Is the Euro well and truly buggered?

The problem at hand iun Europe is high, unsustainable debt levels and an increasing unwillingness on the part of lenders to buy the bonds or debt of profligate countries

Standard and Poor's has put Germany, France and 13 other eurozone countries on "credit watch" due to fears over the impact of the debt crisis.

S&P's move means that countries with top AAA ratings would have a 50% chance of seeing their rating's downgraded.

The news came as a surprise to investors and saw stocks fall back on early gains as the euro also fell.

S&P said there was "downward pressure" on the whole eurozone's credit standing.

"Today's CreditWatch placements are prompted by our belief that systemic stresses in the eurozone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the eurozone as a whole," S&P said in a statement.

Cycloptichorn wrote:

Reducing gov't spending often leads to larger deficits as Austerity causes a slowdown in the economy in question, and a major drop in tax revenues. What you posit here simply isn't as cut-and-dry as you make it out to be.

Cyclolptichorn

Odd then that you don't credit tax reductions coupled with reduced government spending as a stimulus to economic activity (and subsequent tax revenues).

Since the "major drop in tax revenues" following a reduction in government spending is but a small (or even zero) fraction (assuming the spending is not on high tax rate payers) of the reduction in spending, the net effect will clearly be a reduction in government deficits.

MUNICH -- The clients want their money, and they want it in cash. Whether it’s because they need it to get by, or because they fear the drachma will return, many Greeks are pulling their money out of their banks. The hemorrhage is so big it threatens to sink some banks altogether.
The situation looks critical in other euro zone crisis countries as well. So far, bank customers wanting to withdraw their money haven’t suddenly descended on the banks in droves. But in Ireland, Spain and Italy, an invisible – though no less threatening – bank run is ongoing. Statistics from national central banks show that billions of euros are flowing out of Irish, Spanish, Italian and even French banks.
The most flagrant example is Greece. There, since the end of 2009, deposits in commercial banks have dropped 25%, down 60 billion euros to 180 billion euros as of this past October. In Spain and Italy too, business clients in particular are turning away from their banks. "Companies have started withdrawing their funds from banks in Spain, Italy, France and Belgium," says Kinner Lakhani, an analyst at U.S. banking giant Citi.
At the two biggest Spanish banks, BBVA and Santander, deposits by businesses and institutional investors fell by more than 10% in the third quarter alone. Italy‘s Unicredit also lost 10% of its deposits, while rival Intesa suffered a whopping 16% loss. Also affected by lack of client confidence are some French banks, particularly Société Générale, but also market leader BNP Paribas.
For banks, the result has been serious liquidity problems. The drop in deposits is partly to blame, but the bank run is taking place on several other levels as well. Money market funds, struggling with high outflows, are no longer buying short term securities from the banks, and there are no takers for long-term bank bonds. Since the end of June, some 17 billion euros in unsecured European bank bonds have been sold. At the same time last year, that sum was 120 billion euros.
Many European credit institutions have been virtually squeezed out of the interbank market -- bankers are lending very little, whether it be in euros or dollars, to each other. That means the banks’ main financial sources have dried up. They are being drip-fed by the European Central Bank (ECB), which is generously keeping them going with short term credits.
Cash flowing northward
Scandinavians banks are the main beneficiaries of banking problems in the so-called PIIGS (Portugal, Ireland, Italy, Greece and Spain) nations. "People are fleeing the euro zone," says Georg Andersen of the Nykredit in Copenhagen. "The northern countries are proving to be more secure ports." A lot of money belonging to businesses, insurers and pension funds is going to Swedish banks like SEB and Swedbank. Investors also perceive Germany's Deutsche Bank and the Dutch bank ING as secure places for their money.
Those who are able to shovel money directly to the European Central Bank (ECB). Some German car manufacturers and Siemens, which have banking licenses, have quietly and secretly put cash reserves with the ECB in Frankfurt, where it is protected from any potential bank failures.
Both banks and governments are in a vicious circle. The worse the debt crisis gets, the more the bonds of highly indebted euro members lose value – and the worse it gets for the banks. Particularly hard hit are institutions like BNP Paribas and Société Générale, but also Commerzbank, which lent PIIGS money. Bad notes from the ratings agency make the situation that much more complicated. One thing is clear: unlike in 2008, the industrial western nations no longer possess the strength to rescue every bank and guarantee client deposits.
Capital flight already has one victim: Dexia Bank collapsed because it couldn’t get any money short term. The united action taken by the central banks, including the Fed and the ECB, last week turned on the money faucet – and stokes the suspicion that there may be other banks facing collapse. The more difficult it is for banks to cover their financial requirements, the greater the danger that a large bank fails.
People haven’t lost complete confidence in their banks – not even in Greece. But it cannot be excluded that the nightmare of a spiraling run on deposits becomes reality, with clients suddenly turning up in droves saying: “I want my money.”

Correct; something that was obvious from the very beginning.

That's a frightening trend in cash transfers to Scandinavia, because it leaves banks without liquidity, and their inability to operate as banks. With the trend of bank bankruptcies in the US, it's not surprising to see that the Euro country banks are in worse shape

In an interview published in the Saturday edition of the British newspaper, Daily Telegraph, former European Commission president, Jacques Delors, said that the euro currency is inherently flawed.

Delors also accused current European leaders of amplifying the crisis by doing "too little, too late."

The former EU leader, who was Commission chief from 1985 to 1995, blamed the current crisis on "a fault in execution" by politicians during the currency's early years; in particular, their refusal to acknowledge the threat caused by imbalances in the economies of member states.

"Everyone must examine their consciences," the 86-year-old EU veteran told the Telegraph. "The finance ministers did not want to see anything disagreeable, which they would be forced to deal with," he said.

"Too little, too late" is the nature of the beast called the Euro with 17-countries trying to agree on a solution. They should have known that increasing the number of members makes agreements exponentially that much more difficult. They should have learned that lesson by observing how difficult it is for one country's politicos to arrive at agreements on anything.

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Since the "major drop in tax revenues" following a reduction in government spending is but a small (or even zero) fraction (assuming the spending is not on high tax rate payers) of the reduction in spending, the net effect will clearly be a reduction in government deficits.

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Economic cycles are also part of the game that most are aware of, and should be prepared for. No rocket science here.

Many Americans, understandably heartened by the Arab Spring, seem to believe that democracy is on the march. And it is — backward.

It’s Europe where democracy is in headlong retreat. There, the leaders of the continent’s largest nations — German Chancellor Angela Merkel and French President Nicolas Sarkozy — have asked their fellow European leaders to relinquish control of their national budgets to unelected European Union technocrats and judges. Any nation whose budget deficit exceeds 3 percent of its gross domestic product will face (as yet unspecified) financial sanctions, which can be suspended only by a supermajority of other E.U. member nations’ leaders.

The economic consequences of this piece of misapplied fiscal puritanism are frightening enough. If the other E.U. nations agree to it, they will be consigning their citizens to years, maybe decades, of declining living standards. If a country is in recession — and some European nations already are — it will not be able to make job-creating investments. What’s more, a balanced budget is no guarantor of economic health. Spain, for instance, was running budget surpluses right up until its privately funded housing bubble collapsed. When unemployment soared to 20 percent, its budget inevitably plunged into the red. But the changes proposed by Merkel and Sarkozy do nothing to curtail the cycles of speculative boom and bust. By prohibiting governments from enacting Keynesian stimulus legislation, they merely make it all but impossible for a country like Spain to recover.

So why would the European leaders scheduled to vote this week on the Sarkozy-Merkel straitjacket agree to put it on? Why would they surrender their hitherto sovereign power to the bean counters of Brussels? The answer is that markets leave them little choice. The interest rates they pay to float the bonds they need to stay in business have risen to ruinous heights for the less-productive nations of Southern Europe, and now Standard & Poor’s is threatening to lower the credit ratings — effectively raising borrowing rates — of the very productive nations of Northern Europe. Germany is being threatened with a rate hike not because of its conduct but because it is in the middle of a shaky neighborhood.

Like S&P’s August downgrade of the U.S. credit rating after congressional floundering over the debt ceiling, its threat to downgrade Europe on the eve of the vote to terminate national fiscal sovereignty illustrates a huge power shift in human affairs. As investment banker Roger Altman, a deputy Treasury secretary in the Clinton administration, recently noted in the Financial Times, financial markets have become “a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes. . . . [L]eaving aside unusable nuclear weapons, they have become the most powerful force on earth.”

Altman rightly attributes this epochal shift to the huge increase in financial assets and the concomitant rise in global financial flows. Financial deregulation and the emergence of mega-banks “expanded the scale of finance” so greatly that it came to dwarf and then dominate the real economy. From 1990 to 2007, the ratio of global financial assets to global GDP rose from 2.5 to 1 to nearly 3.6 to 1. The ratio of financial power to governmental, democratic and popular power can’t be quantified so neatly, but it has increased hugely as well.

The turmoil in Europe is commonly depicted as a fight between Germany, which wants its neighbors to adopt fiscal constraints, and the feckless southern countries. In a larger sense, though, Germany is merely fronting, however unwittingly, for global finance. This is no small irony, considering that Germany has kept its financial sector small and frowns on speculation. Indeed, the one major concession Merkel made in her agreement with Sarkozy was to abandon her position that banks and other investors would have to settle for less than full repayment of their loans when Europe restructures its nations’ economies. The new European compact will require governments and citizens to get by with a lot less, but banks — even when they’ve been the cause of economic collapse, as they were in Ireland and Spain — will emerge unscathed. Public profligacy is punished; private profligacy goes unchecked.

A global supra-government — unelected, unaccountable and unconcerned with the general welfare — has emerged. It has nothing to do with the United Nations; it doesn’t fly around in black helicopters. Gulfstream jets are more like it. And whatever 2011 may be, it’s not a good year for democracy.

Just wondering if "greed" played any part in this whole mess called the Euro?