)

Also I doubt we have a clear idea of the real level of public debt in most of the countries, especially given the components of the public debt must vary from one country to the other. I suspect it would require the kind of deconstruction/reconstruction we did for the employment figures. Does the public debt include sub-national public entities (US states, French regions...)? How is included quasi-public debt (i.e. in the USA, the huge debt of the GSE (Fannie Mae, Freddie Mac, Ginnie Mae...) ?

"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char

Yet the idiosyncrasies of the eurozone should not distract us from the general nature of the fiscal crisis that is now afflicting most western economies. Call it the fractal geometry of debt: the problem is essentially the same from Iceland to Ireland to Britain to the US. It just comes in widely differing sizes.

What we in the western world are about to learn is that there is no such thing as a Keynesian free lunch. Deficits did not "save" us half so much as monetary policy - zero interest rates plus quantitative easing - did. First, the impact of government spending (the hallowed "multiplier") has been much less than the proponents of stimulus hoped. Second, there is a good deal of "leakage" from open economies in a globalised world. Last, crucially, explosions of public debt incur bills that fall due much sooner than we expect

I don't like his snide comment about "Keynesian free lunches" and I think he is wrong here in that the monetary easing worked ONLY because governments were able and willing to take on that debt burden and step in to replace incapacitated private sector actors. Without public borrowing (and spending), there would have been no borrowing at all and a much more savage crunch.

But he's right that it was still a new pile of (public) debt to try to limit the impact of too much (private) debt in the first place.

And he makes this point about the US:

Although the US household savings rate has risen since the Great Recession began, it has not risen enough to absorb a trillion dollars of net Treasury issuance a year. Only two things have thus far stood between the US and higher bond yields: purchases of Treasuries (and mortgage-backed securities, which many sellers essentially swapped for Treasuries) by the Federal Reserve and reserve accumulation by the Chinese monetary authorities.

But now the Fed is phasing out such purchases and is expected to wind up quantitative easing. Meanwhile, the Chinese have sharply reduced their purchases of Treasuries from around 47 per cent of new issuance in 2006 to 20 per cent in 2008 to an estimated 5 per cent last year. Small wonder Morgan Stanley assumes that 10-year yields will rise from around 3.5 per cent to 5.5 per cent this year. On a gross federal debt fast approaching $1,500bn, that implies up to $300bn of extra interest payments - and you get up there pretty quickly with the average maturity of the debt now below 50 months.

Unless checked before, the financial markets will turn on the US and the Obama administration quickly, and they will of course want blood, ie severe cuts in Social Security and Medicare.

In the long run, we're all dead. John Maynard Keynes

American governments have acquired a vital interest in maintaining an international pattern or monetary and financial relations which is extremely volatile, unstable and crisis-prone, because it is these features of the international economic system which maintain the vast inflows of funds into New York. And it is in this context that we can see the way in which the big US hedge funds are not an aberration but are rather financial institutions in the (deeply distorted) American national interest. Every international act of hedge fund financial warfare in any part of the world acts like a shot in the arm for the liquidity of the US financial markets, maintaining downward pressure on interest rates and stoking the stock market boom. (Peter Gowan, The Global Gamble, p. 124)

As the Independent reported yesterday:

Analysts said much was riding on how EU leaders responded but those speculators betting on a fall of the euro will have to rush back to the market to cover up their "short" positions to limit their losses.

"If a deal is done and Greece is rescued, we could see a rally because a lot of people are short and they will have to wind up their positions," said Neil Mellor, a Bank of New York Mellon currency strategist.

Germany, Forced to Buoy Greece, Rues Euro Shift

As Europe edges toward emergency guarantees to stem market panic over one of the most profligate members of the euro bloc, the country that the region turns to for leadership, Germany, is suffering from growing doubts about the European experiment it long championed.

ohhh, [Europe.Is.Doomed™ Alert]

The apprehension in Germany runs much deeper than a single crisis. It comes in the same week that Germany gave up its most cherished title, world export champion, to China, heightening fears of a declining stature and importance globally.

Germany also faces a demographic challenge, managing a population that is not only graying but shrinking. Last month the government announced that the population dropped below 82 million last year for the first time since 1995. That means fewer people trying to pay off a growing national debt, with a projected budget deficit of $118 billion this year.

ohhh [Europe.Is.Doomed™ Alert]

In the long run, we're all dead. John Maynard Keynes

Doomed from the start  Billy blog

From the outset, as I have noted in several blogs the initial structural design of the Eurozone was never compatible with a federal arrangement that could cope with large asymmetric shocks. The selection of EMU nations never formed an optimal currency area despite the bevy of lackey economists who wrote a plethora of mathematical papers purporting to "prove" that it was. Please see the blog - España se está muriendo for a detailed discussion on that specific aspect of the EMU debacle.

Not having an OCA was one thing. But then the neo-liberal ideologues entered the fray, driven in part by political prejudices that go back into time (particularly World War 2), and conjured up the Stability and Growth Pact (SGP). The restrictions imposed by the SGP were claimed to reflect economic sense but there is nothing in any economic theory that tells us that the design principles of the SGP were optimal.

In fact, from the perspective of modern monetary theory (MMT) the 3 per cent budget deficit to GDP rule is nonsensical. It would be an extraordinary coincidence for a 3 per cent ratio to be consistent with full employment - that is, taking into account the saving preferences of the households and the trade accounts for each country.

In a 2006 book I published with Joan Muysken and Tom Van Veen - Growth and cohesion in the European Union: The Impact of Macroeconomic Policy - we showed that it is widely recognised that these figures were highly arbitrary and were without any solid theoretical foundation or internal consistency.

The current crisis is just the last straw in the myth that the SGP would provide a platform for stability and growth in the EMU. In my recent book (published just before the crisis) with Joan Muysken - Full Employment abandoned - we provided evidence to support the thesis that the SGP failed on both counts - it had provided neither stability nor growth. The crisis has echoed that claim very loudly.

As a result of the establishment of the European Central Bank (ECB), European member states now share a common monetary stance. The SGP was designed to place nationally-determined fiscal policy in a straitjacket to avoid the problems that would arise if some runaway member states might follow a reckless spending policy, which in its turn would force the ECB to increase its interest rates. Germany, in particular, wanted fiscal constraints put on countries like Italy and Spain to prevent reckless government spending which could damage compliant countries through higher ECB interest rates.

The indisputable empirical reality is that the EMU countries have never got close to achieving full employment in the period they have had to succumb to the SGP. And the blowout in unemployment in some nations during the crisis is certainly clear evidence that the SGP is incapable of attenuating the magnitude of a serious crisis.

There is a very interesting article published by Lars Jonung, Eoin Drea in the January 2010 edition of Econ Journal Watch, 7(1), 4-52 entitled - It Can't Happen, It's a Bad Idea, It Won't Last: U.S. Economists on the EMU and the Euro, 1989-2002.

It examines how US economists viewed the development and implementation of the EMU from the time of the Delors Report in 1989 through "to the introduction of euro notes and coins in January 2002″. They trace the evolution of ideas on whether the system would work. Most "were skeptical towards the single currency" although they "adjusted their views as European monetary unification progressed."

I don't agree with its conclusions but it is an interesting methodology (tracing the evolution of argument) and many of the skeptical comments were prescient.

Over 50% of the Greek economy relies on tourism and shipping, external industries both very susceptible to recessions. But it does mean that Greece does have a natural means to bring money into the country OTHER than foreign investment or local industries competing against the world (Greece has an abysmal lack of foreign investment and its industries hardly compete ESPECIALLY after entering the Eurozone).

Greeks got a stable currency, great rates for borrowing, and lots of infrastructure (bridges, airports and subways) since joining the Eurozone. Lots of money went into these projects and all three of them were undertaken by German contractors. That's the bonus of joining. The problem has of course been currency swaps that racked up prices and forced normally non-indebted Greeks to go into debt. And still, the rate of private debt in Greece is at 50% which is much lower than the rate in the UK and Spain. The recession should presumably hurt banks a lot more in those countries since Greece's decline is not as bad and the private sector owns less. Greece fails, however, because of its massive gov't deficit which exceeds all but one country in the zone, and this deficit coupled with the second highest gap in the current year (which of course drove up the interest on the bonds needed to service that debt).

Without a doubt, Greece has created many of its own problems (statistical reporting, inability to align federal bureaucracy with budget reality, corruption and failing tax system) but one wonders if the system itself would have inevitably produced the same problem for Greece. In the midst of a recession, tourism and shipping went south. Because of the Euro and the EU's rather loose monetary policy (I'm referring to a lack of integration between economies), Greece is not able to devalue currency nor is it able receive EU handouts as per the Maastricht Treaty. This produces negative effects for the economy.

As I see it, the options for the EU are to integrate the poorer countries more with a strong eurozone (meaning more German and French taxpayer money to the poorer areas) or else to cut the poorer areas loose.

Check out this story on who owns most Greek debt:

http://www.guardian.co.uk/business/2010/feb/11/greece-debt-france-switzerland

This could be another Lehman-like scenario.

I found this article to be among the best to describe the situation from a Greek perspective:

http://www.independent.co.uk/news/world/europe/sick-man-of-europe-seeks-remedy-from-wary-neighbours- 1895831.html

As for my own cynical perspective, I just see more neo-liberal economics at work.

First, it should be noted that the EU invoked new powers under Article 121 of the Lisbon Treaty, allowing it to reshape the structure of pensions, healthcare, labor markets and private commerce in Greece (the first time this power was invoked).

Note the broad new powers the EU is assuming in this case, the power to take over Greece's economy and install austere fiscal measures. The new powers make me wonder about the set of economic circumstances that brought this about, what percentage of it is Greece's fault for corruption, fudging statistics, tax evasion, etc., and how much of it is an attack on social welfare systems in general. Rich countries can afford them, poor countries cannot. Is there a political will in Germany to pay for Greek social welfare? In a closed system such as that in the USA, we see richer states such as New York (itself highly taxed, itself heavily in debt, itself with many problems) shelling out $2 to the Feds for every $1 it gets back, and its the reverse in poorer states. A lack of such support would be problematic. From my understanding of the EU, this is not happening because the political will isn't there. There are structural funds of course moving from net-donor states to the poorer states, and Greece has been a huge recipient of structural funds in the past. No longer since 2004 of course, since Greece now has a higher standard of living than Baltic and Balkan states.

To reiterate, Greece's economy was always susceptible to recessions because of the lack of diversification. Its biggest industry shipping  accounts for almost a third of Greek GDP, and last year it saw day rates for Cape and Panamax vessels (Greek companies own the largest fleets in the world) drop from $135k a day to less than $10k a day, which forced the shipping companies to keep their ships in drydock (because not shipping was cheaper than shipping when you consider the costs of fuel and repairs) while still paying their unionized sailors and longshoremen. Next for Greek GDP is tourism at about 20%, and that too has fallen off the cliff (mainly due to the recession), followed by agriculture (cotton, dairy, citrus, olive oil, etc.) and banking. With this lack of diversification, a recession can make a budget look painful.

But there are additional reasons Greece is hurting that have nothing to do with a recession. In this light, a recession is a great tool of fear for restructuring, and Greece certainly needs that. The gov't is indeed trying to capitalize on the crisis. Greece was always a poor country in the EU, and other than its shipping industry which could bring back hordes of funds, it maintained competitiveness through cheap labor and cheap tourism. Greeks forever complained that they could not see the world because the drachma exchange rate allowed them to travel to Bulgaria or Turkey at best. Then came the Euro, and overnight Greece lost its edge. Budget travelers stopped coming when they could get what they wanted (sun & sand) in Turkey anyway. Labor and materials were no longer cheap. Fledgling industries vanished overnight. An already poor country was losing competitiveness to even poorer countries far afield. On the other hand, the Euro was a blessing for Greeks since money came pouring in from EU coffers for structural improvements (i.e. Greece's infrastructure improved greatly with new roads, a huge bridge spanning the Peloponnese and Mainland, a subway system for Athens, etc.) but along with new infrastructure came high costs for basic needs. As the Greeks were losing competitiveness, they could not adjust so quickly to the higher cost of living, and then something unheard of in Greece occurred: families went into debt, bank debt and especially credit card debt, because the change in the standard of living had been so swift (Greeks passed down homes through families for generations, and home ownership in the country has been at something like 85% for a century now). Essentially, the EU promised Greeks that they would modernize the country and give it the tools to compete in a more skilled economy, but the change happened so quickly that the reactions of everyday people were unforeseen. Previously seen as a quirky backwater, Greece held a sunny disposition before the Euro, but afterwards, without being able to control its own currency, it had to compete against the best of the best. The people were not ready.

The key, however, is that wholesale shifts in the standard of living, and a lack of training (i.e. education) for the global economy, forced a change overnight. Now they have a form of shock therapy on people's psyches and their physical sense of well being (the Greek diet has changed overnight from one of the healthiest diets in the world to one of the unhealthiest, from fresh organic foods to processed foods). The Greek wealthy, like the wealthy everywhere, did well in the last decade. As the citizens took on higher loans to maintain their standard of living, the rich made exponential profits. The problem Greeks face now is that the government is trying to deliver some hard news about the realities of the global markets. The Prime Minister complains that Greece has been attacked by speculators--and he's right. The problem is that, when banks and so-called investors are involved in the greater part of your economy, you cannot give them a reason to attack you and create the kind of psychological doubts (really, warfare) that will make you vulnerable. Greece has given the speculators ample ammunition, by fudging statistics and losing control of their social security system. When you enter this global market run by bankers, you must protect your flank. You must cut the social welfare system, because the race to the bottom is swift. So, austere measures will be taken, at the EU's behest. People will lose jobs, have their pensions cut, salaries cut (and these are the measures the people have already grudgingly agreed to, the EU has a lot more austerity in mind).

But the EU may yet be surprised by the eternal Greek stubbornness, because the Greek people are not stupid and they know very well what has befallen them. They will protest, and the EU will be left to wonder if dictates from Brussels will actually be followed by the people.

One wonders how much convergence with global markets and the world economy is really pre-planned by our banking system. Those who are lucky enough to get a great education may escape this central fact of middle-class life in the EU and the USA: average salaries for workers are dwindling and have been for a decade.

In the USA, the recession will create an ever bigger gap between not only rich and poor, but between an ever smaller middle class and a quasi-permanent underclass competing for work with 3rd world nations. When you see our prison population, our impoverished, our unemployed, and you realize the huge number of people that have been added to those classes, it becomes increasingly obvious that a social safety net in America is harder to maintain. Indeed, my thesis is that global markets practically dictate that our social system is dismantled, that a new division between working classes be created.

The power grabs, the shift of labor and capital, it all seems so darn preplanned that it takes my breath away. Did they need a horrific recession to do this? Probably, after all, listen to all the people going on and on about taxes and spending. I'm not saying it was purposely triggered, but I do think the plans were already in the vault to take advantage of the chaos. Kind of like how the plans for Iraq preceded 9/11.