September 27, 2023

Greek Tax Crackdown Yields Little Revenue

Politicians, business executives and bankers are being raked through the headlines or incarcerated in a white-collar crackdown as the Greek government goes after people suspected of tax dodging. Those under questioning include the former finance minister George Papaconstantinou, in a highly charged parliamentary investigation into his handling of a list of Greeks with foreign bank accounts.

“Why do you think they are catching all these people?” Mr. Papaconstantinou said in a recent interview, in the suffer-no-fools manner that defined his two years as finance minister until the current government took power last June. “Because we changed the laws to allow the government to do this.”

But those changed laws, and the populist pursuit of supposed deadbeat fat cats, have yielded little in additional tax revenue.

Tax evasion lies at the heart of the Greek financial collapse, which has resulted in international bailout loans exceeding 205 billion euros, or $266 billion, the size of Greece’s depressed economy. In fact, Greece’s international creditors have made revamping its notoriously lax tax system a primary condition for any additional bailout financing.

But even after an overhaul of Greece’s tax collection apparatus — and a politically charged campaign to pursue delinquents — government officials have collected only a tiny fraction of what is owed and potentially collectible.

Rather than capture a lot of extra money, the crusade seems mainly to have captured prominent quarry. The net cast by newly empowered prosecutors has snared the former mayor of Salonika, the leader of the Greek national statistical agency and several former cabinet members.

Lawyers and tax officials estimate that hundreds of people have been locked up in the last year, suspected of tax evasion. Under the new laws, someone who owes the government more than 10,000 euros in taxes can be arrested on the spot and given the choice between paying up or being put behind bars. While held, the suspect can wait as long as 18 months before the prosecutor decides on a formal charge.

Despite those efforts, of the estimated 13 billion euros that government officials say is owed by Greece’s 1,500 biggest tax debtors, only about 19 million euros has been collected in the last two and a half years.

Among the few to benefit from the crackdown have been criminal defense lawyers specializing in tax law. Among them is Michalis A. Dimitrakopoulos, who represents many of the top political and business figures under government investigation or behind bars. His clients include the daughter and the former wife of Akis Tsohatzopoulos, a former defense minister and Pasok party official, all of whom are on trial on charges of money laundering and taking kickbacks.

Mr. Dimitrakopoulos, who proudly shows visitors to his office a wall covered with framed clippings of his courtroom exploits, says business has never been better. But he also says he has clients with many billions of euros overseas who will never bring their money back to Greece as long as — as he contends — killers have better legal rights than tax offenders.

By any measure, that is hyperbole.

Legal specialists note, for example, that Mr. Papaconstantinou, the former finance minister, is awaiting the outcome of the parliamentary inquiry in his case from the comfort of his suburban Athens home. They say it is unlikely he will ever serve time.

Mr. Papaconstantinou declined to discuss the allegations against him: that he doctored the so-called Lagarde list, named for Christine Lagarde. Ms. Lagarde, now managing director of the International Monetary Fund, was the French finance minister in 2010 when she gave Mr. Papaconstantinou a computer disk containing the names of Greeks who had Swiss accounts with HSBC Bank. The file had been stolen by a French former employee of the bank and ended up in the hands of France’s government.

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Former Top Cypriot Bankers Cited in Report

LONDON — Two of the most senior executives at Bank of Cyprus may have deleted crucial e-mail documents last year relating to what proved to be a disastrous decision to invest heavily in Greek government bonds just before Greece’s international bailout in 2010, according to an investigative report commissioned by the central bank of Cyprus.

The report said forensic experts found that the computer belonging to the bank’s former chief executive, Andreas Eliades, who was forced to resign last summer, had “wiping software loaded which is not part of the standard software installations” at the Bank of Cyprus.

Investigators also found such software on the computer of Christakis Patsalides, a senior executive in the bank’s treasury department who, according to the report’s findings, was one of the masterminds behind the decision to buy the Greek government bonds. Mr. Patsalides has also left the bank.

Efforts to reach Mr. Eliades and Mr. Patsalides late Thursday were not immediately successful. The report said Mr. Eliades did not “participate or assist” in the investigation, despite being urged to do so by the bank and its outside lawyers.

The Bank of Cyprus, long considered the better run of the two large banks that have been at the center of the Cypriot bailout debacle, decided to speculate by accumulating a €2.4 billion position from late December 2009 until June, just as the Greece government was running out of money.

That decision resulted in the Bank of Cyprus sustaining a loss of €1.9 billion, or $2.5 billion, when bond investors were eventually forced to take a 75 percent discount on the value of those bonds under the final terms of the Greek bailout, worked out last year.

That loss, and the larger one absorbed by the other big Cypriot bank, Laiki Bank, in a similarly misguided investment foray, together totaled €4.5 billion. That was more than Cyprus, with a gross domestic product of only €18 billion, was able to sustain. And the losses resulted in a near-collapse of the Cypriot banking sector, leading the island’s government to see a €10 billion bailout from the troika of international lenders: the International Monetary Fund, the European Commission and the European Central Bank.

Under terms of the bailout, the Bank of Cyprus’ biggest depositors will be forced to take losses of as much as 60 percent to help absorb the cost of cleaning up Cyprus’s financial mess.

The issue of how the banks became laden with Greek government bonds has become an explosive issue in Cyprus as politicians and regulators scramble to explain to furious taxpayers why the country has been forced to impose harsh measures on bank clients of all sizes, including restrictions on fund transfers and withdrawals.

A committee of judges has already been appointed by the government to get to the bottom of the matter.

The report that surfaced Thursday had been commissioned by the Cypriot central bank last August, well before the country’s bailout was made final. The central bank hired Alvarez Marsal, a financial consulting firm, to investigate how and why the Bank of Cyprus had come to make such a high-risk gambit — one which, in the end, would push Cyprus to the verge of bankruptcy. Investigators say that from Aug. 12, 2012, the central bank had ordered that all electronic data at the banks be preserved.

The report did not say when the file-wiping software on Mr. Eliades’s and Mr. Patsalides’s computers was installed. But investigators did suggest that digital documents could have been disposed of during the many delays that followed the Alvarez evidence request.

The findings of the Alvarez Marsal report, especially the claim that top bank executives may have obstructed a central bank investigation, are likely to resonate widely in Cyprus. And while the top executives and board members most closely tied to the Greek bond purchase are no longer with the banks, the allegations could raise further questions about the Bank of Cyprus’s ability to survive as a viable financial entity.

Under the terms of the bailout, Bank of Cyprus will take on €9 billion of short-term loans provided by the central bank to Laiki Bank, which is being shut down.

But bankers and lawyers are only now discovering that the Bank of Cyprus will also be saddled with €6.7 billion of Laiki’s nonperforming loans.

Originally, it was thought that these most toxic of Laiki’s assets would remain in its bad bank so as not to further infect the Bank of Cyprus’ already dubious loan book.

The Alvarez Marsal report provides new details on the extent to which Bank of Cyprus executives were hoping that the high yields generated by the Greek bonds would cover the bank’s imploding loan book. More explosive, though, was the claim made by the report that the bank was obstructing its investigation well into last autumn.

“Mass deletion of data appears to have been undertaken on the Patsalides computer on 18 October 2012,” the report said.

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Off the Charts: Seen From Greece, Great Depression Looks Good

The Greeks can only wish they had it so good.

The Greek government this week released its estimate of economic output in the fourth quarter of last year, and also published its unemployment report.

For the year as a whole, the Greek economy, measured in 2005 euros, fell to 168.5 billion euros, down 6.4 percent from the previous year. That was a little better than the 7.1 percent decline in 2011. The last time the Greek economy was smaller than in 2012 was in 2001. The cumulative decline since 2007 was 20.1 percent.

In December, the unemployment rate was 26.4 percent, and that figure actually looked a little encouraging because it was lower than the 26.6 percent reported for November. Not since May 2008, when the rate fell half a percentage point to 7.3 percent, had there been a single month when the unemployment rate was reported to have fallen.

The accompanying charts compare the changes in gross domestic product and unemployment in the United States during the five years after 1929 with the changes in Greece during the five years after 2007.

There is reason to take all the numbers with a grain of salt. The American figures were estimated after the fact, by the government for G.D.P. and by the National Bureau of Economic Research for unemployment. For G.D.P., only annual changes were estimated.

The Hellenic Statistics Authority, Greece’s compiler of official numbers, has a history of deception — the country lied to get into the euro zone — and it now cannot apply seasonal adjustments to its quarterly G.D.P. estimates. As a result, the figures shown in the charts are calculated by adding up the four quarters of each year. But European officials now vouch for the quality of Greek figures.

Perhaps the most telling difference between the course of the two economies comes in government consumption spending — basically spending that is not for investment, as in building roads or bombers. In the United States, that spending was growing even under President Herbert Hoover and helped to cushion the economy’s fall. In Greece, required by Europe to follow a course of harsh austerity, that spending has fallen rapidly, even if it has not declined as rapidly as some Europeans want.

By the fifth year of the Depression, personal consumption spending had begun to recover in the United States. In Greece last year, it fell 9.1 percent, more than in any other year of the downturn.

Greece publishes monthly overall unemployment figures, but provides details only on a quarterly basis. The charts show the trends of joblessness by sex and age group through the third quarter of last year, the most recent available. Women are more likely to be unemployed in every age group shown, and older workers are far less likely to be jobless than younger ones. Even the groups that look good by comparison are doing poorly. Among men age 45 to 64, nearly one in six is out of work. Among men 30 to 44, the figure is one in five.

Rates for teenagers and people over 65 are not shown, since few of them are in the labor force. The picture is glum for those teenagers who do want jobs. The male unemployment rate is 52 percent, and the rate for women is 81.5 percent. Most of those over 65 who say they want to work do have jobs, but the proportion of such people in the labor force has been falling in recent years.

Floyd Norris comments on finance and the economy at

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Once More, Troika Asks Greece to Sharpen Pencils

Greek officials scramble to tackle demands for more austerity to obtain the money, even as social distress deepens.

The cycle was staged again Thursday as the Greek government tried to figure out how to meet one of the troika’s toughest requirements: designating 25,000 of the country’s 650,000 or so civil servants for eventual dismissal.

That was one of the international creditors’ demands late Wednesday as their inspectors suspended the latest examination of Greece’s economic overhaul program, leaving town and leaving Greek officials to sharpen their pencils and steel their resolve to find more budget cuts.

The mission chiefs are expected to return to Athens in early April, the troika of lenders — the European Commission, the European Central Bank and the International Monetary Fund — said in a statement on Thursday.

After a week poring through Greece’s books, representatives of the three bodies did praise Greece for making “significant” progress in mending its finances. But they said Athens needed to follow through more strictly on pledges to reduce the size of its bloated government before unlocking the next installment of Greece’s bailout allowance: a 2.8 billion euro ($3.6 billion) tranche due next month.

On Wednesday night, Prime Minister Antonis Samaras and his finance minister, Yannis Stournaras, expressed confidence that Greece would receive the money, speaking ahead of a European Union economic summit meeting in Brussels. European leaders there are trying to head off a rising anti-austerity tide while there are signs that programs like the one in Greece are retarding the bloc’s return to growth.

In the eyes of Greece’s creditors, the country has fallen short too many times on pledges to cut government spending and revamp major areas of the economy that the outside experts say Greece requires if it is to move toward financial independence.

Recently, though, Greece has shown progress. It reported a primary surplus of 1.64 billion euros for January — meaning that the government was bringing in more revenue than it was spending, excluding interest payments. It was Greece’s first primary surplus since 2002.

Further, inflation was only 0.1 percent in February, the lowest reading in 45 years. Such data have largely quieted fears that Greece could exit the euro zone.

The judiciary has also made several prominent moves in recent weeks to show it is rooting out corruption by jailing two former politicians for graft and tax evasion.

And yet Greece, which has received more than 200 billion euros in bailout loans since May 2010, is still making little headway on structural changes that creditors say must happen if the economy is ever to resume growing and become self-sustaining.

The most politically challenging moves for Greece’s coalition government involve the troika’s demands to continue cutting the number of public sector employees. Creditors said Greece had not provided enough details on how it plans to dismiss 7,000 civil servants accused of misdemeanors; to put 25,000 other workers into a special labor reserve that will eventually be eliminated; or to step up the pace of Civil Service retirements.

Until troika auditors are persuaded that Athens can hit those marks, the next aid installment may not be released.

Those measures would need to be taken even as Greek unemployment is at a record 26 percent. In the fourth quarter, nearly 1.3 million people were out of work, in a population of 10 million. Youth unemployment has surged to nearly 58 percent.

Greek consumers continue to make do with less, in response to three years of pay and pension cuts. The real disposable income of households has fallen by a third in that time, and recent increases in property taxes and the value-added tax have crimped spending.

The government reported a revenue shortfall of 260 million euros for the first two months of the year, citing increased tax evasion by citizens and businesses, and the closing of regional tax offices to trim government expenses.

And plans to privatize Greek state-owned assets to raise tens of billions of euros in revenue have stalled again. The head of the agency running that program stepped down last weekend after he was charged with breach of duty for commissioning a power plant in 2007 when he was head of the power board. It was the second such resignation in two years.

Officials say they remain hopeful, though, that some lucrative assets, including the state gambling agency, may be sold in the coming months, a step that they hope will restore confidence in the country and lure investors back to Greece.

Niki Kitsantonis contributed reporting.

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Cyprus Complicates German Quest to Save Euro Zone

But eight months before a crucial election in Germany, Chancellor Angela Merkel is facing charges that Europe is doing just that as the tiny island of Cyprus, a haven for Russian cash, threatens to become the next point of contention in the euro crisis.

In recent days, Germany has signaled that it is reluctantly edging toward a bailout for Cyprus, after lifelines have been extended to Greece, Ireland and Portugal to prevent potentially calamitous defaults. While Cyprus makes up just a sliver of the euro zone economy, it is proving to be a first-rate political headache.

“I don’t think that Germany has ever in the history of the euro zone crisis left itself so little wiggle room,” said Nicholas Spiro, the managing director of Spiro Sovereign Strategy in London. “But Germany wants the euro to succeed and survive, and they are saying we can’t afford a Cyprus bankruptcy.”

But giving a bailout to Cyprus is trickier than it seems. Cyprus’s politicians would prefer not to take European money, which comes with the harsh austerity conditions that have spread misery in Greece. And they can argue that Cyprus was doing relatively well until Greece’s second bailout, when Greek government bonds — of which Cypriot banks held piles — lost considerable value.

The question of keeping the euro together had seemed to be conveniently fading for Ms. Merkel, who in the fall put her full backing behind the euro zone, quieting fears of a breakup. But Berlin seems to have been caught off guard by the political tempest stirred up by Cyprus, which has been shut out of international bond markets for a year but has been kept afloat by a $3.5 billion loan from the Russian government.

With that money running out, Germany and its European partners have been locked in a fierce debate over whether and how to throw Cyprus a lifeline. The problem is, most of the money lost by Cypriot banks was Russian, and the worry is that most of the bailout money could wind up in the hands of Russian oligarchs and gangsters. That fear, backed by a recent report by German intelligence, has stoked a furor even among some of Ms. Merkel’s political partners. “I do not want to vouch for black Russian money,” Volker Kauder, a prominent member of her conservative bloc, said recently.

The Russian presence is thick on Cyprus, a picturesque Mediterranean island and a onetime British colony. The bustling, large city of Limassol has an enclave of restaurants, shops and fur boutiques so packed with Russians that locals call it “Limassolgrad.”

Officials in Cyprus say there is no proof that the Russian cash in its banks is of dubious origin, and they insist that they cracked down on money laundering before joining the European Union. The officials point to an evaluation by the Organization for Economic Cooperation and Development showing that Cyprus is compliant with more than 40 directives against money laundering.

While any lifeline for Cyprus would be small — about $22 billion compared with about $327 billion for Greece — the quandary has reverberated in Europe’s halls of power, and especially in Berlin, which appears to have been backed into a corner by Ms. Merkel’s commitment to keep the euro zone together no matter what.

The outspoken German finance minister, Wolfgang Schäuble, recently cast doubt on whether Cyprus should even be considered for a bailout, given its small size and the stark reality that it is not nearly as vital to the euro’s existence as the larger economies of Spain or Italy. His blunt assessment reportedly drew an admonishment from Mario Draghi, the president of the European Central Bank, which has spent hundreds of billions of euros on a program intended to discourage financial market speculators from attacking euro zone countries.

“We have reached a point of relative stability in the euro zone crisis, so letting Cyprus go could stir up the waters again and trigger another wave of speculation,” said Hubert Faustmann, an associate professor of history and political science at the University of Nicosia in Cyprus.

With Russia refusing to provide any further financing unless the so-called troika of creditors — the European Central Bank, the International Monetary Fund and the European Commission — provides most of the bailout, the Cypriot government has few options. It signed a memorandum of understanding in November with the troika, setting off a wave of austerity measures that are already starting to hit the enfeebled Cypriot economy.

The salaries of public sector workers have since been slashed by up to 15 percent, state pensions are to be cut by up to 10 percent and the value-added tax is set to rise. “The island has been hard hit, and there is an atmosphere of fear,” Mr. Faustmann said. “People are not sure if they will keep their jobs, and if they do, how long they will have them.”

Mr. Faustmann estimated that it would take at least a half-decade for the Cypriot economy to recover — assuming that the conditions required by Germany and the troika do not send Russian money fleeing from the banks. “If that happens,” he said, “then Cyprus is dead.”

Nicholas Kulish contributed reporting from Berlin, and Jack Ewing from Frankfurt.

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DealBook: French Banks Prepare to Pull Out of Greece

A branch of Geniki in Athens. Greece's battered banks are consolidating in an attempt to cope with the country's debt crisis.John Kolesidis/ReutersA branch of Geniki in Athens. Greece’s battered banks are consolidating in an attempt to cope with the country’s debt crisis.

PARIS — France’s biggest banks are preparing to pull out of Greece in the coming weeks, the latest large international business to abandon the country as it grapples with a debilitating recession and nagging questions about its future in the euro zone.

Société Générale said Wednesday that it was in advanced discussions to sell its 99.1 percent stake in Geniki Bank, one of Greece’s biggest financial institutions, to Piraeus Bank of Greece. On Tuesday, Crédit Agricole, another large French lender, said it expected to sign a deal to sell its troubled Greek arm, Emporiki Bank, to another Greek bank in a matter of weeks.

The French banks had embarked on a strategy of expanding in Greece and other Southern European countries when times were good, moving to take advantage of buoyant housing markets and rapid economic growth. When a deterioration in Greece’s finances helped ignite the European debt crisis three years ago, Société Générale and Crédit Agricole wound up being among the most exposed of any European banks to Greece.

Their earnings were hit last year when a swath of Greek government bonds they had invested in turned toxic as the crisis deepened. At the same time, losses mounted at their Greek operations as the country’s economy plunged, triggering a surge of defaults on loans to consumers and businesses. Fears that Greece could exit the euro had also raised uncertainty for the banks, leading them to follow in the footsteps of other large international companies like Carrefour, the big French supermarket chain that two months ago sold off all of its Greek operations.

Prime Minister Antonis Samaras of Greece has been on a charm offensive in European capitals recently to reinforce the message that Greece wants to stay in the euro zone, despite renewed calls from some German politicians for it to leave and a resurgence in bets by investors that a Greek exit from the currency union may at some point be inevitable.

To show that his government means business, Mr. Samaras is scrambling to get politicians in his coalition government to agree quickly to 11.5 billion euros, or $14.4 billion, worth of new austerity measures for 2013 and 2014 in order to secure a loan installment of 31.5 billion euros, which is needed to keep Greece’s economy afloat.

Greece’s so-called troika of lenders — the International Monetary Fund, the European Central Bank and the European Commission — are set to issue a crucial assessment in the coming weeks of how far off track the country is in sticking to its promises to reduce a mountain of debt and a high deficit.

Even if the report were positive, Greece’s real economy is still struggling: The government estimates growth will contract by a staggering 7 percent this year, worse than the 4.8 percent contraction forecast earlier this year by the I.M.F.

With such prospects, Société Générale and Crédit Agricole determined that it would be better to cut their losses.

Société Générale bought Geniki Bank in 2004. It had been bleeding money for the last several years, with losses of 796 million euros in 2011 and 411 million euros in 2010. Emporiki Bank has been a drag on Crédit Agricole’s earnings almost since the French bank acquired it in 2006. In the first nine months of 2011, Emporiki posted a loss of 954 million euros, and Crédit Agricole has pumped about 2 billion euros into the bank in the last two years to increase its capital.

The Greek banking sector is grappling with large loan losses as thousands of businesses go belly up each month and consumers, racked by salary cuts and tax increases required under the terms of Greece’s international bailout, are left unable to repay their debts.

Greek banks also took a huge hit after they agreed, with banks outside the country, to take a 50 percent loss on their vast holdings of Greek government debt. Recently, the E.C.B. has refused to lend directly to Greek banks because the quality of the collateral they have to offer has become extremely poor. The banks must instead borrow money from the Greek central bank, at a higher interest rate than what the E.C.B. would charge, adding to their burden.

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Euro Woes Could Revive Bout of Market Volatility

Investors are bracing for a return to volatility when markets in the United States reopen on Tuesday as renewed gloom about the debt crisis in Europe threatens to end the calm that has prevailed on Wall Street in recent weeks.

“We’ve had a lull, but I expect the pressure to start growing again with a renewed round of financial market agitation,” said Charles Wyplosz, a professor of international economics at the Graduate Institute of Geneva. “There will be a renewed sense of emergency, which doesn’t make for clearer thinking.”

Late last week, Standard Poor’s cut its ratings on shaky borrowers like Italy and Spain and stripped France of its once-sterling AAA debt rating. On Monday, it followed up with another downgrade, this time on a bailout fund aimed at shoring up weaker members of the euro zone. The rating on the European Financial Stability Facility was lowered to AA+ from AAA, and S. P. warned that more cuts could come if Europe failed to address its worsening fiscal situation.

Klaus Regling, chief executive of the facility, said the downgrade of the fund by a single agency would not reduce its lending capacity of 440 billion euros ($556 billion). The fund “has sufficient means to fulfill its commitments” until a permanent fund, the European Stability Mechanism, starts operating in July, he said.

Anxiety is also building over the fate of the country hardest hit by the European debt crisis, Greece. Representatives of the European Union, the European Central Bank and the International Monetary Fund resume negotiations with the Greek government Wednesday over the next step in a planned 130 billion euro bailout, even as they try to force hedge funds and other private holders of Greek bonds to accept large losses to make the country’s debt burden more manageable.

If Athens cannot secure concessions from the bondholders or the bailout money it needs from the so-called troika in the coming weeks, Greece could default by March 20, when 14.5 billion euros in debt comes due and must be repaid. The specter of a disorderly default, rather than the voluntary losses now being negotiated, unnerved stock markets around the world last fall and could prompt renewed selling now.

The next several weeks bring what are shaping up to be a series of turning points on both sides of the Atlantic. Even as the negotiations in Greece proceed, several debt sales by other European borrowers this week should provide clues to how seriously investors are taking the recent warnings by S. P. and other ratings agencies.

Highlighting the political stakes, European leaders are set to gather for a summit meeting in Brussels on Jan. 30. Investors had hoped for more clarity on Greece’s fate before they gathered, but that is looking much less likely, said Julian Callow, chief European economist at Barclays. What is more, Italy has 26 billion euros in debt coming due on Feb. 1, putting additional pressure on European leaders to reassure nervous markets.

In the first test of investors’ appetite for debt since the broader downgrade, France sold 8.6 billion euros ($10.9 billion) of short-term debt securities on Monday at yields slightly lower than in the previous auction. The yields on the country’s 10-year bonds had fallen 0.04 percentage point by late afternoon, to 3.011 percent.

The stability facility is set to auction bills Tuesday, while Spain and Portugal have debt sales later in the week, all of which will be closely watched by investors, said Ron Florance, the managing director for investment strategy at Wells Fargo Private Bank. “Everyone is just kind of holding their breath to see how these auctions go,” Mr. Florance said. “Investors are just going to have to be able to ride through the volatility; it’s going to be bumpy.”

Since late November, Wall Street has taken a more optimistic turn, with the Dow Jones industrial average rising by more than 1,000 points, to close at 12,422.06 on Friday. Signs of improvement in the job market have led some observers to conclude that what had been a very anemic recovery in the United States might be finally gathering some steam.

But if the European banking system seizes up and economies in the region go into a steep recession, the chances that United States can insulate itself are slim, analysts said. “It seems pretty clear to me that once Europe reaches a tipping point, nowhere else in the world can decouple,” said Benjamin Bowler, global head of equity derivatives research at Bank of America Merrill Lynch.

In addition to the news from Europe, American markets will also be affected by earnings news as large companies report their fourth-quarter results, including several financial companies over the next few days. Citigroup and Wells Fargo will announce earnings on Tuesday, with Goldman Sachs reporting on Wednesday and Bank of America on Thursday. Slow capital markets activity is expected to weaken profits across the board, but analysts will be looking for clues about the health of consumer spending and corporate borrowing in the latest results.

David Jolly and Peter Eavis contributed reporting.

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Hedge Funds the Winners if Greek Bailout Arrives

That, more or less, is the bet that a growing number of investors are making now as they load up on Greek government securities that mature in March. That is when Athens hopes to receive a potentially make-or-break bailout payment — a lifeline of as much as 30 billion euros ($38 billion) from the European Union and the International Monetary Fund.

Greece’s new prime minister, Lucas D. Papademos, has warned that without that infusion, his country might well default on its debts, a move that might force Greece to leave the euro currency union.

So even though Greece is already effectively bankrupt, some investors are buying and holding the country’s short-term debt — gambling that, at least in March, Athens will make a point of paying its creditors. The risks those investors run, though, include the possibility that their very actions could help prompt the European Union and I.M.F from handing Greece the March bailout installment that would enable Athens to pay make those debt payments.

With the stakes so high, investors are betting that Europe will go the extra mile to keep Greece afloat. And if the price to do that means that taxpayer funds end up bolstering the returns of a few hardy speculators — then, as far as those investors are concerned, all the better.

Such a trade-off, however, carries ramifications that go well beyond the profit motives of its participants.

For months now, Greece has desperately been trying to persuade its private sector creditors — its bondholders that are not other governments — that it is in their interest to exchange their existing Greek bonds for longer-term securities, while accepting about a 50 percent loss as part of the bargain. The negotiations are known as the private sector involvement, or P.S.I., to employ the widely used shorthand.

A few months ago such a deal looked doable, as the large European banks that held most of this private sector debt, estimated to be about 200 billion euros, recognized that it was probably a better alternative than a default by Greece, which could wipe out their holdings. Moreover, the banks were vulnerable to political pressure from their home countries, where they have a big stake in remaining on good terms with the government and important officials.

But as the talks have dragged on, many of these banks, especially big holders in France and Germany, have sold their holdings. Among the buyers have been London hedge funds and other independent investors that are now questioning why they should accept a loss — if at least in the short run Greece keeps meeting its debt payments.

And as the number of such hedge funds holding Greek debt has grown, so has their ability to forestall a restructuring private sector agreement, thus bringing them closer to being able cash in on their high-stakes gambit.

“They are calculating that Greece will not default before March,” said Mitu Gulati, a sovereign debt expert at the Duke University School of Law and a co-author of a recent paper on the dynamics of the debt restructuring process in Greece.

Mr. Gulati points out that it is these investors that are in many ways behind the delay in executing a private sector involvement. deal. “If you own a bond that matures in March and it is January, then you have every incentive to delay,” he said.

Yet private sector involvement could prove a crucial component of the set of provisions that Greece must meet to receive its next lifeline payment from Europe and the I.M.F.

The private sector loss agreement was expected to lower Greece’s borrowing expenses by as much as 100 billion euros through 2014. The agreement was also supposed to reduce Greece’s ratio of debt to gross domestic product to 120 percent by 2020, down from about 143 percent today. In short, the private sector involvement represents a crucial pillar of the 199 billion euros in financing that Greece will need from outside sources in the next three years.

The German chancellor, Angela Merkel, the most vocal proponent of requiring some sacrifice on the part of private sector lenders, has been the most forceful political leader in pushing for a resolution of the negotiations. Mrs. Merkel met with Christine Lagarde, the managing director of the I.M.F., in Berlin on Tuesday. They issued no statement, but aides said Greek debt was high on the agenda. Ms. Lagarde was then to meet Wednesday with the French president, Nicolas Sarkozy, in Paris.

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Fair Game: Credit Default Swaps as a Scare Tactic in Greece

Leading the charge is BNP Paribas, the big French bank, which has been hired by the Greek government to help persuade investors to accept a deal that would cut the value of their investments in half.

On paper, this restructuring would be voluntary. Bond holders would exchange their old Greek bonds, at a 50 percent loss, for new ones that would mature in 30 years. Painful, yes. But in theory, such a move would help Greece get a handle on its debt, and that would be good for everyone.

Behind the scenes, however, BNP officials seem to be twisting some arms. A big point of contention is — surprise! — derivatives.

Investors who own Greek debt and have bought insurance on it, in the form of credit default swaps, wonder why they should accept the offer that’s on the table. If Greece stops paying after the restructuring, those swaps are supposed to cover their losses, much the way homeowners’ insurance would cover a fire.

The International Swaps and Derivatives Association agrees. The group, which represents the industry and is largely controlled by big banks, says anyone who doesn’t like the offer can walk away. “If a payment is missed, trigger the C.D.S. and be made whole,” the group said on its Web site.

BNP and its client, Greece, want to corral as many investors as they can. The more bond holders they persuade, the more that Greece would benefit — and the more the bank would collect in fees.

So it is perhaps unsurprising that some recent meetings have taken on a forceful tone, according to three portfolio managers who attended three different sessions with BNP Paribas. The investors spoke on condition of anonymity because they feared retaliation by the bank.

Contrary to what the I.S.D.A. says, the BNP Paribas bankers have been telling bond holders that their credit insurance may not pay off down the road, because after the restructuring is completed, the terms of the old debt might be changed, these money managers said.

Normally, investors would shrug off such an argument.

But the warnings from BNP Paribas carried weight, the money managers said, because of one of the officials who was making them. She is Belle Yang, a BNP specialist who also happens to serve on a powerful I.S.D.A. committee. The panel, the “determinations committee” for Europe, decides what constitutes a “credit event” in Greece or elsewhere on the Continent.

This is the committee that will likely rule that the Greek deal would not constitute a default. That is because the restructuring would be “voluntary.” Some investors who were counting on their credit insurance would be out of luck.

In the meetings, the investors said, Ms. Yang identified herself as a member of the committee. That itself was unusual, because the names of I.S.D.A. committee members are normally kept confidential. The association doesn’t disclose them, and lists only panel members’ employers — 15 large global banks and financial services firms. Those institutions include Bank of America, BNP Paribas, Goldman Sachs, BlackRock and Pimco.

One of the money managers who attended the meetings said Ms. Yang’s presence seemed to raise a conflict. Ms. Yang works for BNP, which stands to profit from the restructuring. She is also on the I.S.D.A. panel, which will determine if credit default swaps pay off.

One of the money managers said he pointed out Ms. Yang’s dual role at a meeting.

“You’re on the determinations committee, your firm is earning a big fee and trying to scare me into tendering my bonds,” he said he told her. He said Ms. Yang replied: “No, I’m just trying to help tell you what could go wrong.”

A BNP Paribas spokeswoman declined to comment.

According to one of the money managers, Ms. Yang told the investors that one potential hitch would be if Greece were to change the terms of its old bonds. Ninety percent of those bonds are governed by Greek law, so the government could, in theory, redenominate an issue, say, from $1 billion par value to $100 million. This would require holders to deliver far more bonds to receive the amount of insurance they thought they were owed.

Responding to an e-mail request, Ms. Yang declined to comment, citing “our policy not to comment on matters to do with the I.S.D.A. Determinations Committee.”

It is interesting that an I.S.D.A. committee member would argue that credit default swaps may not pay out. The organization is already facing criticism over its expected ruling that the Greek restructuring is voluntary.

The I.S.D.A. wields enormous power in the derivatives market. Since 2009, it has required that all contracts struck with its members adhere to rulings by its committees on credit events. Before then, counterparties could take disputes to arbitration or court.

The money managers with whom I spoke said BNP Paribas seemed to be motivated either by its desire to generate fees from the exchange or, perhaps, by worries about its own exposure to Greece. They wondered, for instance, if BNP Paribas has written a lot of insurance on Greek debt. If so, getting people to unwind such swaps now would be less costly for BNP than having the insurance pay off.

If investors think debt terms can be changed by fiat, they will flee the market. Ditto if they find that their insurance can be made worthless. Indeed, some of the volatility in European debt recently may be attributed to investor fears about these issues. The discussions with BNP Paribas confirm the view of some investors that credit default swaps are not insurance at all, but rather instruments that big banks use to benefit themselves. The secrecy of who serves on I.S.D.A. committees feeds this fear, as does the fact that these panels are both judge and jury.

“Market forces like to think of market pricing as having symmetry,” said David Kotok, founder of Cumberland Advisors, a money management firm in Sarasota, Fla. “But a system which requires decisions by parties who have vested interests on one side is asymmetric. A surprise rule change or an interpretation which was understood by some and misunderstood by others also defeats symmetry. In the case of credit default swaps, both elements apply.”

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Greeks Move to Slash State Jobs for 30,000

The government also completed a draft budget for 2012, which is expected to be presented in Parliament on Monday and voted on by the end of October, and conceded that it would miss a deficit-reduction target of 7.6 percent of gross domestic product. The deficit is projected to equal 8.5 percent of G.D.P. this year. The deficit shortfall had been expected because of delays in carrying out reforms and a deeper-than-expected recession, with the Greek economy forecast to contract by 5.5 percent this year.

In comments made late on Sunday after a cabinet meeting, a government spokesman, Ilias Mossialos, said Sunday’s deal was the result of “long and difficult negotiations” with foreign auditors and that it constituted the “gentlest possible scenario in terms of social repercussions.”

According to the text of the draft law distributed to the local news media, 30,000 civil servants — or 3 percent of the public work force — would be put on reduced salary by the end of the year. The majority, some 23,000, are at least 60 years old and essentially would be forced into early retirement. The remainder would lose their positions through the merging and abolition of dozens of government agencies. Mr. Mossialos said the plan would save the government some 300 million euros, or $400 million, from the public sector wage bill in 2012.

The Greek government is in a race against time to convince representatives of the European Commission, the European Central Bank and the International Monetary Fund, known as the troika, that it will make good on pledges to put its financial house in order. Without the release of about $11 billion in aid — part of a 110-billion-euro bailout agreement reached last year — Greece could run out of money this month and face a default that would shake the euro zone and global markets.

The decision on whether to release the cash is expected to be made on Oct. 13 at an extraordinary meeting of European finance ministers, but it will depend on the troika officials, currently in Athens, issuing a positive report about Greece’s efforts at fiscal overhaul. A chief source of frustration for foreign auditors has been the delays in carrying out reforms and an apparent reluctance by the government to reduce the country’s public payroll.

There is vehement public opposition to the new reforms, which come after a wave of tax increases and cuts to public sector wages and pensions over the past year. In total, the new measures expect to save nearly $9 billion this year and in 2012.

Civil servants, who have called 24-hour general strikes for Wednesday and Oct. 19, last week blocked several government ministries to prevent the troika officials from collecting data. A sit-in on Friday at the national statistics office, Elstat, prevented the authority from finalizing debt and deficit data for 2010.

There are also rifts within the ranks of the governing Socialist Party. The divisions pose a threat to the administration of Prime Minister George A. Papandreou, which is governing with a fragile majority of four in Greece’s 300-seat Parliament. The government managed to pass a new property tax in Parliament last week, indicating that Mr. Papandreou was still able to rally wavering lawmakers. But the civil servants’ bill might be tougher to pass as it strikes at the heart of the government itself.

Opening Sunday’s cabinet session, Mr. Papandreou indicated that the priority should be guaranteeing Greece’s solvency and position in the euro zone.

“Important decisions, which need to be taken on a European level, depend first and foremost on us,” Mr. Papandreou said. “We need to show we are dedicated to achieving our goals.”

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