Greece, Portugal and Spain headline separate financial woes in the euro zone’s southern tier but there are other stress points that the Troika (EU-IMF-ECB) will need to put to rest to keep the bailouts for the three countries intact. As usual, Greece faces the biggest and most immediate challenges.

Greece is scheduled to redeem 2.2 billion euros in bonds in August. If Athens fails, the IMF would have to violate its rules to standby its commitment to the 240-billion-euro bailout scheme. IMF rules require a borrower to be financed one year ahead of schedule.

An IMF pullout would be disastrous to the euro and euro zone. Lenders are unhappy about Greece’s faltering efforts, a missed June deadline and lack of austerity. But, other aspects of the southern tier countries are also falling apart.

In Portugal, highly regarded Finance Minister Vitor Gaspar, who has been in favor with the Troika and is the recognized architect of the country’s austerity program, resigned on Monday. The country had a strategy to exit the EU/IMF bailout but those plans may be dissipating.

In Italy, political tensions are heightened. Prime Minister Enrico Letta was forced to call a government meeting after a coalition partner threatened to withdraw support for the austerity plan. Investors are anxiously following Italy as are members of the Troika.

Greece’s recent efforts to close spending nearly closed another prolonged government shutdown. The closing of the public radio station, ERT, seemed the most sensible and painless means to meet a government reduction deadline.

Greece missed a June deadline to put 12,500 workers into a “mobility scheme,” whereby they would be transferred or terminated within 12 months. Adding to the problem is that the state-run health insurer, EOPYY, has suffered an unexpected 1 billion euro shortfall. Deeper spending cuts are the only means to reduce the shortfall.

Greece has also failed to liquidate certain public assets, most notably the sale of the government-run gas company. Amidst this chaos, Prime Minister Antonius Samaras has declared that no new austerity cuts will be implemented.

Greece’s unemployment rate is now 27 percent. The country has lost 33 percent of its disposable income. Despite all this data, the euro remains solid against the dollar and the yen.

Currency Shifts  

The dollar achieved four-week highs against a basket of currencies. US ten-year bonds were steady at 2.48 and luring investors back to the market.

The dollar also continued its climb against the yen. The yen remains under pressure from the Bank of Japan’s aggressive stimulus program but is also reflecting concerns about Asian economies and emerging economies in general. China’s slowdown is affecting all economies and currencies at emerging economies are suffering as a result. The dollar settled at 99.87 yen.

The euro held above the $1.30 mark settling at $1.3062, below the 200-day average of $1.3074. Against the yen, the euro reached a three-week high of 130.485.

The Australian dollar slumped 0.7 percent to $0.9172 upon news that the currency has fallen 13 percent against the USD. The cash rate set by the RBA stayed at 2.75 percent for the second month in succession.

As details of the Memorandum of Understanding (MoU) between government and the “Supreme Savings‘ international lenders” were revealed on Tuesday, markets stepped back to gauge the 10 billion euro bailout. Markets also slowed in anticipation of this week’s updates from the Bank of Japan (BoJ) and the European Central Bank (ECB). Investors are concerned about whether the BoJ will scale down its proposed easing initiative. At the same time, the ECB will need to calm investor fears in the wake of the Cyprus fiasco that cost international investors billions of euros.

One of the big concerns facing the euro zone and the European Union is whether the Cyprus model is the model that could befall Spain and Italy. A general lack of confidence in the EU has led to the paring of the euro. Investors are unclear as to the direction of the BoJ and the USD rose to its highest level in two weeks against the yen.

Cyprus Turnaround Outlined

The MoU leaves little doubt about what the bailout investors, who contributed 10 billion euros to the troubled banking sector, will require of Cyprus. Meanwhile, the former finance minister resigned in anticipation of legal action for his roll as President of the country’s second largest bank, which failed last week.

As if there was not enough disgruntlement on the island nation, Cypriots are now staring at some lofty goals that are likely to impose the similar austerity sanctions other southern tier euro zone neighbors face.

The MoU says Cyprus must attain a four percent of GDP primary surplus by fiscal year 2017. This would a significant turnaround.

Reuters reports there are a number of other goals established by the MoU:

• In 2013, Cyprus will suffer a 395 million euro budget shortfall (2.4 percent of GDP) in 2013.
• This shortfall exceeded the 1.9 percent deficit in 2012.
• In 2014, the deficit will expand further to 678 million euros.
• The MoU expects the deficit to pare down to 344 million (2.1 percent GDP) by 2015.
• In 2016, Cyprus is charged to achieve a primary surplus of 204 million euros (1.2 percent GDP) by 2016.
• By 2017, Cyprus must achieve a 4 percent surplus by 2017.
• Growth in Cyprus will contract by 8 percent this year.
• Growth in Cyprus will contract 3 percent in 2014.
• Growth will finally increase by 1 percent in 2015 and 2016.

In light of these assumptions, Cyprus has much work to do to live up to expectations. The 8 percent paring of GDP suggests a good amount of austerity will be necessary and Cypriots have thus far rejected most EU initiatives.

The MoU states that Cyprus will earn about 1.4 billion euros by selling certain state-owned assets, such as state-owned telecoms. Additionally, Cyprus expects to realize revenue from selling off rights to undersea natural gas deposits, which have been found of the island coastline.

The future of the public sector will be under pressure with new actions taken by government. The banking sector employment is already in turmoil. Now, government has announced that public sector pensions are frozen. The retirement age will be raised by 2 years. New taxes will be imposed upon alcohol, tobacco products and petrol. The VAT will be increased and corporate taxes on earnings and on interests earnings will also rise. Fees for all government services will increase by 17 percent effective immediately.

These measures are designed to ensure that debt in Cyprus is at 100 percent by 2020.

The ECB, BoJ and BoE

Investors are anxiously awaiting results from the three central banks. There are concerns that the BoJ will scale back on its proposed quantitative easing policy.

The ECB is now expected to hold steady on current interest rates. Prior to the Cyprus crisis, it was projected that the EC would raise interest rates.

In England, the BoE is expected to continue its current purchase of asset program without increasing the stimulus. British sterling gave back recent gains in anticipation of the upcoming central bank meeting. It is nervous times on the currency front.

For a nation that contributes just 2 percent to euro zone growth, the proposed bailout is taking a far larger measure of the market than seems proportionate. In fact, the handling of the Cypriot bank bailout is weighing heavily across the globe.

There are many fears surrounding the bailout approved by the European Union, the International Monetary Fund and the European Central Bank. The biggest concerns are that the restraints imposed upon international accounts and the troublesome capital controls which have yet to be revealed.

Unconfirmed reports suggest that Cypriot banks will re-open on Thursday. In anticipation of runs on the banks, withdrawal restrictions will be imposed. It will be difficult to move money out of the country and national depositors will be limited as to how much money can be withdrawn in a single day or in a single transaction.

Foreign Investors    

The fate of foreign investors is sure to test the nerves of wary depositors in Cyprus and throughout the European Union. The fear is that the Cypriot model will serve as a remedy for other troubled banks in the region.

Cypriots are expected to pull huge sums of deposits out of the country’s banks. There is a very real sense of fear throughout the land. Consumer confidence has hit the floor and retail trade is at a virtual standstill.

Finance Minister Michael Sarris has said that capital controls will be “within the realm of reason.” Un confirmed reports said these controls would only apply to international transactions but that seems unlikely.

The Chairman of the Cyprus Chamber of Commerce, Phidias Pelides, told Reuters, “We have been assured that limitations will not affect transactions within Cyprus at all. Where there will be limitations is on what we spend abroad and also on capital outflows.”

Sarris has said his goal is to limit the damage caused by withdrawals inside the country. However, CNBC reported that national withdrawals would be closely monitored and very restricted.

Under the terms of the 10-billion euro bailout, certain international investors could take 40 percent losses. All deposits over 100,000 euros will be taxed. Russian investors are especially vulnerable.

Russian Fallout

Russia, who failed to work with Cyprus to eliminate the demands of the Troicka, stands to lose the most in the current plan. The country has said that their current loan of 2bn euros to Cyprus would be under review unless their investors are treated fairly. In Russianese, that means suffer no losses.

Losses are unavoidable for Russian investors and companies that have used Cyprus to stash away tax-free funds. Russian Finance Minister, Anton Siluanov said, “If there are such measures, this will not foster trust but only provoke additional problems for participants, depositors.” It was clear that Russia will be unwilling to restructure the Cyprus loan if the capital controls hurt Russian investor liquidity.

On The Ground

Civil unrest reigns in capital. Students marched on Tuesday and bank workers lined the streets in protest on Wednesday. Laiki or the Cyprus Popular Bank, the country’s second largest bank has been closed. Loans and account under 100,000 euros have been moved to the Bank of Cyprus. Deposits at Laiki and the Bank of Cyprus over 100,000 euros are frozen.

The two-week shutdown on the banks have raised havoc across the economy. Supermarket shelves are not stocked. Retail sales are non-existent. Shop owners have no access to their funds. Bills are not being paid. The economy is paralyzed and cash rules the day.

Italy Adds Fuel to Fire      

The political chaos in Italy has added to the crisis level of the euro zone. Without a new president, the country has no direction, no public mandate and is subject to the policies of the Troicka. That means unwelcome austerity, no growth, tough banking policies.

Italian bonds struggled at Wednesday’s auction. Long-term and mid-term Italian bonds sold at multi-month highs and auctions were not fully subscribed.

The euro fell to 1.2772 USD, down 0.7 percent at one point. The Dow Jones slid off yesterday’s highs and was struggling to maintain a 38 point loss. The S&P 500 fell 5.91 points. Benchmark US 10-year Treasuries climbed 19/32 to a 1.8454 yield.

Finance minister George Osborne stated his case for more aggressive and innovative Bank of England initiatives to help the country climb out of the economic rut that has led to a credit downgrade and has the economy on the verge of another recession. His address to Parliament was marred by jeers from Labor and their leader, Ed Millibrand.

While the politics is sticky, the current economic trends point to disaster unless a commitment to growth is in place. Osborne looks to the BoE to carry the ball by giving the economy some breathing room with an already stifling inflation rate.

Osborne made it clear that this was not the time to cut back on austerity. Prime Minister David Cameron and Osborne remain committed to the austerity strategy that is designed to narrow the deficit through curtailing public debt. Many Brits believe their success will determine the outcome of the elections in two years. The deficit reduction package is a five year plan.

Another EU Nation Long On Austerity, Short on Growth

However, as other EU nations have found, austerity without growth is a dangerous formula. Recession looms and the UK manufacturing output is discouraging.

Latest growth projections are dismal. Osborne announced the economy will grow about 0.6 percent this year. The finance minister projects 1.8 percent GDP expansion in 2014. He was quick to point out that the 1.8 percent would exceed the output of Germany and France.

Cameron and Osborne had paid a price politically for the struggling recovery. British sterling took another hit on Wednesday but the prospect of a more aggressive BoE seemed to stabilize equity markets.

Osborne called for the central bank to maintain its 2 percent inflation rate, if possible, but not at the expense of growth. He asked for the bank to devise a strategy to reduce the inflation rate over time if it became necessary to increase the rate by more than 2 percent to supply enough easing to stimulate growth.

Housing and Construction Must Lead Way

Of particular interest is the stagnant construction and housing industry. Osborne’s charge to the BoE would transform the mission to resemble the mandate of the US Federal Reserve, whose controversial three rounds of QE have sparked a slow, tenuous but steady recovery.  US equity markets have flourished in the meantime.

Most troubling in Osborne’s presentation is his paring of the 2013 GDP growth. The 0.6 percent is half the original 2013 projection of 1.2 percent.

Osborne said, “As we’ve seen over the last five years, low and stable inflation is a necessary but not sufficient condition for prosperity. The new remit explicitly tasks the MPB with setting out clearly the tradeoffs it has made in deciding how long it will be before inflation return to target.”

It looks like uneasy times are ahead for the Sterling and the UK economy.

Faced with a deepening recession and ever increasing unemployment, Great Britain is not waiting for the euro crisis and elections in Greece to deploy anti-recession tools.  Referring to the euro zone debt crisis as a “black cloud” which threatens the UK, Bank of England Governor Mervlyn King announced a plan to flood the country’s banks with low interest funds which the central bank hopes will be used to encourage borrowers and jobs.  King also said the Bank of England would activate an emergency liquidity tool.

Treasury officials revealed a separate plan that new funding would support up to 80 billion pounds in new loans. The Bank of England contributions will amount to 5 billion pounds per month for six-months.  King said the 110 billion pound injection should be used by businesses and civilians to “batten the hatches” before the crisis hits.

Finance Minister George Osborne supported echoed the global message that the euro zone put politics aside and solve the deepening crisis. Osborne stressed that the UK was not powerless to defend its economy or people.  Britain has not overcome the 2007-2008 recession that forced the Bank of England and Treasury to bailout the Nation’s banks.

Osborne has been criticized for implementing deep austerity cuts that have affected every walk of life in Britain. However, Osborne stated his case on Thursday saying that it was the austerity cuts that enabled the central bank to be able to assist in the current recession.  The austerity plan has come up a little short as the budget still runs at about a deficit equal to 8 percent of GDP.

Osborne and King have jointly developed strategies to spur growth, indicating that there is more assistance to come.  In the next few weeks, the BoE will be offering 3-4 year below current rate loans to the country’s banks. These loans will only be available to banks that have increased their lending to businesses and households.

The BoE will also commence using funds in the Extended Collateral Term Repo (ECTR) facility to help banks deal with liquidity issues caused by distressed loans. This facility was created in December for the specific purpose of offering banks six month relief from troubled loans.

In another area, King also hinted that there was a strong possibility of resuming quantitative easing, which was halted in May after the BoE had purchased 325 billion pounds in UK bonds.

While King emphasized the risk of the euro zone, he failed to mention that Britain’s economy is struggling with a new recession started in 2012. Britain’s Office for National Statistics reported that the trade deficit increased to 10.1 billion pounds in April 2012. This mark is the largest trade deficit since January 1988.  The biggest export gaps were recorded in the fields of chemicals and autos. Great Britain squeezed out a 0.1 percent growth 9in the first quarter of 2012 which appears to have been wiped out in the second quarter.

The Treasury and BoE moves have utilized the three weapons that Britain has moves available.  The first is the six-month liquidity loans issued by the Indexed Long-Term Repo (ILTR).  Through the Discount Window Facility (DWF) banks can swap stressed collateral for gilts for as long as one year.  The third tool is the Extended Collateral Term Repo facility which provides up to three years of financing for distressed assets which could come into play if Greece fails.

If Greece were to fail, the BoE has a large weapon, the UK Treasury’s Credit Guarantee Scheme, in reserve.  This plan was used to bailout banks to the tune of 250 billion pounds in 2008.  The majority of these funds have been repaid so this would be a stop gap available if Greece puts the nation’s banks under extreme pressure.

As the finance minister in France, Christine Lagarde established herself as a straight talker who brought solutions and an appetite for negotiations to the table.  As the managing director of the IMF, Ms. Lagarde’s reputation has proven to be well deserved.  With the G20 Summit opening today in Washington, Lagarde has already won support for her request for another $400 billion from the fund’s 187 members.

In the past, the U.S. has led the way for IMF funding.  Due to a sluggish recovery and an upcoming election, the US will not participate in this additional funding initiative.  In the past, the US refusal to subscribe would mean that the initiative was dead on arrival.  Lagarde’s original action plan called for IMF members to contribute $600 billion.  When the US hedged, Lagarde lowered her request to $400 billion.

Japan ($60 billion), Sweden ($14.7 billion) and Denmark ($7 billion) agreed to make contributions that boosted the funds new resources to more than $316 billion.  Japan is the first non-European nation to make a contribution. After pledging their contribution, Japan announced that Ms. Lagarde would meet the $400 billion benchmark and may possible surpass the amount.

The timing of Japan’s announcement could not have been better.  The commitment seemed to open the spigot for a host of other contributors.

On Thursday, the world’s leading emerging economies.  Fresh from their late March meeting in Delhi, Brazil ($20 bn), Russia ($10 bn), India, China ($60 billion) and South Africa (BRIC) arrived at the summit with a plan.  Russia vowed that the BRIC nations would contribute to the IMF plan.  The emerging economies are expected to pledge another $100 billion on top of what has already been pledged.

Brazil added a caveat to its pledge.  The bustling economy is now fully employed and has established itself as a solid economic force. As the world leader in procuring international investments, Brazil is empowered and beginning to flex its considerable muscle.  Brazil wants a heavier role at the IMF and asserted that any contributions would be conditioned upon gaining a seat on the 24-member IMF board.  Brazil is not alone.  Canada has also suggested that the number of European members on the board should be reduced.  

In a speech to the G20 on Saturday morning, Brazilian Finance Minister, Guido Mantega, will state his case that Europe has too big a voice at the IMF.  He will contend that emerging economies are vital to the global economy and as such should have seats on the Board of Directors.  To date, shifts in the IMF board have been opposed by the United States. Rightfully, the BRIC nations want a voice in how their money will be spent.  At this time, there is mounting support for changes at the top of the IMF.

An offshoot of Lagarde’s fund raising effort is to calm investors who feel the euro zone rescue plan is unstable. Lagarde has always been engaging and passionate about he work.  Since taking charge of the IMF, Lagarde has shown to have a steady and firm grip on the euro zone crisis. 

In addition to her fund raising, Lagarde also announced that a request by Egypt for a $3.2 billion loan would not stabilize the country’s economy.  Egypt has received a $2.7 billion loan from Saudi Arabia.  Egypt will receive its first installment of $750 million before the end of the month.

While the G20 meets in Washington, all eyes will be watching the first round of elections on Sunday in France.  President Sarkozy is in a fight for his job and is expected to need a come-from-behind rally to hold off a challenge by Francois Hollande. 

In a large rally on Wednesday, Sarkozy told more than 100,000 Parisians that he would do an about face and reconsider France’s role in the euro zone. Previously, Sarkozy has supported the euro zone and ECB initiatives. 

Sarkozy’s change of form is caused by the strong support of his opponent who has already advocated that France must take a different and possibly singular approach to the euro zone alliance. If France were to withdraw from the euro zone treaty, a dismantling of the euro zone appears inevitable.              

On a day when the US posted surprisingly strong economic data and when events raised new hopes for Greece, US equity markets seized momentum and ran with it.  At the same time, German – Greece relations took their socio-economic differences to new levels of animosity. 

In Europe, Greece came up with sufficient cuts to meet the euro zone member guidelines.  The ball has transferred to the finance minister of the other 16-euro zone members who could sign an agreement for a 130-billion euro bailout on Monday.  The first tranche would commence in 30 days with a 14.5 billion euro installment that would avoid total and unstructured default.

Thursday was a busy day on all economic fronts.  Moody’s released a report indicating potential downgrades of 17 global and 114 European financial institutions.  The biggest names were Morgan Stanley and UBS but any institution with exposure to euro debt is in red alert.  Nine Danish banks were under pressure. Moody’s is analyzing long-debt holdings and other credit risks related to the euro zone and EU.

Antonio Samaras, the favorite to win the upcoming election for president in Greece was optimistic about the newest of austerity cuts.  This will be Greece’s second bailout since the original 2010 trigger.  This time around, Germany holds the key to the launch and there is bitterness from Berlin.  Originally, Chancellor Angela Merkel drew the ire of Greek traditionalists but that sentiment is now focused on Finance Minister Wolfgang Schaeuble.  

Greece is treading with the hand that feeds them in this exchange.  If Germany votes “no” on Monday, Greece will spiral into unstructured default in 30 days.  Sometimes, it is best to swallow hard and take the medicine.  Germany controls all the buttons in this mess.

US Economic Data Encouraging

In the wake of an astounding approval rating of 10 percent, Congress appears ready to play ball on behalf of American taxpayers.  The joint House–Senate Committee charged with extending the payroll tax cut and unemployment claims is putting a compromise plan together that should pass before another Congressional week-log vacation.

The new legislation doe not include the Keystone XL Pipeline that is much ballyhooed by Republicans.  Rather the finished product will not only extend the tax cuts, but will also extend unemployment benefits for millions of Americans while preventing reductions in payment for services for Medicare patients.  Given the previous Congressional record, analysts were cautiously optimistic about final approval of the legislation.

Could Congress actually conclude legislation without senseless media battles?  In an election year?  Is it possible that even the most influential members of Congress fear for their jobs?  To many voters, whatever Congress does will be too little, too late.

Even the strongest skeptics are encouraged by the relatively strong economic data.  Today, fewer Americans filed for unemployment benefits than at any time in the past four years.  This was another unexpected result and Wall Street was watching.  Equity markets jumped over the 12,900 level as the S&P 500 hit a nine-month high.

Initial unemployment claims dropped 13,000 to an adjusted rate of 348,000, significantly lower than the projected 365,000.  This is the lowest unemployment figure since April, 2008.

More good news came from the Philadelphia Federal Reserve who reported that that its business activity index rose to 10.2 percent, soaring past January’s 7.3 percent.  Orders and shipments showed string gains.  While the region’s employment rate did not rise, the important hours worked figure showed marked improvement.

On another front, housing starts rose 1.5 percent indicating 699,00 unit annually.  Multi-unit starts led the charge and may well support a changing dynamic in homeownership.

Economists were anxious that the 4^th quarter growth of 2.8 percent came from inventory sales.  There is speculation that that short-term gain would weigh heavily on the first quarter 2012 economy.

Despite dissenting opinions from the Federal Reserve’s late January meeting, Chairman Ben Bernanke downplayed the possibility of a third tranche of quantitative easing.  The Chairman sited the growing job market as a positive consideration.  The private sector has added more than 200,000 jobs in each of the last four months.  However, 23.8 million Americans are looking for work.

Was there ever any doubt that the euro zone debt negotiations would turn combative?  Anyone who has followed the Greek debt debacle could only assume this would happen.  Early on in the process, Greece sniped at Germany because of World War II. 

The most recent salvo was unleashed today as President Karolos Papoulias hit back at Germen Finance Minister Wolfgang Schaeuble, “I cannot accept Mr. Schaeuble insulting my country. Who is Mr. Schaeuble to insult Greece?  Who are the Dutch?  The French? Who are the Finnish?”  His speech at the Defense Ministry is Papoulias’ first entre into international waters.  As an interim technocrat, the President’s main objective is to get a bailout plan in place.

On the streets of Athens, German flags were burned in protest.  The social unrest is at its highest peak.  The employment prospects are dismal.  150,000 public sector jobs will be lost in 2 years.  The minimum wage has been trimmed by 20 percent.  Pension provisions have been altered.  Unemployment for youths is more than 50 percent.  The retirement age has been raised to 62 instead of 59.

Papoulias himself has declined to take a salary of 280,000 euros.  The President is largely responsible for holding the euro zone alliance together.  He walks a fine line negotiating with private and public investors, who now stand ready to take at least a 50 percent trimming on existing holdings.  

Without Germany, the Greece bailout will not happen.  Schaeuble’s criticism is not alone.  Finland has insisted upon collateral; namely the country’s lucrative public services.

Wednesday’s Brussels Summit Postponed  

It was anticipated that Greece would shore up their austerity plans and present them to the euro zone and European Union members in Brussels today.  Instead, the meeting was postponed until February 20^th.  Phone conferences allowed the members to converse.

And, the talk was far from upbeat.  There remain serious reservations about the next tranche of bailout funding.  Much of the concern is centered around the Greek elections to take place in April.  Euro zone countries are now questioning if the new government will live up to the terms agreed to by Papoulias. 

The euro zone has reason to question the commitments of a new regime.  In addition to the speculation as to how the new government will act, the euro zone nations, led by Germany questions the accuracy of Greece’s debt to GDP ratio.  Currently that is in the range of 160 percent.  The ECB and IMF have insisted that the ratio must be lowered to the 120 mark.  By settling with its creditors, Greece is improving the ratio substantially but the burning question is if the starting point is realistic.  Greece does not have a good credibility and the participating countries are rightfully concerned that Greece has once again gone to voodoo economics.

Dutch Finance Minister, Jan Kees de Jagr told U.S. Public Radio that, “We have to see the evidence of implementing the measures into law… promises are not enough.”

Last week’s summit surprised investors.  Greece was sent back to the drawing board to eek out about 432 million euros in additional cuts.  After the Greek Parliament passed the measures, Germany, Finland and the Netherlands commenced negotiations that would delay the funding. 

Pointing at the upcoming elections comes is handy, but one can only wonder how serious Germany ever was about this plan.  Greece and Germany are two cultures that could not be more diverse.  Their approaches to finances are about as wide as a divide could be.  There is an aura surrounding Greece that seems like the schoolyard brat gone bad and everyone else must pay the price.

With the continent deep in recession, it gets more and more difficult to send money to an irresponsible neighbor that never should have been admitted to the coalition in the first place.  In addition to the possibility that the bailout finds would be delayed, it has also been suggested that the bailout might take place in installments.  However, the first tranche of about 14.5 billion euros is due before March 20^th when Greece must meet its obligations or default. 

If the euro zone approves payments and does not follow through, the investors will have wasted that money.  Germany’s finance minister called Greece a bottomless pit of debt.  That image is very much on the mind of its neighbors.

Amidst this turmoil, who needs more?  Well, a new player has joined in the fray.  Antonis Samaras leads Greece’s conservative party and is favored to win the presidency in the April elections.  Samaras has already signed a pledge that if elected he would comply with the terms of the bailout package.

Remember the saying, “loose lips sink ships.”  Earlier this week, Samaras silenced critics by saying that Greece should not be concerned about its debt.  After the bailout money is in place, life in Greece would change. This was not a message the euro zone wanted to hear.  Samaras’ statement typifies the mixed messages that have characterized the debt negotiations. 

Last time I checked, there were very bankers who liked to take losses.  No bankers compound the loss by pouring more money into a bottomless pit.  Greece is the euro zone’s Lehman Brothers.  It is a bitter pill, but it looks like the cord is about to be severed.  This bailout is a bitter pill.  Like Lehman, the failure of Greece will be felt around the world.  At some point, this will happen.  14.5 billion euros may treat the symptoms but the disease lives on.

Regardless of how the Euro Zone finance members really think about the economic and financial matters of its 17 members, the word from the finance ministers assembled in Davos was inordinately optimistic.  The cause for that optimism is difficult to understand and might lead one to wonder if this is simply another effort to stabilize the economies whose demise has now spread to the heart of Europe.

The Euro Zone’s well-orchestrated damage control went in to a full court press, including a two-part interview with CNBC by former ECB President Jean-Claude Trichet.  In the first leg of the interview, Trichet touched upon general observations saying the Euro Zone Crisis is a serious and global problem.  Trichet added that Euro Zone finance ministers were operating on a round the clock crisis mode. 

The former ECB president described the current situation as progressive, but that market conditions inspired no confidence.  On a day when Spain, Portugal and Ireland came under closer scrutiny, the euro remarkably crossed the $1.32 barrier settling at its highest value since early December.  The concept of a global crisis serves the Euro Zone well because it infers that external forces should enter the fray.

Trichet indicated that the progress made in the last 5 months was an indication of how the Euro Zone members are committed to reversing the crisis.  However, under questioning, Trichet did say the investors in Greece would take a significant hit but admitted that he did not believe losses would be incurred by the ECB.

Like every release from the region, the statements from Davos were muddled.  An unidentified finance minister said that the deal with Greece’s private investors was ready to proceed.  The losses suffered by these investors will be painful.  European Economic and Monetary Affairs Commissioner Olli Rehn said he expected the deal to close before February and probably over the weekend.

The response was swift.  Italian 6-moth bonds fell by 2 percent to the lowest level since May 2011.  Germany’s auction also offered lower yields. 

A default by Greece seems unlikely, but there will be a significant shortfall of 12 -15 billion euros to reach the mandated goal of 120 percent debt to GDP.  This is the level that the IMF has designated as sustainable.  The current ration is 160 percent of GDP.

In a later segment of the CNBC, Rehn was adamant that Greece would not enter into an unstructured default.  When asked what effect the default of Greece would mean, Rehn did everything possible to avoid the “C” word, contagion.  It is clear that the fear of massive default is what is prompting such a concentrated effort.

One of the features of a renewed optimism is an expansion of the income stream.  German finance minister, Wolfgang Schauble, supports the new transaction tax on all financial transactions.  Currently every other type of transaction has a use tax. 

Virtually every type of austerity cut has been discussed with Greece, but as happens often in the Euro Zone, the austerity cuts have been resisted by the Greek populace.  One of the purposes of this summit is to identify the promised cuts and address their implementation as swiftly as possible.

While all eyes have been focused on the resolution of the private investors, these promised cuts have slid off the table.  These are precisely the administrative commitments that seem to falter when they are applied to the real life environment. 

One of the most important examples of this laxness is Greece’s unwillingness to address the reform of the supplementary pension program.  This has already been met with numerous demonstrations but has been promised as a condition of approved austerity cuts.

Other important promises by Greece that have not been implemented include: 

• Spending cuts on defense.
• Spending cuts on health provisions.
• Elimination of superfluous governmental agencies.
• Improved tax collection initiatives.
• Trim the number of workers leaving the workforce to 1 in every five persons compared to the 5 of 5 current support plan.
• Open job markets for professions such a lawyers and pharmacists that have been sealed for years.
• The Bank of Greece is charged to complete an assessment of the country’s banking capital shortfalls.
• Greece is charged to improve wage flexibility and open service sectors that have been heavily regulated and thus are non-competitive.

Good luck with that!  Greece has only agreed to negotiate some of those requirements.  To supply funding to Greece without strict compliance is the equivalent of kicking the can down the road. 

Originally these conditions were contingencies for receiving any further funding.  The IMF is firm in its position that Greece must enact these conditions.  The IMF, ECB and EU are all firm that Greece must pass the 2012 budget that includes these actions.

Greece has agreed in principle but has not enacted their austerity programs.  With private investors taking painful losses, Greece somehow seems to think that life can go on as before the crisis.  It is this mindset that is the cause for alarm.  Neither private nor public lenders will extend any further funding if these terms are not met.

Geithner Urges Caution 

U.S. Secretary of the Treasury, Timothy Geithner, has delivered his thoughts about the Greek and Euro Zone Crisis.  He cautioned investors that extraordinary austerity cuts would be reflected in GDP.

Geithner urged the Euro Zone members to solidify the EFSF.  Geithner believes that without bigger commitments to the European Financial Stability Facility, the crisis will worsen because the funds for future bailouts will be depleted.  In his mind, Greece is only one piece in a 17-piece puzzle.    

The U.S. does not standalone on this stage. China and other major economies have strongly suggested that the Euro Zone needs to come up with their own funding to stabilize the market.  Both China and the U.S. praised the ECB for its low interest loan program.

Spain and Portugal

Spain’s plans to avoid the need for billions of euro funds appear to be crumbling at this moment.  Reports from the country’s banks indicate that the administration has significantly underestimated the capital needs of the nation’s banks.  Since the outset of the global recession, Spanish banks are carrying billions of euros of unsalable assets and billions more of impaired loans.

Spain has joined Greece as another country in need of outside cash infusions.  The fact is that nobody has an accurate estimate of the amount but it is substantial.  The government has previously asked its banks to come up with about $66 billion to stabilize unstable financial institutions.

The Bank of Spain estimates that Spanish foreclosures account for about 175 billion euros. Of this amount only about 58 billion has been accepted as losses.  These figures do not include losses incurred by local lenders.

Spain’s Deposit Guarantee Fund has already received some additional funds after being depleted of its 5.2 billion euros when the CAM savings bank was rescued. Spain is preparing to approach the EFSF for cash infusions.  This is precisely the contagion that the Euro Zone finance ministers have feared.

The long awaited G20 meeting of finance ministers and central bank representatives received the bad news early on Friday morning.  The IMF is seeking to expand its $380 billion base by another $350 billion.

The IMF’s largest contributors, China, the U.S. Japan and Germany were joined by Canada and Australia in rejecting more capital infused into the beleaguered International Monetary Fund. Timothy Geithner, the US Secretary of the Treasury, said that the IMF “ has very substantial resources that are uncommitted.”

Most of the developed nations are undergoing their own tight money battles. There was quick and decisive resistance to the idea of bolstering the fund.  The IMF has said the fund does not have enough resources to help the Euro Zone. 

The Euro Zone’s European Financial Stability Facility (EFSF) consists of 440 billion euros.  The finance ministers from the largest economies are pressing the 17-member Euro Zone to tackle their own problems.  These countries believe that the plan mapped out in July will work.

According to the July Euro Zone initiative, the EFSF would be increased to 600 billion euros and then leveraged to create a fund with 2 trillion euros.  This money would serve as a bailout fund and a reserve for banks needing capital.  The IMF would serve a s a safety net. This is an accurate reflection of the seriousness of the Euro Zone debt crisis.  With the U.S. rejecting the concept of a contribution to the IMF, the plan will need to be tweaked before November 3^rd.

The finance ministers of Germany and France have much at stake.  They agreed at the morning session to put a workable plan on the table at the next G20 meeting on November 3 and 4^th.  However, Australia’s finance minister, Wayne Swan, may have summed up the international sentiment by saying, “The first priority here is for Europeans to get their own house in order.”

Many analysts wonder if the Euro Zone can hold their house in order.  The July initiative originally failed to pass the Slovakian Parliament.  However, in a Friday re-vote, the bill passed.  This means that Greece will receive its 9 billion euro shortage to meet its November 9^th call. 

In the July plan, banks were advised to prepare for a 20 percent hit.  Most likely, the new Franco – German plan will point to steeper losses.  Indications are that the new plan, which will first be presented to the European Union meeting on October 23^rd. 

In behind the scenes talks, China and the U.S. continue to haggle over a proposal in Congress that the Chinese currency, the Yuan, be re-evaluated.  The Euro Zone crisis has overshadowed this dangerous rhetoric.

In today’s activity, the 10-year bond spiked to $2.25 and the 30-year bond hit $3.38.  The euro rose to $1.38.  At the end of the day, the rush was to American equities, which topped over 12,600, and the bond market.