Beyond the Greek Crisis: Will Capitalism Survive?

Reuters reports, Greece readies austerity measures, markets steady:

Union officials said the International Monetary Fund asked Athens to raise sales taxes, scrap bonuses amounting to two extra months pay in the public sector, and accept a 3-year pay freeze.

"They want Greece to cut the deficit by 10 percentage points in 2010 and 2011 ... so that Greece can go back and borrow on markets in the third year of the program," said a union official who requested anonymity.

Andreas Loverdos, social affairs minister, said pensions would be reformed. "There isn't much room for maneuver -- this is about saving the country from collapse," he told the FT.

IMF, European Union and European Central Bank officials are in Athens to negotiate the bailout and hope to wrap up a deal within days in an effort to prevent the debt crisis from sinking other fragile EU countries.

German politicians have said the aid package could be worth 100-120 billion euros ($133-160 billion) over three years, against an original plan for 45 billion euros of aid in 2010.

"The immediate emergency measures will be a strong bridge to cross over to great changes, secure the life of every citizen and have dynamic growth in a more just society," Greek Prime Minister George Papandreou said.

"We will do whatever it takes to save the country."

Germany has expressed deep reservations about bankrolling a profligate Greece, which misled partners over its catastrophic finances, and demands fierce budget rigor in return.

But German Finance Minister Wolfgang Schaeuble said there was no alternative to aiding Athens to protect the euro.

"We have to go this route," he said. "We are not defending Greece, we are defending the stability of our currency."

Fears have grown of the contagion spreading to other indebted eurozone countries. "We want to limit the crisis to Greece," said German Economy Minister Rainer Bruederle.

Economists said euro zone states could end up footing a bill of half a trillion euros ($650 billion) to save several nations if they failed to engineer a Greek bailout that calmed markets.

Ilias Iliopoulos, general secretary of Greek public sector union ADEDY, met the prime minister to discuss the salvage plan.

"We realized we stand before a done deal," he complained afterwards. "This will acutely burden people and, what is worse, unfairly."

Police fired tear gas to disperse hundreds of protesters outside the Greek finance ministry.

Sources familiar with the aid talks said officials were expected to announce details of a 3-year package by Monday, ending months of uncertainty. That was enough to spark a relief rally in markets fearful of contagion across the eurozone.

The euro wavered in Asian trade on Friday, after gaining for the second straight day on Thursday. Peripheral euro zone bond yield premiums eased and costs of insuring risky debt fell on hopes an accord was imminent.

European and U.S. shares rose, and in Japan hopes for a bailout were cited as a major factor in an early rise of more than one percent in the benchmark Nikkei.

Germany's opposition Social Democrats said it supported the Greek package, but wanted banks to help out.

CLOSING RANKS

The gravity of the Greek crisis became apparent weeks ago. But EU leaders were slow to react, promising vaguely to help but only really acting when markets dived and other heavily indebted nations, like Portugal and Spain, were threatened.

French President Nicolas Sarkozy insisted France and Germany were working in tandem. "We're in perfect agreement," he said in China, adding Greece's economic plan was "perfectly credible."

Unions have called a series of strikes in the days ahead.

"It's a disaster! The government has crossed the line. We can't live this way," said ADEDY board member Despina Spanou. "We will fight these measures with all our might, because this is a battle for survival."

Opinion polls show most Greeks object to the involvement of the EU and IMF and two-thirds believe there will be unrest.

But local markets appeared confident the deal would work. The Athens bourse's banking index jumped more than 13 percent, rebounding from losses in previous days, and the general Athens index gained 7.14 percent.

Some of the aid to Greece will come from the IMF but the bulk would have to come from other euro zone countries, many of which are struggling with their own spiraling deficits, and it was not clear how they would finance such a deal.

TRICHET CALLS FOR NEW RULES

Concerns over the Greek crisis prompted global investors to cut back holdings of euro zone government bonds, although such a flight has yet to occur with the region's stocks, Reuters polls showed.

ECB President Jean-Claude Trichet called on Thursday not just for a deal on Greece, but also a revamp of Europe's fiscal rules and more intense surveillance of governments' finances.

"The weak points of past multilateral surveillance will be corrected, and the Stability and Growth Pact will be reinforced and rigorously applied in its letter and in its spirit," he said in a speech at the Munich Economic Summit.

Ratings agency Standard & Poor's cut Spain's credit rating on Wednesday, a day after downgrading Portugal and slashing Greece to junk status. On Thursday Moody's told Reuters it might also give Greece junk status in the next few days.

"The prospect isn't zero that it can go that far, but it's very difficult to see it with certainty," Kristin Lindow, a Moody's senior analyst, told Reuters in a phone interview, when asked whether Greece could be downgraded to a speculative level.

Moody's expects Greece's debt to stabilize in the next few years, but at higher levels, which needs to be reflected in the country's sovereign ratings, Lindow said.

The path to stability will be a tough one, however, as Moody's foresees years of low economic growth, adding to the difficulty of making needed fiscal adjustments.

Fitch Ratings has the country at BBB-minus, the lowest investment-grade level, with a negative outlook.

Spooked by the ratings cuts, Portugal announced it would speed up its austerity strategy and said this might allow it to reduce its deficit more than expected in 2010.

Opinions on the Greek debt crisis vary. Jeffrey Miron writes in Forbes, Let Greece Default. Boyd Erman of the Globe and Mail reports that while a rescue could encourage other nations to seek a handout, forcing Greece into bankruptcy could freeze credit markets:

As much as some investors and politicians would like to make an example of Greece by forcing it to essentially declare national bankruptcy as a deterrent to other spendthrift nations, the odds of a ripple effect are too large to ignore, analysts say.

For example, should Greek debt be downgraded by a second rating agency, it will create huge problems for the nation’s banks. That’s because Greek bonds will no longer be acceptable as collateral for loans from the European Central Bank that banks use for emergency funding.

A full-scale default would also hammer other debt owners, including banks elsewhere in Europe. As of the end of 2009, European banks held $193-billion of Greek government debt, with most of it on the balance sheets of French and German lenders. That could create losses that eat into bank capital, reducing their ability to lend and slowing economic growth across the region, a prospect that could force governments to aid banks yet again.

“I can’t dismiss concerns that a contagion of sovereign debt defaults from Greece to Portugal to Spain might have the same consequences as the collapse of Lehman and AIG,” Ed Yardeni, president and chief investment strategist at Yardeni Research, told clients on Wednesday. “Apocalypse Now might have severe unexpected consequences, as occurred during Apocalypse Then. This time, however, the stress will be much greater on European banks than on American ones.”

There is no doubt that as Greece falters, fears stretch around world:

Debt levels of all developing countries are rising to levels not seen over the past 60 years, the IMF said in an economic survey released last week.

The U.S. government forecasts that its publicly traded debt as a percentage of the total economy will reach 77 percent by 2020. By comparison, Greece's debt burden exceeds 100 percent.

"The Greek problem highlights a broader problem across the globe," said Mark Zandi, chief economist at Moody's Economy.com. "Governments used their resources to end the financial panic and the Great Recession, but now they have to figure out how to pay for it."

He added, however, that the United States has one thing in its favor that other countries such as Greece do not: A competitive economy capable of producing solid growth to increase government revenue.

Japan, the world's second biggest economy, isn't Greece either, economists say.

Even though it shoulders the biggest public debt burden in the industrialized world, the country does not face an imminent crisis.

More than 90 percent of its debt is funded domestically, putting the country at low risk for capital flight. Servicing that debt remains manageable because of low interest rates. Moreover, Japan holds the world's second largest store of foreign reserves and consistently posts a current account surplus.

The turmoil in Greece has in fact led investors to turn to Japanese government bonds as a safe haven.

"Claims that Japan's debt mountain is about to explode have been around for over a decade," said Richard Jerram, head of Asian economics at Macquarie Capital Securities, in a recent report.

But the future is another matter.

Prime Minister Yukio Hatoyama's government will issue a record 44 trillion yen ($473 billion) in bonds to fund this fiscal year's budget. Fitch Ratings warned last week that Japan's credit rating could worsen if Tokyo does not rein in snowballing debt, which reached 201 percent of gross domestic product in 2009. Deflation, slow growth and dwindling household savings could eventually undermine Japan's ability to fund itself.

The rest of Asia is on sounder financial footing, especially considering its rapid growth. The region underwent a "profound deleveraging" in the 1990s following its own financial crisis, mandated by the IMF's strict bailout conditions, said Glen Maguire, chief Asia economist at Societe Generale.

China's government reports its debt at about 20 percent of GDP. But Tom Orlik, an analyst in Beijing for Stone & McCarthy Research Associates, says the figure is far higher than official numbers suggest. Add in local government debt and nonperforming loans in the government-owned banks, and the level tops 50 percent of GDP, he said.

"The number is higher than the government acknowledges, and that is well known, but it is still not a very alarming number," Orlik said.

The European turmoil, however, may compel Beijing to postpone any moves to allow its currency to rise until the international outlook is clearer, said Ken Peng, China economist for Citigroup in Beijing.

China has tied its yuan to the dollar since late 2008 to help its exporters compete amid weak global demand. Washington and others complain that keeps the yuan undervalued, giving China's exporters an unfair price advantage and swelling its trade surplus.

"The government reaction to any major disturbance is to avoid moving," Peng said. "The enthusiasm for de-pegging has probably fallen."

While Asia appears strong enough to avoid the debt problems engulfing Greece and Europe, it hasn't been immune to the anxiety the turmoil has produced. Asian equity markets have been hammered this week, in line with deep share declines in Europe and the U.S.

Signaling what may lie ahead, the chief executive of ANZ Banking Group Ltd., an Australian lender with operations across Asia, warned Thursday that the sovereign debt crisis in Europe could make it harder for banks to access credit.

"I am still quite worried about the global economy," Smith told reporters. "Europe is a mess."

Europe is a mess and politicians there keep showing their ineptitude in handling the Greek crisis. While Germany will pony up most of the aid, Floyd Norris of the NYT is right, they're saving Greece to protect Germany:

Angela Merkel, the German chancellor, made clear this week what she believed to be the primary purpose of the European rescue package. It was not to spare Greeks pain, or even to help that country’s economy regain competitiveness.

“When Greece accepts these tough measures, not for one year but several, then we have a chance for a stable euro,” she said.

All this brings to mind the American politician William Jennings Bryan, who was nominated for president three times more than a century ago. He campaigned against the “cross of gold,” arguing that American prosperity was being sacrificed so the country could stick to a gold standard.

Now the Greeks — and soon, perhaps, the Portuguese or the Spaniards or the Irish — are being told to accept higher unemployment and lower wages for the indefinite future. Not for their own good, necessarily, but to preserve a currency.

At the moment, the euro has weakened because of the Greek crisis. For Germany, that is another bonus. Its already competitive manufacturing industries get an extra boost.

My fear is that when Greeks, Spaniards, Portuguese, Italians and Irish figure out what these austerity measures entail, their population might turn around and say screw the euro and screw Germany. Don't be surprised if Greek revolts spread throughout southern Europe.

Finally, don't think for a second that what's going on in Greece and Europe will never happen in the US and even Canada. On Monday, the WSJ reported that Ken Griffin, the head of Citadel Investment Group said the U.S. risks becoming "the next Greece" within a decade unless action is taken on fiscal reform.

Ken Griffin, founder and CEO of the financial services group, also blamed the lack of job creation on "policy uncertainty" in the wake of the financial crisis.

"We have a crisis in front of us," said Griffin on a panel at the Milken Institute Global Conference, citing the rising cost of health and social security benefits.

"There's no acknowledgment of that at any [policy level]. That worries me," he added.

Griffin said without action he is concerned about the U.S. becoming "the next Greece" and added the Obama administration missed a chance for "a new social compact" to fund reform.

His concerns over job creation reflected the gains in productivity seen during the recent recovery. He cited the lingering debate over cap-and-trade and broad financial reform for restraining bank lending.

There is no acknowledgment of the global pension crisis either and how we are going to address serious social issues, including the widening wealth gap between workers and financial oligarchs who are sucking this economy dry, leaving crumbs for the rest of us.

So while the IMF and the EU impose austerity measures on Greeks and who knows who else, let's step back and remember who profited the most from the global debt crisis. I don't see the banksters taking cuts in their bonuses or corporate titans accepting higher taxes. They conveniently escape the burden of "austerity measures".

Watch the clip below on the Greek crisis and pay attention to what Max Keiser says. There is much more at stake here than the Greek crisis, but mainstream media seems to be ignoring the restless many, focusing on the concerns of the privileged few.

It is clear to me that pensions and the global economy have succumbed to Casino Capitalism - a form of capitalism which benefits the financial and corporate oligarchs, leaving the rest of the population behind. Greece is the birthplace of democracy, will it also be the birthplace of a new form of capitalism?