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Europe’s crisis claims another victim: Romanian PM falls

Brussels — IMF says bailout deal not affected by resignation of prime minister who pushed through wage cuts, tax hikes.

Portugal: the new Greece

Unsustainable bond yields being used to finance unpayable debts.
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Things are really rough all over the Iberian peninsula as Portugal's Prime Minister Pedro Passos Coelho (R) seems to be telling his Spanish counterpart Mariano Rajoy. (PATRICIA DE MELO MOREIRA/AFP/Getty Images)

In Portugal the numbers are all bad:

The deficit is 9.1 percent of GDP. The economy is expected to contract by anywhere between 3.1 and 5 percent this year. It took a bailout from the EU, ECB, IMF "troika" of 78 billion euros ($102.6 billion) and will have a hard time paying it back because its credit rating is now "junk." Five year bond yields yesterday broke a record: 18.9 percent. Three year bond yields hit 21 percent.

Oh, and unemployment stands at a record 13.2 percent.

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Austerity bites, pt. 2

Second thoughts about austerity cuts as the cure for what ails Europe's economies
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Retired hedge fund manager George Soros at Davos today. He expressed concern that the euro zone's austerity policies would create social unrest that would engulf Europe. (VINCENZO PINTO/AFP/Getty Images)

Austerity cuts seems to be the theme of my blog posts today. Heavily indebted European governments need to "deleverage," as the current buzz word has it, but how far and, crucially, how fast?

In Britain, despite warnings from the opposition Labour Party about the pace and size of cuts doing more harm than good, Britain's Conservative-led coalition government has reduced the size of government spending with abandon. Predictably Prime Minister David Cameron's austerity program has landed the country on the door-step of a double-dip recession. The economy contracted in the last quarter of 2011 by 0.2 percent.

At Prime Minister's Question Time today, Cameron contemptuously swatted away criticism from Labour leader Ed Miliband. But that is party politics. The IMF's chief economist Olivier Blanchard is no left-wing politician and he told the BBC today it would be wise for Cameron and his Chancellor of the Exchequer George Osborne to slow down the pace of the cuts.

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IMF report sharply downgrades global growth and blames the euro. European daily economic round-up

IMF dramatic revision of figures projects euro zone as a whole will be in recession in 2012

The IMF has sharply cut its growth forecast for the global economy this year and reason number one is the euro area. Just last September, in its World Economic Outlook, the IMF had projected world output to grow by 4 percent in 2012, now because of the euro zone debt crisis it expects growth of just 3.3 percent. The organization made clear what this dramatic reassessment means.

“Given the depth of the 2009 recession, these growth rates are too sluggish to make a major dent in very high unemployment,” the IMF said.

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Greek debt talks: European economic daily round-up

Greek debt talks, IMF's Lagarde talks, financial markets talk

The Greek debt talks continued today. The sticking point remains the rate of interest bondholders will be paid on new issues of Greek sovereign debt. The idea is they will exchange their current bonds for new ones that are at least 50 percent less in face value. (Friday I saw speculation that they might be worth between 65 and 70 percent less.)

When you take that big a haircut now, you want something sweet to look forward to down the road. The Greek government doesn't want to give what's left of its future away to high interest rates on these new bonds. We'll see.

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Berlin resists pressure from Lagarde and Monti to bolster European Stability Mechanism bailout fund

BERLIN — A week ahead of the EU summit, pressure is growing on Angela Merkel to expand the euro-zone rescue fund.

IMF needs more money. Europe daily economic round-up

Cash calls, rhetoric and continued stable markets.
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British Prime Minister David Cameron and his Italian counterpart Mario Monti at Downing Street today (DANIEL SORABJI/Getty Images)

The big European news of the day came from IMF headquarters in Washington. The IMF announced it had begun discussions with members about raising an additional $500 billion for the fund. The IMF believes it needs $1 trillion on hand, according to its statement.

"Based on staff's estimate of global potential financing needs of about $1 trillion in the coming years, the Fund would aim to raise up to $500 billion in additional lending resources. This total includes the recent European commitment of about $200 billion in increased Fund resources."

This led to the quote of the day (courtesy Daily Telegraph) from the IMF's Olivier Blanchard:

"Post the 2008-09 crisis, the world economy is pregnant with multiple equilibria—self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications."

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Pimco is the world's largest bondholder and when its CEO Mohamed El-Erian speaks people tend to listen. Today the Greek newspaper eKathimerini has an interview with El-Erian in which he says the famous 50 percent haircut for Greece's bond holders is not enough.

"According to our analysis, 50 percent is not enough for Greece to restore credibly the conditions for medium-term debt sustainability and economic growth. A 50 percent haircut would still leave open way too many questions about Greece’s economic and financial outlook," the CEO told the paper.

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Euro zone debt crisis: focus returns to Greece

Negotiators head to Athens to try and nail down agreement on bail-out
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The rioting has calmed down in Athens but negotiations on the Greek bail-out aren't going so well. This week is crunch time and depnding on what's decided the streets may catch fire again. (LOUISA GOULIAMAKI/AFP/Getty Images)

You may have thought the Greek crisis was pretty much over. After all the headlines from last November were: Greek bondholders agree to take a haircut and the country's Prime Minister George Papandreou resigns to be replaced by a technocrat named Lucas Papademos, who is more congenial to the needs of the EU's leadership in Brussels, and more important, to German Chancellor Angela Merkel.

But as focus shifted to Italy and now to France, the Greek situation has remained bogged down in details. This week Greece's creditors in banks and hedge funds (not necessarily interested in the same outcome) plus representatives of the "Troika" (EU, IMF and European Central Bank) descend on Athens for an intensive round of negotiations with the Greek government.

Larry Elliott at The Guardian has the best line of the day on the event. "It is international finance's version of Sartre's Huis Clos, a vision of hell where three people who loathe each other are stuck in a room for eternity."

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Hungarian government back tracks: a little

Foreign minister Janos Martonyi indicates controversial constitutional changes may be rescinded
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Hungarian Foreign Minister Janos Martonyi surrounded by the stars of the EU. The EU is demanding the Hungarian government restore independence to its central bank as a condition of backing its request for bailout funds from the IMF. (GEORGES GOBET/AFP/Getty Images)

Debtors can't be choosers is the lesson for Hungary's extreme right-wing government. The government of Viktor Orban has brought in major constitutional changes in recent weeks The Hungarian opposition say these undermine democracy via rigid gerrymandering of electoral districts and restrictions on freedom of the press among other things.

The IMF, from whom Hungary wants more money, is exercised by constitutional changes that undermine the central bank's independence. So is the EU which must give its bona fides for Hungary to get the loan. No more money until that problem is fixed.

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