Ever since March 2009, the relationship between the dollar and U.S. equities has behaved like similar ends of a magnet. When equities rose, the dollar fell and vice versa. Analysts blamed the role of the government’s lenient credit policy for this inconsistency.

Now, other factors have come into play. The dollar and equities seem to be reacting similarly to national and global economic events. On the national scene, there are signs that employment is stable, trending upwards and definitely has the attention of the Obama Administration.

While the necessary spirit of cooperation is at record lows in Washington, there appears a hint of progress.  The $15 billion jobs bill is progress and consumer spending is on the rise. Meanwhile, more small businesses have indicated a willingness to hire. 

The Federal Reserve had such favorable credit terms that the effect was to drive the dollar down and equities up. Basically, investors were using a currency that cost virtually nothing to acquire undervalued equities. It may have been and still may be a false economy, but it stemmed the tide at a critical time.

With recent statements from Fed Chairman, Ben Bernanke, the future of the dollar looks good. Bernanke has outlined a series of actions designed to strengthen the currency. Interest rate hikes, a cessation of purchasing distresses assets and certain progressive credit reforms are all positive steps for the dollar.

Timing is Everything

The Fed’s changes have been timely. As the euro zone tries to untangle the financial chaos in Greece, the euro has suffered a significant downturn. In 2010, the euro has dropped 4.8 percent against the dollar and a whopping 7.6 percent against the yen.

On Monday, French President Nicolas Sarkozy said there are plans to rescue Greece. He added that if the fiscal crisis in Greece worsened the euro would be hurt. Currency trading has been light as investors are waiting and watching Prime Minister Papandreou’s attempts to control the damage.

But, Greece may well be just the first block in the tenable euro zone to tumble. Spain may be next with Italy, Portugal and Ireland in the wings. With talk of more quantitative easing in Great Britain and a fair amount of intense disagreement between the liberal and conservative factions in England, the pound is wavering under the pressure.

Australian and New Zealand dollars rose favorably against the dollar on Monday.

In 2010, the S&P 500 is up 2 percent. The dollar has risen 3 percent. Helping the equities markets are a new infusion of merger and acquisition activity. The Options Exchange Volatility Index (VIX) is a highly regarded index indicating markets attitudes. The VIX has fallen below 18 percent and is trending towards the year’s low.

As the Oracle of Omaha suggested, things are looking up and it is a good time to invest, in the dollar and in equities.

Since most emerging market economies and financial markets are fairly small, their currencies are subject to the whims of international investors, moreso than is the case with major currencies. For that reason, when I research emerging market currencies as a whole, I often like to focus on what investors are saying are saying about their stocks and bonds.

According to one columnist, “For an asset class once considered a snake pit of risk, emerging market sovereign bonds have become remarkably popular among investors. So popular, in fact, that even the most cautious of institutions have developed an appetite. Indeed, US pension funds are poised to pour almost $100bn (£65m, €74m) into emerging market debt in the next five years…potentially helping push yields relative to US Treasuries to a record low.” The popularity of emerging market debt is pretty incredible in the context of the Greek debt crisis and the consequent spike in risk aversion. At the same time, emerging market countries have been lauded for their sound finances and low debt-to-GDP ratios, so perhaps it’s no surprise that investors remain willing to continue lending them money. “More and more investors are looking to emerging market local bonds as an alternative to standard global bond allocations, as the problems in Greece and the European periphery highlight the credit risks of that market that have been long underpriced.”

The same is basically true for emerging market stocks, as “A recovery in economic growth and exports in developing nations is boosting the outlook for…company earnings.” Added another analyst, “When you look at the most recent financial crisis, one of the key features has been that emerging market countries weathered the storm extremely well.” Going forward, the consensus expectation is that emerging markets will soon account for the lion’s share of global growth.

For the most part, investors are still quite bullish on both stocks and bonds, despite – or perhaps because of – their amazing performances in 2009. The MSCI emerging market stock index has doubled over the past year, and the JP Morgan EMBI+ bond index rose 28% in 2009 en route to a record high. Still, there is concern that since emerging market stocks and bonds are basically in line with fundamentals, a further inflow of capital would push them into bubble territory. “Jerome Booth, head of research at Ashmore Investment Management, reckons that currency appreciation will be the main source of return for local emerging market debt portfolios in the medium term. ‘The only questions are when it starts and whether it happens fast or slow: with old world currency crashes or managed adjustment.’ ” This is problematic because it means at this point, investors may be chasing currency appreciation rather than direct asset appreciation.

Some investors have started to talk about bubbles, but these appear to be more regional in nature, and the handful of bears point to specific countries rather than dismiss emerging markets outright. For example, it’s now clear that there is a bubble in China’s property market, but not necessarily in the country’s stock market. The South African Rand, meanwhile appears to be overvalued, but the Central Bank of South Africa has announced that it will allow the Rand to continue appreciating. The Chilean Peso, meanwhile, is also poised to appreciate, ironically because of the recent earthquake, as Billions of Dollars aimed at relief efforts are already pouring into the country.

There’s much else that can be said about emerging market currencies at this point, and the near-term will depend largely on if/when/how the Greek debt crisis is resolved. While emerging market investors like to pretend that this is irrelevant, the fact is that they are still somewhat skittish, and even a minor crisis would send them running towards the exits.

After a surprisingly strong 10-year syndicated bond sale raised 5 billion euros on Thursday,Greece staved off pending financial doom and built a strong case for the success of its fiscal moves. The sale was three times oversubscribed and, at a hefty 6.4%, provided a return twice as large as offered by Berlin.

The quality of the investor was also impressive. Long-term investments such as pension funds, commercial banks and insurance companies replaced shorter-term hedge fund speculation. 90 percent of the investments came from outside Greece.

Across the globe, analysts were anxious to weigh in on the success of the bond auction and the country’s recently announced austerity-spending cuts. For the most part, the finance ministers showed relief with the auction but continued to push for deeper cuts. All eyes now turn to the Friday meeting between Greece’s Prime Minister George Papanadreou and German Chancellor Angela Merkel in Berlin.

Papanadreou seeks additional support from Germany to help the struggling economy lower its borrowing costs. Merkel has played it close to the vest, shunning suggestions that Germany rise to the occasion. German economists and media have taken a strong position in opposition to any further aid. With other euro zone economies in desperate straits, Merkel is not likely to set a dangerous precedent for relief. Publicly, the Chancellor has encouraged Greece to mend its own fences.

While the bond sale may be encouraging and provide some immediate relief, the problems in Greece are very real and very near at hand. The country must raise 20 billion euros by the end of May and another 53 billion by the end of the year.

While euro economic ministers voiced approval for Greece’s budget trimming and bond auction, the citizens of Greece roared their disapproval. This is not to say, the labor unions do not recognize the need for the cuts. The Prime Minister still maintains healthy approval ratings.

On Thursday, Greece’s communist labor unions stormed the finance ministry, occupying the building and preventing agency employees from entering the workplace. Public and private labor unions called for a 3-hour strike on Friday at the same time the new austerity cuts will be enacted by Parliament in an emergency session.

Euro Up Briefly

The euro continued its rocky walk on Thursday. The bond sale in Greece pushed the euro above $1.37 before strong economic news from the U.S. buoyed the dollar. U.S. employment numbers improved and retail sales were stronger than anticipated. The reports drove the euro down, settling at $1.3572.

The euro is off 10 percent since euro zone members began to lag in November 2009. German resistance to aid for Greece has also weighed on the currency.

European Central Bank chief economist, Jean-Claude Trichet quelled any promise of raising the record low euro zone interest rates, announcing that rates will remain unchanged. The announcement signaled a slight pullback from the central bank’s strong support.

In Asia, currencies turned upwards on the positive news from the U.S., the largest importer of Asian goods. Late Thursday Congressional approval of the $15 billion labor legislation is likely to pressure the euro further while boosting Asian markets.

Upon an announcement by the Bank of Japan that more quantitative easing was forthcoming, the Nikkei 500 average was up 2.07 percent. The Topix gained 1.53 percent in high trading.

German Resistance Gaining Support

As Greece’s Deputy Foreign Minister made an extraordinary plea for German support on public radio, the buzz and media assailed Greece’s plan and any use of taxpayer revenue to bail out euro zone members. Dimitris Droutsas pled for help saying, “What we need from our EU partners and from such an important EU partner as Germany is an explicit, clear signal to the international financial markets that Greece and the Greek government have their full confidence.

Policy expert for Chancellor Merkel, Frank Schaeffler, rebutted publicly, “Those in insolvency have to sell everything they have to pay their creditors. Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption.”

Germany’s media seized on the story, suggesting that the country sell vacated outlying islands immediately. The radical remedy was dimly viewed in Greece, setting the stage for tense meetings on Friday.

On Wednesday, Greek Prime Minister George Papandreou announced sweeping changes designed to trim $6.5 billion or approximately 2 percent of the country’s debt ratio to GDP. The Prime Minister hopes the changes will convince euro zone nations that his government is serious about tackling the massive debt, thus paving the way for assistance from the EU.

The spending cuts were not well received by the country’s biggest public sector union, which immediately called for a one-day strike on March 16^th. In the meantime, 500 disenchanted pensioners marched on the finance ministry in Athens.

General Secretary Ilias Iliopoulos told Reuters News, “We will be on the streets with all our might. I am afraid there will be a social explosion. People will start to get hungry soon.”  The Prime Minister may himself have inadvertently added fuel to the fire by comparing the country’s fiscal problems to a war, adding that harsh and seemingly unfair fiscal practices were now required.

Papandreou’s austerity announcement was well received in credit and exchange markets. The euro rose as Greece’s borrowing costs lowered. The risk premium on Greek 10-year bonds fell to their lowest levels since early February.

While the cuts may pave a temporary bailout path for Greece, the fact is that more actions will be necessary to cope with the country’s 300 billion euro debt level. That figure is an astounding 125 per cent of the country’s annual economic output.

Papandreou To Meet Merkel On Friday

German Chancellor Angela Merkel will be meeting with Papandreou on Friday. On Wednesday, Merkel again asserted her public position that no German government assistance would be forthcoming. The citizens of Europe’s biggest economy do not want their tax dollars used to bail out Greece.

The fate of the euro may well rest with Merkel’s decision. Merkel has demanded even more fiscal trimming before Germany would consider participating in any euro zone remedy. Germany does not want to be seen as a bailout nation for failed economies, of which there are many in Europe.

Spain is likely to be the next crises and the economy is significantly larger than Greece’s. Portugal, Italy and Ireland are not far behind in their unstable efforts to cope with the severe recession.

The German economic minister hailed the new Greek initiatives as an essential starting point in lowering the deficit to 8.7 percent of GDP from the current 12.7 percent level.

The fate of Greece may well rest on a soon to be released credit rating by Moody’s Investor Services. Standard and Poor’s has already downgraded the public debt below A. If Moody’s follows suit, as was suggested last week, Greek government bonds could no longer serve as collateral for the European Central Bank at the end of this year.

Despite an endorsement by the European Union, investors remained skeptical about the country’s ability to meet its declared goals. European Commission President, Jose Manuel Barroso, said, “Greece’s ambitious program to correct its fiscal imbalances is now on track.” Support was also forthcoming form the EU, who said the euro zone was ready to step in.

German and U.S. Watchdogs on Red Alert

German watchdog BaFin has joined the U.S. Justice Department in investigating speculators who may stand to reap big dividends if Greek borrowing is unfairly hindered. German inquiries have resulted in contacts with the Depository Trust and Clearing Corporation in New York. The clearinghouse records all purchases and sales of Credit Default Swaps which are very much in play.

At question is whether hedge funds should be permitted to invest in these swaps, which could serve to drive up the price of Greek borrowing. Reuters quoted a source as saying, “It would be bad if it were to emerge after a rescue that the money had gone into the pockets of speculators.

In the U.S. the Justice Department has asked hedge funds to keep all trading records linked to euro trades. Speculation has been that certain funds collaborated investments to devalue the euro. Meanwhile many Wall Street banks, including Goldman Sachs, are under investigation for derivative trades with Greece. In Europe and the U.S. the plot thickens.

It’s still anyone’s guess as to if and when China will allow the Yuan (RMB) to continue appreciating. You can see from the chart below – which shows the trading history for the RMB/USD December 2010 futures contract – that expectations of revaluation have eroded steadily since December 2009. At that time, it was projected that that Yuan would finish 2009 at 6.57 RMB/USD, 4% higher than the current level. Fast forward to the present, and investors now only expect a modest 2% appreciation rise on the year.

What’s behind the change in expectations? The answer is a combination of economics and politics. On the economic side, China’s trade surplus is much smaller than in recent years, as import growth outpaces export growth. “Double-digit annual growth in exports is all but assured in coming months due to a low base of comparison in early 2009, but…sequential growth momentum went into reverse in January, with exports down 16 percent from December.” Moreover, while GDP growth appears strong, it appears tenuously connected to exports and fixed-asset investment. In addition, if the Central Bank of China raises interest rates to counter property speculation, it will have even less room to maneuver in its forex policy if it wishes to maintain high GDP growth. In terms of politics, the CCP doesn’t want to lose a crucial bargaining chip in international relations, and it also doesn’t want to mitigate the threat to its political legitimacy posed by a prolonged economic slowdown.

On the other hand, China still desires to turn the Yuan into a global reserve currency, again both for economic and political reasons. In order to accomplish such a feat, one of the prerequisites would be dual convertibility. Financial institutions and foreign Central Banks are still extremely reluctant to hold RMB currency since it’s difficult to convert into other currencies. “Citing data from the Bank of International Settlements (BIS), it [Citigroup] said the renminbi’s share in the global foreign-exchange market turnovers was only 0.25 percent in 2007, ranked 20th in the world and fifth among Asian emerging-market currencies.” This is pretty incredible considering that China’s economy is the world’s third largest, and will only change when the exchange rate regime is loosened.

While some analysts predict that the Yuan will continue rising as soon as next month – and at least by a slight margin for 2010 – the modest pace of appreciation will ensure that China’s foreign exchange reserves continue to grow. They are currently estimated at $2.4 Trillion, and while their composition is largely a secret, analysts estimate that more than 2/3 is denominated in USD-denominated assets. Recently, there was a perception that China had begun to diversify its reserves out of Dollars, as US Treasury data indicated that its Treasury purchases had all but stopped. As it turned out, China had merely moved to conceal its purchases by conducting them through a UK Bank.

The biggest threat to the USD posed by China is not an end to the RMB peg – for such is unlikely – but rather a change in its structure. Currently, the RMB is pegged directly to the Dollar, which means that the Bank of China MUST stockpile its trade surplus in USD-denominated assets, namely US Treasury securities. If the peg were to shifted to a basket of currencies, however, it would have more flexibility in the denomination of its reserves. Until then, China’s forex policy will continue to favor the Dollar.

The 16-nation euro zone is grappling with the fiscal crisis in Greece. The country’s deep debt level has weighed heavily on both the euro and the British pound.

The stakes are high and may well get higher.  According to an article in the Financial Times authored by billionaire investor George Soros, Greece is just one of several European economies in dire straits. The combined fiscal unrest in Spain, Italy, Portugal and Ireland will far outdistance the relatively minor problem in Greece.

Meanwhile, the pound is in turmoil. Amidst calls for more quantitative easing and political imbalances, the pound has dipped sharply against other world currencies, including the dollar. Advances in support for the Labor Party have caused concern among the country’s conservatives.

At the root of the problem in Greece is a mammoth 2009 deficit amounting to more than 12.7 percent of GDP. The cap for the EU members is 3 percent. Despite Greece’s pledge to reduce the budget deficit to 8.7 percent in 2010, the more stable European nations are publicly hesitant to come to the socialist government’s aid.

Germany Talking Tough

Greece has outlined several unpopular national cost-cutting measures. These preliminary and immediate steps include pay freezes, trimming of income supplements in the public sector, tax increases, an aggressive stance against tax evasion, increase in fuel duty taxes, raising the nation’s retirement age and cuts in all forms of public spending. The announcement of these measures led to a 24-hour national work strike.

Prime Minister George Papandreou has been considering additional measures and will need to make additional concessions to secure outside help. The still popular Prime Minister is said to be weighing a Value Added Tax, a luxury goods tax, a more aggressive fuel duty tax, a freeze in public pensions and even deeper public spending cuts.

There are several possible remedies for the Greek – EU situation. The EU ministers are scheduled to consider the Greek consolidation plan on March 16^th. The clock is ticking as Greece needs to reorganize about 25 billion euros or $33.97 billion by late May.

The European Union’s biggest economy is Germany. Public statements between the two nations have been tense, at best. Prime Minister Papandreou is scheduled to meet with German Chancellor Angela Merkel in Berlin on Friday.

Publicly, Merkel insists that the problems in Greece belong to Greece. The Chancellor has been resolute in turning away any assurance that German aid stood ready. Public sentiment in Germany, Luxembourg and the Netherlands is strongly opposed to the use of tax revenue to bail out a loosely regulated economy. Germany does not want to set a precedent for bailing out failing European economies.

Currently, Greece pays 3 percentage points above the German bond yields to borrow in capital markets. Last week, Greece’s borrowing costs hit their lowest level since mid February. The decrease appears to be based upon promised tax increases.

European Central Bank Joins EU in Greece Monday

European Economic and Monetary Affairs Commissioner, Olli Rehn, and European Bank Chief Economist, Juergen Stark, met with top Greek economists on Monday. The purpose was to specify all necessary measures needed to trim 4 percent off the deficit by the end of 2010.

Behind the public scene, euro zone governments are furiously examining all possible measures to support the ailing nation with international bond markets. Merkel hinted as much when the Chancellor declared that the EU treaty did not include provisions to eliminate the guarantee of Greek debt through state-owned institutions.

French Economy Minister, Christine Lagarde has said that France was studying possible solutions to the Greek problem. Lagarde suggested a private-public venture might be the best remedy.

The Office of Debt Management in Greece has not released details of an expected bond auction. Most likely, this offering will not take place until all the government’s austerity measures are in motion.

A successful auction could ease the need for a severe rescue plan. To encourage investors, a preliminary interest rate of 7 percent is projected. If this auction fails, then 911 calls will be on the street and the euro will eel even more pressure. The stakes are indeed very high indeed in Greece and throughout the euro zone.

The Wall Street Journal’s coverage of the Greek dent crisis has focused less on the crisis itself, and more on the markets’ reaction to it. With headlines like “Hedge Funds Try ‘Career Trade’ Against Euro” and “Speculators Bet Record Amount Against Euro For 4th Week” and “Europe Trouble, U.S. Opportunity” – among others – the WSJ has identified a collapse in the Euro (mainly against the Dollar) as one of the most prominent (and profitable!) strategies for exploiting the crisis.

As I mentioned in the last post (”Understanding the Greece Situation“), the debt crisis has become self-fulfilling, not only for Greece, but also for the Euro. In other words, as perceptions abound that Greece is insolvent and the Euro is doomed, Greek bonds and the Euro have lost value, which only makes the crisis worse. It seems that speculators are taking advantage of this phenomenon by making large bets against the Euro. In fact, large is an understatement, as the net short positions against the Euro now total a record $12 Billion, according to the closely watched Commitment of Traders report.

Some analysts have taken such information at face value, noting that “The fact that the shorts got even shorter when they were already at extreme levels highlights just how negative the sentiment is toward euro.” On the other hand, there is evidence (and some degree of admission) that large speculators are now acting in concert to bring down the value of the Euro. The WSJ reports mention private meeting between hedge funds managers and investment banks helping their clients bet against the Euro using derivatives. For those that are skeptical that speculators could really influence currency markets, consider that one man – George Soros – single-handedly forced a devaluation of the Pound in 1992, and made $1 Billion in the process. While the Euro is certainly bigger than the Pound ever was, there are more people watching it than ever, and when there is money to be made -  hundreds of billions of dollars in this case – it isn’t inconceivable that the Euro could suffer a similar fate.

Already, there is evidence that this strategy is working, as the Euro has fallen 10% in less than three months, which is unbelievable for a currency whose daily trading volume is estimated at $1.2 Trillion. In fact, one popular options trade is based on the the Euro falling to parity against the Dollar. Once unthinkable, such a possibility now faces odds of “only” 1 in 14 (based on options premiums), compared to 1 in 33 in November. On the one hand, it’s frustrating to accept the market power that these speculators have. But emotion has no place in (forex) trading, and standing in the way of momentum would be costly.

On the other hand, Euro fundamentals remain strong. To be sure, a currency is only as strong as its constituent parts, and the fact that a handful of EU member states have shaky finances certainly cannot be dismissed. At the same time, the fact that such currencies have no direct control over the Euro is just as important. Before the inception of the Euro, currency traders would be justifiably concerned that a country in a similar position to Greece would deliberately devalue its currency (by printing money) in order to devalue its debt and make it more manageable.

Now, this would be impossible, since the Euro is controlled by the European Central Bank, over which Greece has no power. The current crisis in Greece notwithstanding, “The European Central Bank’s (ECB) resolve to maintain sound money is…important. This is especially true for the ECB, which has a single mandate—price stability—unrelated to fiscal problems.” While there is legitimate concern that the ECB will be forced (or voluntarily) print more money to fund bailouts of bankrupt EU member states, this doesn’t seem very likely, given the history of the ECB. Its monetary policy has always been quite conservative, and it’s no wonder that the Euro has come to be seen as a viable alternative to the Dollar.

In my opinion, the decline in the Euro is mostly baseless, and if it were to continue, it wouldn’t represent the prevailing of logic. Then again, logic is not exactly a word that I would apply to the forex markets, now or ever.

With this post, I want to try to clarify the Greek fiscal crisis. The problem is that it’s not clear exactly how serious the problem is, because most of the media coverage of the crisis has been directed towards the financial markets’ perception of it, rather than its underlying fundamentals. In the end, I think it’s important to understand both.

The Financial Times published a great timeline that shows perception and reality side-by-side. While there were certainly other important developments that bear in Greece’s fiscal position (in addition to those listed below), you can see that financial markets are basically making their own reality. For example, there was hardly a response to the October announcement that Greece’s budget deficit would be 12.7%, which was 5% higher than earlier estimates. In fact, the markets only became bearish on Greek debt after it the government announced that it would try to bring the debt down to 9.4% through various measures.

Apologists for the markets would be right to wonder why investors should be inclined to believe the government of Greece when it said it could control the budget deficit. Fair enough. Still, one has to wonder why the markets suddenly started worrying about Greece’s fiscal problems, when only a couple months ago, the possibility of a whopping 12.7% budget deficit barely caused investors to blink. Besides, the credit crisis has been raging since 2008, which means the markets have had plenty of time to digest the implications of recession for Greece’s fiscal position.

These days, where is a financial crisis, chances are derivatives are not far removed. As credit default swap spreads (i.e. the cost of insuring against default by Greece on its loan obligations) have risen, so have concerns that this is a bona fide crisis. “It’s like the tail wagging the dog…There is a knock-on effect, as underlying positions begin to seem riskier, triggering risk models and forcing portfolio managers to sell Greek bonds,” said one portfolio manager. From this perspective, it almost looks like this “crisis” is being completely manufactured by speculators for the sake of profit. Summarized another analyst, “It’s like buying fire insurance on your neighbor’s house — you create an incentive to burn down the house.”

To be fair, Greece also played a role in derivatives speculation, and on some level, it was even more nefarious than the speculators. Assisted by Goldman Sachs (who is now betting on Greek default [how un-ironic that is!]), Greece entered into a series of swap agreements last decade, which it used to conceal its true debt burden. “By using an historical exchange rate that didn’t accurately denote the market value of the euro, Goldman effectively advanced Greece a €2.8 billion loan. Under EU accounting rules—which were tightened in 2008—Greece wasn’t obliged to include the loan in overall public debt on its books.” Now that those transactions have been uncovered and the truth is coming to light, financial markets are rightly re-evaluating the risk of further lending to Greece.

There is no question that Greece’s debt problems are serious. As to whether labeling it a crisis is necessary, that depends on your standards. Greece ranks near the top of the list on a variety of individual “debt sustainability” criteria. At 94.6% of GDP, it’s net debt is among the highest in the world. Its projected 2010 budget deficit is also high, though not the highest. Its cost of borrowing is also significantly higher than projected GDP growth, which means that net debt will continue to grow until a budget surplus can be produced. When you average these measures together, it appears that Greece’s debt problems are the most unsustainable of any country in the world. But this is hardly news.

On the other hand, the weighted average of the maturity of Greek debt is 7.7 years, well above average, and plenty of time (relatively) for Greek to sort through this mess and secure new lenders. Towards the latter end, it has hired a former bond trader to head its debt management agency. In order to improve its fiscal position, it has announced a series of austerity measures, including budget cuts, tax increases, wage cuts for public-sector employees, and stricter laws against tax evasion.

At this point, a ratings downgrade looks inevitable, and some analysts think the crisis has already become self-fulfilling. As borrowing costs rise, it only makes it more likely that Greek will default, which causes rates to rise further, and so on. On the other hand, Greek politicians are being forthright about their position (”Greece’s finance minister, George Papaconstantinou, remarked this week: ‘People think we are in a terrible mess. And we are.’ “) and have a plan for rectifying the situation. There is cause for skepticism here, but also for hope. And that goes not just for Greece, but also for the Euro.

Secretary of State Hillary Clinton was called before a joint Senate and House Budget Oversight Committee to explain the Department of State’s whopping $52.8 billion budget request for 2011. In response, Clinton drew upon her experience as a former member of the Senate who served on the budget committee 10 years ago when the country had a balanced budget and was paying down the country’s debt.

Clinton took direct aim at former Federal Reserve Chairman Alan Greenspan who she said came before the committee during the Bush years and introduced the loose spending and tax cut formula that is at the root of the federal deficit.

Shortly after Greenspan’s appearance, the U.S. engaged in two wars and undertook a massive overhaul of the health care program that has enlarged the country’s debt. Greenspan felt the amount of debt was sustainable. Clinton used her defense of the agency’s budget to encourage lawmakers to address the $1.4 trillion deficit. In fact, she termed the deficit a threat to national security. China now holds $755 billion in U.S. securities.

In defending her budget request, Clinton explained that it represented a $4.9 billion increase over the 2010 budget. Most of that money would be used for the department’s efforts in Iraq, Pakistan and Afghanistan.  The agency, Clinton said, is “now assuming so many of the post-conflict responsibilities, and that is the bulk of our increase.”

President Obama crossed Pennsylvania Avenue on Thursday to meet with Republican and Democratic members of Congress at a televised meeting in the Blair House. The purpose of the seven-hour meeting was to demonstrate a new willingness to work together to solve the country’s many problems, including health care.

The Obama health care legislation now faces its sternest test as Republicans clearly intend to hold their ground. The minority party contends health care reform is necessary but that an entirely new plan is necessary.

The President concluded the meeting with a request that Republicans work with Democrats to structure a reform bill within the next six weeks. Republicans balked at the proposal saying more time was necessary.

Health care is a huge budget item, consuming 16% of the federal budget yet leaving 48 million Americas uninsured. The meeting was great theater but served only to highlight the party’s agreement to disagree about the current legislation and any future legislation.

Members of both parties were vocal and insistent on their views. The Senate’s number two Republican, Jon Kyl said the parties, “do not agree about the fundamental question of who should be in charge of health care.” Kyl asserts Republicans want doctors to control health care, not Washington. Democrats assert the system is broken, wasteful and in need of a dramatic overhaul.

Democrats are now forced to make a difficult decision. By enacting a seldom-used legislative protocol, the Democrats currently have the votes to push the bill through the House and Senate. Obama and Senate majority leader Reid agree that the bill will not receive one Republican vote in support. By enacting the legislative anomaly, termed reconciliation, Democrats can pass the bill with a simple majority.

Basically, by not working to amend the current bill, the Republicans stand to lose the ability to have any input in the legislation. The bill on the table would cut costs, regulate insurers and expand coverage to millions of uninsured Americans.