The trajectory of the euro and its relationship to the dollar is indeed a puzzling concern.  What these valuations reflect the world’s central bank’s ability to unleash a bevy of remedies for troubled economies.  The problem in Greece is that there are 17 nations in peril and several, including Greece, in need of resuscitators.

As the streets of Athens fall prey to yet one more countrywide labor strike, the Greek parliament deliberates the austerity cuts that will tighten Greece’s belt even further.  And, why not?  Greece only gained admittance to the euro zone due to fabricated bookkeeping. The Greeks are used to retiring with full pensions at age 59. The people who may or may not come to their rescue are unhappy to retire at age 70.  The socio-political divide between Greece, the euro zone and other global economies is so vast that a working relationship seems impossible.

Yet, even though Greece fails against every reasonable economic standard and all 17 members of the euro zone and most of the 27 European Union (EU) are mired in unsustainable debt amidst a prolonged recession, the euro is rising.  How then is the American dollar devaluing as the euro is rising?

The answer is Central Bank intervention; the same action that prevented the U.S. banking sector from destroying the national and international markets.  However, the ECB does not have the ability to execute quantitative easing.  This has left the ECB, the EFSF and the IMF all groping for some sort of coordinated counter attack.  The institutions have generated big initiatives but when one parliament fails to support these initiatives, they become meaningless proposals.

If there has been one consistent theme of the Republican Presidential Debates, the role of the Federal Reserve and the role played by Federal Reserve Chairman Ben Bernanke should change.  Some candidates have suggested that the Federal Reserve has no constitutional basis and should be disbanded. 

But, let’s be clear.  Had Ben Bernanke and Timothy Geithner, the Secretary of the Treasury, not worked decisively, creatively and rapidly, the entire global economy would have crumbled.  This event would have made the Great Depression look like a hiccup.  You may not like a certain lack of transparency and you may disagree with the power vested in the Fed, but when George Bush’s recession took hold, it was Bernanke’s and Geithner’s decisive action that saved the U.S.   

If there is anything to be learned about the euro crisis, it is the importance of a strong central bank that has the ability to make adjustments in response to economic emergencies.  For the past two days, Chairman Bernanke has been explaining his vision and his policies in regards to the U.S. economy, the struggling euro zone and the possibility of another round of economic stimulus.

In an interesting exchange, Bernanke informed Congress that he was determined to prevent the treacherous euro zone waters to destruct the economic progress the U.S. has made.  Bernanke was cautious in describing the newest employment data and he was equally cautious about the state of the recovery.

To describe the upbeat employment news, Bernanke said, ”We still have a long way to go before the labor market can be said to be operating normally.”

Regarding the euro zone debt crisis, Bernanke offered, “We are infrequent contact with European authorities and we will continue to monitor the situation closely and take every available step to protect the U.S. financial system and the economy.”

In alarmingly light activity, the Dow closed higher once again, but there is an underlying uneasiness in the marketplace as investors try to escape the Greece problem and as the euro zone tries to contain the damage.  That seems an unlikely outcome.  While other euro countries may be willing to accept austerity cuts that Greece is being forced to accept, the biggest fear is the fear of contagion.  There are very few reasons to believe that euro zone members and EU members will make the dramatic contributions that could calm market jitters.

The private and public investors charged with reaching an organized default mechanism with Greece are failing under the weight of political and economic conflicts. 

Bernanke and the Bush Tax Cuts

The Bush Tax Cuts expire on January 1, 2013.  Most observers have assumed these cuts would become the big political topic after a new administration is elected.  In a rare opinion, Bernanke informed Congress that the Bush Tax Cuts would influence household and corporate spending and could well stabilize the deepening national debt.

“I don’t know exactly when the uncertainty would become a factor, but surely as we get closer to January 1, and Congress has not given a clear road map for how it plans to proceed, that would certainly affect business decisions, household decisions, as they look ahead to next year.”

The steady recovery has prompted prominent financial institutions BNP Paribas and Deutsche Bank to increase estimates of U.S. first quarter GDP growth from 2.0 percent to 2.5 percent.  Thus far, the Fed has lowered interest rates to near zero and has vowed to keep the rates there for a longer term.  To boost the economy, the Fed has invested $2.3 trillion in bonds.

The Republicans and Democrats are in a stalemate on every issue.  Only by giving one party decisive control of both houses will the tax issues, jobs programs and the fate of the Fed be decided.  In this politically charged environment wrought with deep potential potholes, Congress is unable to put aside political rhetoric and act on anything. 

The two biggest challenges facing Washington is a comprehensive jobs program and dealing with the national debt.  The cessation of the Bush Tax Cuts would be a huge step in narrowing the debt.  However, Republicans are only willing to discuss spending cuts.  The fundamental difference between Republicans and Democrats is the use of a balanced approach of income and spending to reduce the debt or spending only process to trim the debt.

Regarding the Bush Tax Cuts, Bernanke made it clear that inaction was not an option,” Just simply promising future action risks at least an adverse market reaction, an adverse reaction in terms of confidence and son on.”

About The Federal Reserve

Because the Federal Reserve promises to be a hot political topic and is already controversial, we should know what duties fall under the auspice of the Fed.  The Federal Reserve is the central bank of the United States.  In this role, the Fed is the “gatekeeper” of the U.S. economy. 

The Fed has the ability to issue quantitative easing, buy bonds and otherwise stabilize the economy.  The Fed is committed to regulate financial institutions, take actions to help the economy and to maintain sound financial institutions.

There are 12 Federal Reserve Banks in the nation.  These entities are offshoots of the Federal Reserve. These Fed banks assure the fluid nature of the country’s payment system. 

The Federal Reserve also acts as the Government’s Bank.  The Fed’s biggest customer is the world’s biggest spender, the U.S. government.  The Federal Reserve receives tax revenue and issues payments in cooperation with the policies of the U.S. Treasury.  In this capacity, the Fed purchases and sells U.S. bonds.  The Fed also prints money and creates coins.

The far-reaching Fed also supervises and regulates banks.  In this capacity, the Fed monitors banking activity and investments.  This particular responsibility angers most Republicans who believe market conditions should dictate banking policy.  Historically and recently, that model has failed.

The Fed is also charged to assure that banks are acting in the best interests of the public.  This accounts for new revisions in Truth in Lending and Equal Credit Opportunity Act, the Home Mortgage Disclosure Act and the Truth in Savings Act.

The Federal Reserve also determines margin requirements for investors.  This requirement tells investors how much money they can spend on investments.

Perhaps all these responsibilities are overshadowed by the Fed’s responsibility to act as the money manager for the biggest economy in the world.  The multi-tiered responsibility is all encompassing.  However, there is an excellent chance that every transaction and every credit action by consumers and lenders has the handprint of the Fed upon it.

The distribution of these jobs was spread across the country and touched every sector of the economy.  The “diffusion index” tracks job creation by sector.  The index rose to 64.1 in January from the 62.4 in December. 

The non-farm payroll data was welcome news to the Obama Administration.  Some analysts have attributed much of the gain to the aggressive payroll tax reduction, which will expire by month’s end unless Congress can find middle ground.  The positive job trend comes on the wake of a disappointing Consumer Confidence Index report earlier in the week.

In the Federal Reserve’s employment projections for 2012, the unemployment rate was to decline to 8.2 percent in December.  There is some division within the Fed as to what the role of the Federal Reserve should be.  This positive employment data indicates that the Fed should be more patient before resorting to additional quantitative easing.  With the new data, the Fed is likely to hold on any new initiatives. 

Unemployment trends by industry November 2011 – January 2012 

 The unemployment rate lowered as the Household Survey showed a new jobs gain of 631,000.  The January report also states that an additional 60,000 jobs were filled in November and December 2011 that were not included in those reports.

The weekly hours index measures the total work effort.  The index shows an encouraging gain of 0.2 percent.

The manufacturing industry has been hard hit by the recession.  In January, this sector added 50,000 new jobs.

The retail sector caught analysts by surprise and could bode well for a growth trend.  Retailers added 10,500 workers in January.  Meanwhile, the construction industry, which has been decimated by the recession, added a surprising 21,000 jobs.

After the holiday rush, only 1,500 courier or messenger jobs were trimmed.

Bolstered by this positive data, the equity markets opened on a high note.  By midday, the Dow Jones was up 141 points.  The S&P was up 16.99 points and NASDAQ climbed 41.4 points. 

This is one surprise that Wall Street likes.  In view of Federal Reserve Chairman Ben Bernancke’s statements to Congress, the market was guarded because of a slower than expected growth in GDP.

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.

In a scene that resembles the gridlock in Washington, the likelihood of Greece continuing as a Euro Zone member looks dismal.  Rumors circulated today about the country’s dismal trajectory and the strong probability that regardless of what happens with these talks, Greece may not be a Euro Zone member 12 months from now.

That bitter dose of reality is cause for concern among potential investors.  The issue is as clear as the traditional bailout question, “Why pour good money after bad?”  Viewed in that perspective, who would invest in Greece?

What is remarkable is that this little country with a dreadful economy and track record and encumbered by a poor work ethic has positioned itself at the center of the economic universe.  Recently, the IMF presented compelling information and advice about the state of the global economy, the state of the Euro Zone economy and the impact of failure by the region to help its most desperate member. The greatest fear is that if Greece fails, other economies will also fail.

The private investors have retained Charles Dallara of the International Institute of Finance (IIF) to lead their negotiations with Greece and the other Euro Zone entities.  Private investors have offered a debt swap that calls for a 65 percent loss for current investments and a yield on 30-year rollover balances averaging 4 percent.  Greece has countered saying that the country cannot pay more than 3.5 percent.

Critics have begun to evaluate the consequences of an unstructured default.  If negotiators fail to cut a deal by the end of the month, there may not be any choice.

On Tuesday, the IMF released disturbing projections that indicate the Euro Zone failure will cause a global recession.  Here are the IMF’s salient points. 

• Global growth for 2012 was reduced to3.3 percent from 4.0 percent. 
• Global growth could fall to 1.3 percent if the Euro Zone continues stalling for solutions. 
• Growth in 2013 is expected to reach 3.9 percent. 
• The Euro Zone economy will contract 0.5 percent this year. 
• The U.S. GDP will grow by 1.8 percent in 2012. 
• Japan’s GDP was trimmed from 2.3 percent to 1.7 percent. 
• Overall growth in advanced economies will be 1.5 percent in 2012 and 2013. 
• Growth projections in emerging economies were pared from 6.2 percent to 5.4 percent. 
• 2012 Growth projections in China were trimmed from 9.0 percent to 8.2 percent but will bounce back to 8.8 percent in 2013. 
• Asia’s emerging economies will be loser to7.3 percent compared to original projections of 8 percent. 
• The area hit largest by the global slowdown will be evident in central and eastern Europe where 2012 growth may expand by a slim 1.21 percent. 
• Non-oil commodities are projected to increase by a stunning 14 percent. 

A leading analyst, Olivier Blanchard, said that if Europe did not arrive at a collective agreement to deal with the recession that has gripped the region, the impact on global GDP will be even more dramatic.        

In a written statement, the IMF said, “The most immediate policy challenge is to restore confidence and put an end to the crisis in the euro area by supporting growth while sustaining adjustment, containing deleveraging and providing more liquidity and monetary accommodation.”  While that is a formula for success, it sounds easier than it is.  

The elephant in the room is quantitative easing, the controversial printing of euros.  Quantitative easing is what enabled the U.S. and the UK to stay afloat at the outset of the recession.  It would result in lowering the value of the euro and faces some constitutional challenges, but given the traumatic state of politics and state economies there appears no other remedy.  To date, every other option has failed. 

If the Euro Zone fails, it is very possible the U.S. will trigger another round of quantitative easing.   

The Managing Director of the IMF and former finance minister for France has said that the failure to create a larger failsafe than currently exists in the European Financial Stability Facility will result in a 1930’s style global depression. 

The only recourse the Euro Zone has is to boost the bailout fund as soon as possible.  That is the only action that will quell investor doubts and show potential investors that the Euro Zone is serious about restoring confidence in the flamboyant market place that is under subscribing to the region’s bond auctions.

In the United States, what appears to be a recovering consumer confidence could be dashed if contagion in Europe is unchecked.    Japan’s projection for reduce debt was accompanied by a call for more stringent debt reduction.

The projections for 1.5 percent growth in advanced economies will not be enough to significantly ease high unemployment rates. 

The private investors in Greece have renewed their call for action by the Euro Zone’s public creditors.  Funds to meet Greece’s upcoming 14.5 billion euro call as part of the overall 130 billion relief fund recommended by the IMF are necessary to stem an unstructured default.    

Understanding the ESM and the EFSF 

The European Stability Mechanism (ESM) is a new and permanent platform that will swing into action in mid-2013.  The ESM was proposed and created under guidance by the European Union and is not restricted to act on behalf of the Euro Zone members.  Rather, the ESM is designed to service the 27 members of the European Union, except for Great Britain, whose finance ministers agreed to the concept on November 28, 2010. 

The ESM will expand the capabilities of the existing European Financial Stability Facility. This body will have wider enforcement and surveillance guidelines that will include the consenting EU members. 

Great Britain has declined to participate because the country uses its own currency rather than the euro.  The purpose of the ESM will be to prevent a recurrence of the ongoing crisis.  The agency will generate an evaluation of the EU by mid-2016 and to provide assistance to distressed economies. 

Private sector involvement will also be monitored by the EMS.  This activity will be studied on a case-by-case example.  Private investment will be consistent with guidelines established by the IMF. 

The hope is that stressed economies with liquidity issues will be relieved by the ESM.  When these economies seek assistance with investors, the ESM will help the troubled members negotiate a private solution that will encourage the investment.  Basically, this is a more transparent and comprehensive mechanism.  The ESM will not be available to interact with private investors until mid-2013.

The plan on the table would require investors to accept a 65 – 70- percent loss on current Greek obligations.  Greece would take the remaining balance and convert the balances to 30-year bonds that would yield an average of 4 percent.  The plan also calls for a 15 percent cash sweetener from  

Private investors left town but agreed to further discussions via telephone.  The private investors have retained The Institute of International Finance (IIF) handle their negotiations.  Charles Dallara is the chief negotiator.

While this general remedy creates an outline, there are many conditions and aspects of the negotiations that need to be resolved.  Drawing of the mere paperwork is tedious and could not be completed in less than three weeks from acceptance.

One of the big concerns is what role the European Central Bank, (ECB), the European Union (EU) and the International Monetary Fund (IMF) will play in the rescue plan.  Greece has an upcoming 14.5 billion euro call that is covered by the European Finance Stability Fund (EFSF).  All agreements are contingent upon that infusion.  The total bailout package consists of 130 billion euros.

The IMF has stated that no funds will be extended to Greece unless a plan is in place to reduce the debt from 160 percent of GDP to 120 percent by 2020. With Greece in the midst of its fifth recession, there is little hope for GDP growth.     

The finance ministers meeting in Brussels would have to approve whatever plan is presented and the clock is clicking.

Greece Calls The Shots

The bailout of Greece is about as far from a win-win scenario as could be imagined.  The only winner is Greece, the country who cooked their books to gain admission into the euro zone.  It is anybody’s guess what financial condition accurately portrays the depth of the Greek crisis.

Despite the pitiful condition of Greece, the country holds a stacked deck. The creditors must decide between a ”voluntary structured” loss or a “coercive” exchange. Taking a 65-70 percent hit strikes a stale note, but the alternative could be worse with far reaching consequences.

However, Greece’s creditors face the reality that the Collective Action Clauses (CAC) that will be attached to their debt.  If Greece activates these clauses, hedge fund managers have little control over how the final deal will be shaped.  As the majority of Greek bonds are held by euro zone banks. Greece simply needs to appease the banks and the hedge funds will be forced to comply.

Greece can structure the CAC to a loss ratio that European finance ministers will accept.  That 65-70 percent ratio will settle bank resistance.  If the bonds were handled on a one-on-one formula, the hedge funds would have more clout.  As it is, Greece will need to negotiate further with hedge funds.  They can simply force the deal upon the funds. 

Watch Out For Portugal

After the Greek negotiations fell apart, the focus immediately shifted to Portugal, another euro zone member in a prolonged recession.  Standard & Poor’s has reduced Portugal debt to junk bond status. 

This has led to speculation that Portugal will be the next country to seek voluntary relief from its creditors.  Lloyds Bank in London issued a statement saying that the gap between 10-year Portuguese bonds and the 10-year German bunds will widen between 100 and 200 basis points.

Euro zone finance ministers have repeatedly said Greece was a one-time situation but evidence points to the contrary.  The region’s biggest fear is contagion but countries like Italy, Hungary, Spain and Portugal are mired in recession and there seems no clear path to GDP growth.  Everything in the euro zone points to negative growth.  The net effect is that no matter how much money is thrown at these countries, without growth the crisis will only intensify.

In October, the euro rose to $1.3145 against the dollar.  Analysts believe that until the currency crosses that threshold the bottom has not been found. 

The Thursday bond sales in France and Spain will serve as a good barometer for how much the S&P downgrades have hurt the euro zone.  Investors are cautiously optimistic in the wake of a bond sale in Portugal that sold 2.5 billion euros in debt and was fully subscribed.  Germany’s Wednesday auction also had more demand than anticipated.

Since last Friday, the dollar index has fallen from 81.784 to a two-week low of 80.473.  The Australian dollar gained strength climbing to an 11-week high of $1.0419. The Australian dollar is holding well above its 200-day moving average.  Australia is believed to have added 10,000 in December.

The Dow Jones equities continue to holdover 12,500.  Much of that support is the result of better banking news than expected.  The major financials appear to have fared better in the 4^th quarter and will not require additional capital.

The positive euro zone activity seems foolhardy.  Greece is meting with private investors on Thursday in a last gasp effort to gain approval for their debt swap program, which is little more than a restructured default.

The structured default must occur by week’s end to avoid a breech in the 13.4 billion euro call in March.  Another major problem looms.  There is doubt that investors and hedge funds burned by Greece will stay out of the European bond sale market.  U.S. equities are strong and the dividends are especially appealing.

Treasury Secretary, Tim Geithner, informed the IMF that Europe would have to solve their own problems. U.S. taxpayers cannot come to the aid of countries like Greece, Italy and Spain.  The people lack the will and are clearly supportive of more aggressive jobs legislation.  The political fallout from a bailout of Europe would be devastating to President Obama. 

On the other hand, the European banking sector fell 32 percent in 2011.  Even with a temporary rescue plan, Greece will continue to need funding and Euro Zone members will face this same crisis sooner rather than later.  It is time for private investors to take what little money they can and let Greece go its own way. The negotiations with private investors are tense and it is difficult to see why hedge funds and other investors would throw good money after bad.  That is a business model that is fine with Greece but has no appeal to larger markets.

The struggling country is in its fifth recession but has few sympathizers for a nation that rigged the books to gain admittance into the euro zone. Although most private investors have agreed to a structured default and have agreed to accept as much as a 50 percent loss in credit default swaps, the banking sector is not on board.

In order to meet a 14.5 billion euro call in late March, Greece must put a deal together immediately or prepare to file bankruptcy. Negotiations ground to a standstill when banks demanded higher interest rates on new bonds and also demanded a security plan for potential investor losses.

The two sides will not meet again until Wednesday. Meanwhile, Prime Minister Lucas Papademos sent his top financial aides to Washington to meet with the IMF. Reports from the negotiations blame the failed negotiations on the European Central Bank (ECB), the International Monetary Fund (IMF) and the European Union (EU).

This powerful troika is due in Athens at week’s end. The purpose of the visit is to arrive at an agreement for another round of the bailout funds. Greece seeks 130 billion euros to reduce their debt to GDP ratio from 160 percent to 120 percent.

If the risks were not so dangerous, Greece’s situation would be laughable. Despite the country’s long recession, there is no evidence that suggests the country can support any debt, much less 120 percent of GDP. The prospect for economic growth is dismal. The most optimistic analysts project negative GDP for the next three years. It is time for the world and the euro to face the inevitable. Investing in Greece is the classic equivalent of throwing good money after a bad investment.

Greece lacks the political, social and economic will to change the country’s trajectory.

Following Friday’s sobering downgrades, global investors have had to look failure squarely in the face. Countries do fail. Currencies do fail. The failure of Greece does not have to take the rest of the euro zone with it. Rather than throw another 130 billion euros to Greece, conservatives want to use the funds to shore up other economies in the euro zone.

As banks and private investors explored possibilities, it became clear that Greece might need to ask investors to take a 75 percent hit plus issue new bonds at 2-3 percent. Investors want a 50 percent reduction and a minimal interest rate of 4 percent on new notes.

Adding to the confusion is the very likely fact that Greece will need even more future funding than the newest 130 billion euro tranche. An assistant German finance minister said that the euro zone does not want a temporary fix but wants a one and done workout plan. Throughout the region, Friday’s downgrade has been less disturbing than the plight of Greece.

According to S&P, Ireland avoided a downgrade.  Likewise, Finland and the Netherlands survived the rating’s scrutiny and will retain their AAA ratings. The news was not so good for France, which fell one notch from AAA to AA+.  Not to be lost in the rubble, Austria lost its AAA rating and fell one notch.  Portugal and Spain fell two notches. Italy collapsed from A to BBB.  There was no news from several other Euro Zone members who are awaiting the axe. 

This week, Spain’s three-year bond auction was fully subscribed giving cause for optimism.  But, one day later, Italy’s 3-year bonds fell short of expectations and highlighted the stress Italy will have to overcome in bond sales over the next three month.  Even at near record yields, private investors cannot warm to the Italy. 

Germany has dodged the bullet this time around but the government is pouring money into the system at unprecedented levels.  Another disappointing bond sale in Italy and the ongoing hedge fund battle with Greece weigh heavily on the euro zone.  Greece has a 14 billion euro call in March.  Without help, Greece cannot meet this obligation. 

Highlighting investor’s aversion to long-term euro zone bonds, investors are desperately seeking more relief from Greece.  One cannot imagine that any deal with Greece is simply kicking the inevitable doomsday down the road. 

This aversion has put the ECB in dangerous waters.  The central bank left interest rates unchanged at 1 percent.  The ECB has made low cost, three-year loans to member banks.

On Friday, the euro fell to a 17-month low at $1.2623.  Against the yen, the euro fell to an 11-week low at 97.28. The collapse of the euro bond market has increased demand for U.S. Treasuries, JGB’s and Swiss bonds.

After trading hours, several analysts reported to CNBC that if the euro can hold the $1.26 level, they would play the currency to climb to $1.30.  However, the $126 mark is key.  If the euro falls below this threshold, investors expect a steep downward slide.  Conditions do not merit the $1.30 value.

What is sustaining the market now is the ECB’s aggressive lending which has created a risk play of borrowing at 1 percent and purchasing high-yield Italian (6.73), French and Spanish bonds.  In spite of these favorable yields, euro member bond auctions show a troubling trend as consistently under subscribed.

The elephant in the room is China.  Thus far, the elephant has been passive but looming in the brush.  These downgrades are likely to have a ripple effect.  Previously, China had stayed with the euro zone bond markets but how they will react to the downgrades is likely to quiet their appetite.

Greece continues to suggest that they will strike a deal with investors and insurance companies who have been cool to taking a 50 percent hit on their investments.  Rumors from hedge fund investors suggest that private equity will not be invested in Greece unless substantial concessions are made by Greece.

One unnamed source, privy to the negotiations, reported to Reuters, “Yesterday, we were optimistic and confident. Today, we are less optimistic.”  Private investors have been less receptive to Greece because of the ongoing bad news for an economy that is not marketable and will not grow for at least three years.  Rumors persist that if Greece is unable to strike a deal with its private/public investors, the country will return to its own currency and be expelled from the euro zone.  Unfortunately, the outcome will send ripples through the entire global currency and equity markets.  The Euro Zone members will be especially hard hit.

In after hours, S&P confirmed the downgrades but made it clear that the German “austerity” programs were not enough to ease pressure from the ratings agency.  Some CNBC contributors warned listeners to expect that massive quantitative easing is probably the failsafe.  Not only will the euro plunge, but other currencies will also take hits.

In terms of quantitative easing, analysts acknowledge this is the only way to save Europe, but it will come at a steep price.  In Friday, there were reports that the U.S. Federal Reserve was preparing for another round of quantitative easing.  Next week has the look of a point in time that will be in every history book.  Unfortunately, it seems unlikely that the news will be bullish.

What was particularly interesting was that Washington received the news very quietly.  For once, Congress was not rushing to then podium to score some divisive political points.  By all accounts this job report was better than expected.  That does not mean there are some inflated seasonal jobs, but the economy is plowing ahead.

The information sparked a very short rally on Wall Street, but the disturbing news from Europe soon sent equity markets lower.  The euro is poised to fall below $1.27.  News from Spain was discouraging.  Greece fails to make headway.  Hungary has now joined the failed economies in the euro zone as S&P lowered the credit rating.  Germany released manufacturing data that showed improvement.  Overall, investors have one eye on the euro zone and a majority of bets is on the short side.  The strongest currency plays were long LatAm.

The jobs progress has tempered the possible action plans from the Federal Reserve.  The prospect for a third round of Quantitative Easing  (QE3) seems lower with this news.  A steady rise in private job growth gives President Obama a gigantic lift. 

The President will get credit for this progress that has been accomplished in the face of a Republican House that has not offered one constructive jobs plan.  Americans are celebrating the fact that the most ineffective Congress in history is home.

Robert Binche, the global head of currency for RSS in Stamford Connecticut, explained the market reaction to the positive report.  “It is a pretty solid report.  This is the fifth month of the year that private payrolls were up 200,000.  That is a good sig.  The only caveat is that construction is that construction employment was up17,000 jobs that won’t get repeated anytime soon… We’re at a point where the divergence in U.S. growth and the rest of the world is becoming noticeable.”

The positive report helps to explain the rise in consumer confidence.  The decreasing claims for unemployment comes in the face of difficulties with the country’s biggest importers, Europe.  The troubles in Europe will be most destructive to the US banking sector.

The Chief Economist for Pierpoint Securities believes that the key indicators in US growth have actually been favorable for some tine. However, the dramatic weather catastrophes in 2011 slowed even more favorable economic data.

Most analysts received the news with tempered enthusiasm.  The influence of seasonal employment is the cloud over the report.  In December, government lost 12,000 jobs.  

Below is a summary of the Employment Report issued by the U.S. Department of Labor: 

Annual

1.                 Nonfarm payrolls increased by 200,000 in December
2.                 During 2011, nonfarm payroll has increased by 1.8 million jobs.
3.                Government jobs (Federal, state, municipal and postal) lowered by 280,000 in 2011.

 In December

1.      Transportation and warehouse added 50,000 jobs
2.      Couriers and messengers added 42,000 jobs
3.      Retail sector added 28,000
4.     Manufacturing added 23,000 jobs
5.      Mining added 7,000
6.      Health Care added 23,000
7.      Construction added 20,000
8.      Leisure and hospitality added 24,000

The average workweek also improved in December.  Hours hedged upwards by 0.1 hour  per week to 34.4 hours.  Manufacturing hours improved to settle at 40.5. 

This progress could be seasonal, but it does speak volumes about the importance of the payroll tax reduction extension.  It seems like Americans are so disgusted with the Republican created stumbling blocks, that President Obama’s approach to carry the message to the people has been effective.

But, when Europe is involved, sweet news can turn sour in an instant.  Damaged by Friday’s report of Spain’s larger than expected deficit, the country’s new government immediately announced tax increases and frozen ages for government employees.  Spain was thought to be in a better place now that their bind auction has been fairly stable and as the yields have steadily decreased.

But, Spain has serious issues.  On Wednesday, France’s President, Nicolas Sarkozy, and Germany’s Chancellor, Angela Merkel, showed a united front in staring down an almost certain credit rating trimming by S&P.  The ratings agency is expected to announce a downgrade of every euro zone member (17) in the next few weeks.

Mark Wall, a London-based economist with Deutsche Bank, explained some of the concerns the downgrade would have on Germany’s relationships with other regional nations.  “There is a question about the balance of power if we see France downgraded first.  If we move to a world in which France is not Triple A, will Germans see themselves as carrying the financial bags for the rest of Europe?  There may be a political impact at the national level.”

A downgrade would probably end the Sarkozy government, which already faces an uphill climb to hold office in the two tiered April – May elections.  In Berlin, Merkel’s approval rating has dipped substantially.   Her party now holds a one-seat majority in Parliament.  To get any legislation approved, Merkel needs the help of other parties.  Thus far, she has proven to be adept in this climate but further Germans are unhappy about how their tax dollars are being spent.

It appears that France will suffer the downgrade.  France’s debt level is now a shocking 85% of GDP.

Sarkozy has a lot on the line.  If the country suffer a one-notch lowering, the President is likely to be voted out of office.  With a two-notch dip, Sarkozy can start packing his bags.  He has navigated a slippery slope since the Europe entered the second leg of a recession. 

He has survived by linking himself to Merkel and Germany.  But, the blush is gone and Sarkozy may stand beside Merkel, but any rating cut will jeopardize the relations between the euro zone’s two biggest economies.

Sarkozy won the presidential election of 2007 on the heels of a pledge to decrease unemployment.  With the 2008 recession, that pledge has flown by the wayside.

US Growth Encouraging

The global marketplaces responded favorably to economic data and to minutes form December’s Federal Reserve that seemed to indicate a readiness to issue more stimulus funding.  There was relief from Germany and China that reflected some improvement in the economies.

In December, US manufacturing rose to its highest level since June 2011.  The volume of new orders indicates the recovery is continuing to get legs.  Surprisingly, construction in the US surged to its best level in 18 months.  The construction industry has been extremely hard hit since the recession.  Any job growth in this sector is a big lift to the economy.

On Tuesday, the Dow Jones industrial average added a robust 215.86 points increasing by 1.76 percent. The S&P 500 and Nasdaq added 1-76 percent and 1.80 percent respectively.

The euro also enjoyed the promising news and settled sat $1.3076, up from $1.2858 last week.  The euro climbed based on the encouraging growth in manufacturing and on the analysis of the Federal Reserve minutes.  European stocks closed at their highest levels in five months.

According to MSCI, global stocks jumped a heft 1.93 percent, but investors are still grappling to find something real.  Long-term investment opportunities are few and far between.  The chances of any stability in world markets remain low until the euro zone stabilizes its banking sector.  Thus far, there has been a lack of the political will to put activate a solid plan.