Has Portugal's debt default clock begun to tick? - Yahoo! Finance

By Axel Bugge

LISBON (Reuters) - Portugal clinched a deal on ambitious labor market reforms this week and carried out its biggest debt sale since seeking a 78-billion-euro bailout, but the challenges for the second-most risky country in the euro zone may be shifting up a gear.

Undermining the glow of Lisbon's achievements is the rapidly rising market concern that Portugal is the next potential candidate to default in the euro zone after Greece -- a point that is fast becoming clear as Athens approaches the end of its debt restructuring talks.

"Portugal is obviously the next in the line of fire," said Michael Cirami, a portfolio manager at U.S. investment managers Eaton Vance. "Portugal is unlikely to go unnoticed whether they strike a deal or not (on Greek debt restructuring)."

The concerns were clearly borne out this week as Portugal's bond yields rose virtually without interruption, to all-time highs, despite the issuance of 2.5 billion euros of short-term treasury bills on Wednesday at slightly lower yields.

The country's 10-year yields rose to almost 15 percent on Thursday and hovered around 14.80 percent on Friday. Five-year credit default swap prices implied the market was pricing in a 66.8 percent chance of a Portuguese default.

The sharp rise in bond yields was partially triggered by Standard & Poor's downgrades of European countries last week, which left Portugal as the second euro zone country to be rated "junk" by all the main rating agencies, along with Greece.

 
Read more: Has Portugal's debt default clock begun to tick? - Yahoo! Finance

Portugal slips into default territory - FT.com

Portugal is trading in default territory after investors offloaded the country’s bonds this week amid rising fears of contagion, hurting a government debt auction on Wednesday. Worries are mounting that the private sector and Greece will fail to agree a restructuring package for Athens’ debt.

Portuguese 10-year bond yields, which have an inverse relationship with prices, jumped to a new euro-era high of 14.40 per cent in London on Wednesday. Before the S&P two-notch downgrade late on Friday, yields were trading at 12.45 per cent.

Portugal on Wednesday sold €1.25bn of 11-month bills, €754m of six-month notes and €496m of three-month notes, lower than the €2bn to €2.5bn targeted by the government debt agency.

Portugal does not have a bond maturing until June, when €10bn is due for repayment. Its borrowing needs are also modest at €17.5bn. However, investors worry about Portugal’s painfully slow growth, which could impact on its ability to service its debts.

Many investors were forced to sell Portuguese bonds after Standard & Poor’s downgraded the country to junk on Friday. Other funds sold Portuguese debt after Lisbon was removed from Citigroup’s European Bond Index, which these investors track, because of its fall to junk status.

All three main credit rating agencies, S&P, Moody’s, and Fitch, rate Portugal as junk, below investment grade. In the eurozone, only Greece is also rated junk by all the agencies.

 
Read more: Portugal slips into default territory - FT.com

Hungary faces ruin as EU loses patience - Telegraph

Hungary's defiant premier Viktor Orbán has no hope of securing vital funding from the EU and the International Monetary Fund until the dispute is resolved, leaving him a stark choice of either bowing to EU demands or letting his country slide into bankruptcy.

Yields on Hungary's two-year debt jumped to 9.17pc on Tuesday, an unsustainable level for an economy in recession with public debt of near 80pc of GDP. Hungary's debt was cut to junk status by rating agencies last week.

Capital Economics said Hungary must repay €5.9bn (£4.9bn) in EU-IMF loans and raise external funds equal to 18pc of GDP this year, the highest in Eastern Europe. Two-thirds of household debt is in Swiss francs, leading to a lethal currency mismatch as capital flight weakens the forint.

"Hungary is playing with fire," said Lars Christensen from Danske Bank. "The EU is not bluffing. It will let Hungary go over the edge to make the point that EU countries must play by the rules. Our worry is that Hungary's government has not yet got the message."

The EU said it had sent three letters of "Formal Notice" over Hungary's assault on the independence of the judiciary, the central bank, and the data protection ombudsman – the first step in "infringement proceedings". The dispute could ultimately lead to loss of Hungary's voting rights under Article 7 of EU treaty law.

Read more: Hungary faces ruin as EU loses patience - Telegraph

If Spain's banks collapse, UK may send in Navy to save ex-pats | Euro debt crisis News | The Week UK

I doubt the U.S. would care for its citizens if they get trapped in a country because of a banking crisis. A war yes but not a banking crisis.

THE GOVERNMENT is drawing up emergency plans to evacuate British ex-pats from Spain and Portugal in the event that the Iberian countries' banking systems collapse, raising the prospect of Royal Navy ships bearing down on the Costa del Sol to rescue well-tanned retirees.

Ships, planes and coaches could be sent to bring home Britons who find themselves unable to withdraw money to pay for basic needs or travel home because of a Spanish or Portuguese banking crisis, while diplomats scramble to get special treatment for ex-pats from local banks.

According to The Sunday Times, the Foreign Office and the Treasury have both been drawing up contingency plans after credit rating agency Standard & Poor's last week downgraded the status of ten Spanish banks.

The agency put some Spanish banks, including Banco Popular, on "credit watch with negative implications" suggesting it expects to lower their status further still. Another agency, Fitch, warned yesterday that a solution to the euro crisis was probably "beyond reach".

Read more: If Spain's banks collapse, UK may send in Navy to save ex-pats | Euro debt crisis News | The Week UK

Shenandoah: Liquidity Swap Announcement: A Repeat of 2008

Can you say deja vu all over again........................
 

From the Federal Reserve website, Press Release on Monetary Policy release from September 18, 2008:

Press Release

Release Date: September 18, 2008

For release at 3:00 a.m. EDT

Today, the Bank of Canada, the Bank of England, the European Central Bank (ECB), the Federal Reserve, the Bank of Japan, and the Swiss National Bank are announcing coordinated measures designed to address the continued elevated pressures in U.S. dollar short-term funding markets. These measures, together with other actions taken in the last few days by individual central banks, are designed to improve the liquidity conditions in global financial markets. The central banks continue to work together closely and will take appropriate steps to address the ongoing pressures.

Federal Reserve Actions

The Federal Open Market Committee has authorized a $180 billion expansion of its temporary reciprocal currency arrangements (swap lines). This increased capacity will be available to provide dollar funding for both term and overnight liquidity operations by the other central banks. 

The FOMC has authorized increases in the existing swap lines with the ECB and the Swiss National Bank. These larger facilities will now support the provision of U.S. dollar liquidity in amounts of up to $110 billion by the ECB, an increase of $55 billion, and up to $27 billion by the Swiss National Bank, an increase of $15 billion. 

In addition, new swap facilities have been authorized with the Bank of Japan, the Bank of England, and the Bank of Canada. These facilities will support the provision of U.S. dollar liquidity in amounts of up to $60 billion by the Bank of Japan, $40 billion by the Bank of England, and $10 billion by the Bank of Canada. 

All of these reciprocal currency arrangements have been authorized through January 30, 2009. 

Sound familiar to this morning’s announcement? Here it is from the Federal Reserve’s website this morning (link to press release here):

Press Release

Release Date: November 30, 2011

For release at 8:00 a.m. EST

The Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, the Federal Reserve, and the Swiss National Bank are today announcing coordinated actions to enhance their capacity to provide liquidity support to the global financial system. The purpose of these actions is to ease strains in financial markets and thereby mitigate the effects of such strains on the supply of credit to households and businesses and so help foster economic activity. 

These central banks have agreed to lower the pricing on the existing temporary U.S. dollar liquidity swap arrangements by 50 basis points so that the new rate will be the U.S. dollar overnight index swap (OIS) rate plus 50 basis points.  This pricing will be applied to all operations conducted from December 5, 2011.  The authorization of these swap arrangements has been extended to February 1, 2013.  In addition, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank will continue to offer three-month tenders until further notice.

As a contingency measure, these central banks have also agreed to establish temporary bilateral liquidity swap arrangements so that liquidity can be provided in each jurisdiction in any of their currencies should market conditions so warrant.  At present, there is no need to offer liquidity in non-domestic currencies other than the U.S. dollar, but the central banks judge it prudent to make the necessary arrangements so that liquidity support operations could be put into place quickly should the need arise.  These swap lines are authorized through February 1, 2013. 

Federal Reserve Actions

The Federal Open Market Committee has authorized an extension of the existing temporary U.S. dollar liquidity swap arrangements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank through February 1, 2013.  The rate on these swap arrangements has been reduced from the U.S. dollar OIS rate plus 100 basis points to the OIS rate plus 50 basis points.  In addition, as a contingency measure, the Federal Open Market Committee has agreed to establish similar temporary swap arrangements with these five central banks to provide liquidity in any of their currencies if necessary.  Further details on the revised arrangements will be available shortly.

U.S. financial institutions currently do not face difficulty obtaining liquidity in short-term funding markets.  However, were conditions to deteriorate, the Federal Reserve has a range of tools available to provide an effective liquidity backstop for such institutions and is prepared to use these tools as needed to support financial stability and to promote the extension of credit to U.S. households and businesses.

The last time the world’s central banks agreed to this type of intervention, the S&P reacted positively, as expected on September 18th and 19th of 2008:

(click to enlarge/reduce size of chart)

Meanwhile, reality set in shortly thereafter:

 

11.30 Liquidity Swap Announcement: A Repeat of 2008

The Fed, Other Central Banks Prepare for the Firestorm

The Fed has shocked us once again, and it’s probably right. There’s a firestorm on the horizon. It starts in Europe, but it threatens the U.S. economy just as surely, and the Fed is getting ready.

The most fundamental role of any central bank is to deal with a financial market crisis, to ensure markets operate as normally as circumstances permit. A central bank does this primarily by ensuring an adequate flow of liquidity to market participants, whether banks, other financial institutions, or other central banks. It is in this light one should view the coordinated announcement by the Federal Reserve along with the European Central Bank and four other central banks across Europe and Asia.

Specifically, the Fed cut the price of emergency dollar funding from 1 percent to a half a percent. The Fed has arrangements with other central banks that allow it to swap dollars for other currencies on an overnight basis. The Fed cut the price of these swapline arrangements and extended the life of the swapline by 6 months to February 1, 2013.

As the global reserve currency, much of the world’s commerce takes place in dollars. Foreign central banks often source dollars to their own banking systems, which use the dollars to fund internal commerce as well as export purchases. Inadequate dollar liquidity abroad can upend financial markets abroad and also in the United States. Three years ago, these same financial markets hemorrhaged during a financial crisis, and the U.S. unemployment rate is still around 9 percent.

To be clear, the Fed is not bailing out Europe or the euro. There has been some musing about the Fed bailing out the euro—an idea so preposterous it doesn’t rise past the level of cocktail party speculation. But what the Fed is doing is something quite different. It’s not putting taxpayer money at risk. It’s not buying foreign sovereign debt. It’s not increasing the bailout capacity of the International Monetary Fund or any of the tools Europe has constructed to paper over its troubles. The Fed is just beefing up its own tools for lending dollars on a short-term basis to foreign central banks.

Why now? Europe, of course, is going through a terrible time financially and economically, but where’s the crisis that would trigger such an action by the Fed? And why is the market reacting so positively? Just wait.

A good way to think about this is to imagine that every fire engine in and around New York City were to converge on Manhattan. Every fire truck would lay out every bit of hose and tap every fire hydrant they could find. Every post is manned and ready, but there’s no fire, only a little smoke. Just wait.

The market’s reaction is analogous to a real estate buyer who sees all this fire equipment, decides the neighborhood must be really safe, and bids up the nearest townhouse. Today’s 400-point initial rally in the Dow is proof positive that markets are either irrational, perfectly myopic, or both.

What’s going on here? The Fed and its counterparts in Europe and Asia are getting ready for utter calamity. The crisis in Europe is reaching a crescendo. Bank credit in Europe is collapsing; interest rates, even in Germany, are rising; recession and worse is at the doorstep in southern Europe and threatens to engulf the entire continent; even the euro technocrats are now talking about having only a matter of days to save themselves and their beloved monetary union.

There’s no real fire yet. But there will be. A big one. It’s heading this way, and the Fed is doing what it can to get ready.

  
The Fed, Other Central Banks Prepare for the Firestorm

Europe's lost decade as $7 trillion loan crunch looms - Telegraph

The risk is "Japanisation" without the benefits of Japan: without a single government, or a trade super-surplus, or 1pc debt costs, or unique social cohesion.

Even today, the jobless rate for youth is near 10pc in Japan. It is already 46pc in Spain, 43pc in Greece, 32pc in Ireland, and 27pc in Italy. We will discover over time what yet more debt deleveraging will do to these societies.

Stephen Jen from SLJ Macro Partners says the loan to deposit (LTD) ratio of Europe’s lenders is 1.2, much like Japanese banks in the early 1990s at the onset of the country’s Lost Decade (now two decades).

How Europe allowed this to happen will no doubt be the subject of many enquiries. Suffice to say that it was an intellectual failure by everybody: lenders, economists, regulators and the European Central Bank. The ECB misread the implications of the global capital surplus in the middle of the last decade (like the Fed) and gunned the M3 money supply at double-digit rates (like the Fed).

This great error further juiced the fatal flood of lending from North Europe to Club Med. Interestingly, it is what US lending did to Germany in the late 1920s. When the music stopped -- when Wall Street cut off loans, as Germany has now cut off loans to Spain -- trouble ensured within two years. Weimar limped on, but not for long.

Read more here: Europe's lost decade as $7 trillion loan crunch looms - Telegraph

Euro Zone: 'Depression' Makes Return to Mainstream Lexicon - CNBC

You know it's grim when the prevailing debate among economists and historians is whether the world economy faces the "Great" depression of the 1930s or the "Long" depression of the 1870s.

Listening to commentary surrounding the seemingly intractable sovereign debt and banking crisis in Europe, the stimulus/austerity battle in the United States and even hard-landing risks in China, gloom is fast becoming the consensus.

Only the shade of gloom, it seems, is in question. It's got so that, depending on your view of big or small government, you can pick your version of the pending depression. 

Harvard professor and economic historian Niall Ferguson, a fan of the British government's austerity drive and skeptic of further stimulus, reckons the world is facing a "slight depression" and favors comparison with the late 19th century rather than 1930s. 

Speaking on Monday at private bank Kleinwort Benson, where he is on the advisory board, Ferguson restated his critique of the fiscal and monetary stimuli from western governments over the past four years and said their modest impact questioned the key lessons most economists took from the Great Depression. 

"They may have stopped another 'Great' depression but not a depression and what for many was the most profound lesson of economic history may turn out to be wrong," he said, adding the fact that government debts and obligations were already so high before the crisis pump priming meant they now risked backfiring.

Euro Zone: 'Depression' Makes Return to Mainstream Lexicon - CNBC

RT crew caught in Athens tear gas chaos, slammed by Greek rioters

Unfortunately once we start cutting off government assistance, unemployment, food stamps and firing government workers this is what is also going to happen here in the United States. If you don't believe this can happen here just look at what has been happening in Wisconsin over changes in the collective bargaining rights of government workers.

First it starts with peaceful protests and sit-ins but it always ends in tear gas especially when people are scared and broke.

What happens when Greece defaults – Telegraph Blogs

Remember how the default of one Investment Bank, Lehman Brothers, collapsed the financial system because everyone is tied together well the same thing will happen when Greece collapses.

What happens when Greece defaults

By Andrew Lilico Economics Last updated: May 20th, 2011
285 Comments Comment on this article

 

It is when, not if. Financial markets merely aren’t sure whether it’ll be tomorrow, a month’s time, a year’s time, or two years’ time (it won’t be longer than that). Given that the ECB has played the “final card” it employed to force a bailout upon the Irish – threatening to bankrupt the country’s banking sector – presumably we will now see either another Greek bailout or default within days.

What happens when Greece defaults. Here are a few things:

- Every bank in Greece will instantly go insolvent.

- The Greek government will nationalise every bank in Greece.

- The Greek government will forbid withdrawals from Greek banks.

- To prevent Greek depositors from rioting on the streets, Argentina-2002-style (when the Argentinian president had to flee by helicopter from the roof of the presidential palace to evade a mob of such depositors), the Greek government will declare a curfew, perhaps even general martial law.

- Greece will redenominate all its debts into “New Drachmas” or whatever it calls the new currency (this is a classic ploy of countries defaulting)

- The New Drachma will devalue by some 30-70 per cent (probably around 50 per cent, though perhaps more), effectively defaulting 0n 50 per cent or more of all Greek euro-denominated debts.

- The Irish will, within a few days, walk away from the debts of its banking system.

- The Portuguese government will wait to see whether there is chaos in Greece before deciding whether to default in turn.

- A number of French and German banks will make sufficient losses that they no longer meet regulatory capital adequacy requirements.

- The European Central Bank will become insolvent, given its very high exposure to Greek government debt, and to Greek banking sector and Irish banking sector debt.

- The French and German governments will meet to decide whether (a) to recapitalise the ECB, or (b) to allow the ECB to print money to restore its solvency. (Because the ECB has relatively little foreign currency-denominated exposure, it could in principle print its way out, but this is forbidden by its founding charter.  On the other hand, the EU Treaty explicitly, and in terms, forbids the form of bailouts used for Greece, Portugal and Ireland, but a little thing like their being blatantly illegal hasn’t prevented that from happening, so it’s not intrinsically obvious that its being illegal for the ECB to print its way out will prove much of a hurdle.)

- They will recapitalise, and recapitalise their own banks, but declare an end to all bailouts.

- There will be carnage in the market for Spanish banking sector bonds, as bondholders anticipate imposed debt-equity swaps.

- This assumption will prove justified, as the Spaniards choose to over-ride the structure of current bond contracts in the Spanish banking sector, recapitalising a number of banks via debt-equity swaps.

- Bondholders will take the Spanish Banking Sector to the European Court of Human Rights (and probably other courts, also), claiming violations of property rights. These cases won’t be heard for years. By the time they are finally heard, no-one will care.

- Attention will turn to the British banks. Then we shall see…

What happens when Greece defaults – Telegraph Blogs

WSJ: Spain Vote Threatens to Uncover Debt As Socialists Risk Losing Key Areas - WSJ.com

By Jonathan House and Sara Schaefer Munoz 

Of THE WALL STREET JOURNAL   

MADRID (Dow Jones)--Weekend elections that threaten to drive Spain's ruling Socialist party from power in several regions and cities also promise a potentially nasty surprise: the revelation of piles of undisclosed debt in local governments that could undercut the country's drive to avoid an international bailout.

Five months ago, a government change in Spain's Catalonia region revealed a budget deficit more than twice as big as previously reported. Now, a growing chorus of economists, local politicians and business leaders say that new governments are likely to discover, as Catalonia did, piles of "hidden debt" owed to health clinics and other suppliers. 

Economists, analysts and anecdotal reports from companies that supply local governments suggest there is widespread, unrecorded debt among once-free-spending local governments. Some companies are complaining that fiscally frail administrations are pressuring them to do business off the books and not immediately bill for goods and services, said Fernando Eguidazu, vice president of the Circulo de Empresarios business lobby group in Madrid. 

Such bills could add tens of billions of euros to the official debt figures reported by local and regional governments. If such skeletons come out of the closet in coming weeks, Spain's cost of funding could continue to rise--throwing the country back into the limelight after it has struggled to demonstrate it doesn't need to be bailed out like Greece, Ireland and Portugal. 

Read more: WSJ: Spain Vote Threatens to Uncover Debt As Socialists Risk Losing Key Areas - WSJ.com

Athens Mulls Plans for New Currency: Greece Considers Exit from Euro Zone - SPIEGEL ONLINE - News - International

Greece's economic problems are massive, with protests against the government being held almost daily. Now Prime Minister George Papandreou apparently feels he has no other option: SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou's government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens' intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night. The meeting is taking place at Château de Senningen, a site used by the Luxembourg government for official meetings. In addition to Greece's possible exit from the currency union, a speedy restructuring of the country's debt also features on the agenda. One year after the Greek crisis broke out, the development represents a potentially existential turning point for the European monetary union -- regardless which variant is ultimately decided upon for dealing with Greece's massive troubles. 

Given the tense situation, the meeting in Luxembourg has been declared highly confidential, with only the euro-zone finance ministers and senior staff members permitted to attend. Finance Minister Wolfgang Schäuble of Chancellor Angela Merkel's conservative Christian Democratic Union (CDU) and Jörg Asmussen, an influential state secretary in the Finance Ministry, are attending on Germany's behalf.

'Considerable Devaluation'

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro. 

"It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro," the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble's staff have calculated that Greece's national deficit would rise to 200 percent of gross domestic product after such a devaluation. "A debt restructuring would be inevitable," his experts warn in the paper. In other words: Greece would go bankrupt. 

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

What is certain, according to the assessment of the German Finance Ministry, is that the measure would have a disastrous impact on the European economy. 

"The currency conversion would lead to capital flight," they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. "This could not be reconciled with the fundamental freedoms instilled in the European internal market," the paper states. In addition, the country would also be cut off from capital markets for years to come.

In addition, the withdrawal of a country from the common currency union would "seriously damage faith in the functioning of the euro zone," the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. "That would lead to contagion in the euro zone," the paper continues.

Athens Mulls Plans for New Currency: Greece Considers Exit from Euro Zone - SPIEGEL ONLINE - News - International

Bailing out Portugal is illegal

How Severe Is Europe's Intertwined Debt Crisis?

Labour MP: UK student fees 'monstrous & enormously damaging'

Some Euro Countries Are Bankrupt: Rogers

Guardian- Greece seeks longer to repay €110bn IMF bailout loan as austerity bites

It is only a matter of time before the Greeks either default on their repayments to the IMF or burn their politicans and become a communist country.

Greece seeks longer to repay €110bn IMF bailout loan as austerity bites

Demonstrations are expected in Athens today as the head of the International Monetary Fund, Dominique Strauss-Kahn, arrives for a two-day visit to the debt-laden country.


Nearly a year after Athens emerged on the frontline of Europe's worst-ever fiscal crisis, George Papandreou, the prime minister, faces one of the biggest tests of his political leadership as he uses the visit to negotiate an extension of the repayment period Greece has been given for the €110bn (£95bn) EU and IMF-sponsored rescue package it received in May.

The IMF chief will also meet Greece's finance finance minister, opposition leader and central bank governor, and is due to speak at Parliament's economic affairs committee. Left-wing unions planned to hold demonstrations in Athens in protest at his visit and the strict austerity programme the government has imposed to meet IMF and EU conditions attached to the bailout.

Giorgos Papaconstantinou, the finance minister, said ahead of the long-awaited talks: "The decision to extend the loan is very important. It opens the way to a return to the markets earlier than expected."etc...

The socialist government hopes an extension will dilute fears that Greece will have to restructure its debt when the bailout expires in 2013. In line with Ireland, Athens is expected to be given until 2024 to pay back the emergency aid without which it would not have averted bankruptcy after its borrowing costs soared earlier in the year.

But concerns are also mounting over the depth and pace of Greece's economic recovery. This month Eurostat, the EU statistics agency – upwardly revising the country's deficit from 13.6% to 15.4% in 2009 – projected that its public debt would reach 160% of gross domestic product in 2013.

Although the loan rescheduling will ease the debt burden, fears in Brussels are growing over the lack of progress, with reforms now seen as crucial if growth and competitiveness are also to be restored. Anxiety has been compounded by the deepening recession following spending cuts, tax increases and other unprecedented austerity measures that Athens has been obliged to take in return for the financial support.

Unemployment is set to hit a record high of 15% next year, with the labour ministry estimating that 2 million Greeks already live below the poverty line. More than 25,000 businesses have been forced to close since May and there are reports that seven out of 10 shops can barely pay bills. Amid resurgent fears of social unrest, the middle classes, society's great stabiliser, face plummeting living standards.

Highlighting the bleak outlook, the former Italian finance minister Tommaso Padoa-Schioppa, one of Papandreou's senior advisers, let slip last week that it would be "several generations" before Greece's parlous public finances recovered.

"It is impossible to say when growth will return," he told an economic conference in Athens. "We're still in the honeymoon of the [fiscal consolidation] programme and risks remain high. The biggest risk is exhaustion. Reshaping an economy which has faced serious structural difficulties for a long period of time is something that will take years, not months – maybe a decade – so patience is needed."

Within days, the credit-rating agency Standard & Poor's warned that Greece's sovereign debt rating could be further downgraded because of concerns over its ability to implement reforms. The coming months are critical for a government told that it must enact "corrective measures" to restructure the wider public sector if it is to receive the next €15bn instalment of the bailout agreement in March.

The changes, which include streamlining loss-making public utilities and liberalising a plethora of "closed-shop" professions that have kept competition at bay, entail the socialists confronting entrenched vested interests and, in many cases, their own trade unions and supporters.

Clamping down on tax evasion – a national sport that loses the Greek state €16bn a year – has also been cited by international creditors. "It will be a revolution, a combination of Thatcherism and shock therapy that no other government has attempted," an insider said. "Around 100 bills have been lined up. We will have to take on everybody."

Greeks know that if they fail, the consequences will be dire – not only for themselves but the entire eurozone. "Greece is the great experiment, the laboratory of Europe," said Theodore Pelagidis, professor of economic analysis at Pireaus University. "What happens here will determine what happens in Europe. and if the euro breaks up, survives and on what terms it survives."

Europe's Debt Domino Effect

Germans lead gold rush frenzy

It seems like the Germans are taking the Euro crisis seriously.

From the Financial Times
By Jack Farchy in London

Published: May 15 2010 03:00 | Last updated: May 15 2010 03:00

At the Rand refinery in South Africa, the phone has not stopped ringing this week.

Panicking German dealers and banks have been desperate to get their hands on krugerrands, the world's most popular gold coin.

"We have some extraordinary sales to German customers," says Deborah Thomson, the Rand treasurer. The refinery, which usually sells 2,000 coins to each customer at a time, says that last week it received an order from one German bank for 30,000 coins. Another bank requested 15,000 coins.

Frank Ziegler, head of precious metals at BayernLB, one of Germany's largest wholesale suppliers of gold, says: "People are buying krugerrands like crazy." The frenzy pushed gold prices to a nominal high of $1,248.95 a troy ounce yesterday while the euro price surged through €1,000 an ounce for the first time. Adjusted for inflation, however, gold prices are still a long way from their all-time high above $2,300 an ounce in 1980.