Europe: D Day Approaches Amid Many Unanswered Questions

Do you want the good news or the bad about Greece and Europe and this week's talks?

The euro likes the bad news and rose against the dollar last week (but fell against other currencies, such as the yen).

But the good news is that Greece could get the $US10 billion of aid under the May, 2010 bailout, but all depends on the International Monetary Fund (IMF) with London reports claiming the IMF won't give its approval.

Those reports Sunday are contrary to the state of play the day before when it was reported the executive of the Fund would recommend to its board that the money be paid over.

If the IMF doesn't give its approval, it's very bad news and the whole rescue bid for Greece and the euro and the EU's banks fall apart, not to mention the global economy.

Assuming though that the IMF does give its OK, the bad news is that the rest of the situation surrounding Greece, the euro, the banks and other weak economies such as Spain, Portugal and Italy, remains as confused and directionless as at any time in the past two years.

Situation normal, many people will say, but this is the week (or rather Sunday was, originally) when Europe has to get its act together and fix the problem once and for all.

It is no longer a Greek, eurozone or EU problem, the health of the global financial system and economy are riding on this week's talks and it is not looking good.

There are a few questions to be answered by the talks and any agreement that emerges overnight Wednesday, our time.

The first is, will the terms of any agreement prevent Greece from defaulting on more than 360 billion euros of debt, and will the agreement give Greece new money on top of the 109 billion already promised?

What steps will be taken to strengthen European banks in the event that Greece, or any other country (read Portugal, or in extremis, Italy) weaken further and need more suppor?.

A whole lot of other questions flow from these two, such as the how, what and when of any decision to back Greece.

These include, how much money (a very stocky question), how much capital will the banks need, what happens if the markets start whacking Italy (whose 10 year bonds saw their yields rise about 6 per cent on Friday, which in the zone of Aw... sh*t if it continues for the next month).

How will the new agreement come into force, who will put up the money and how will it be ratified (all potential failure points)?

Then there's another unspoken question at the moment, what happens if this agreement fails to assure markets?

Finally the big, big question, when do you call the whole game off, send Greece into default and start again?

Underlying all this political chit chat and arm twisting is the state of the Greek economy; it's worsening, the recession is deepening, the cost cuts and spending reductions are not happening, or are falling short.

Now there's a growing view that Greece will need a third and much bigger bailout before the second can be implemented.

On top of all this, the wider European economy is slowing and could very well slide into recession, a move that would see ratings downgrades of at least France and Spain and perhaps Italy.

The UK economy is stalling, and has very high inflation and rising unemployment.

Germany has cut its 2012 growth forecast to 1 per cent from 1.8 per cent. Greece will be in recession in 2012, Portugal as well.

France reckons its growth could be less than 1 per cent next year, at best and many commentators say a continent-wide recession can't be ruled out.

If that happens then the whole rescue story is dead; the European Financial Stability Fund will fail because ratings groups Moody's and Standard & Poor's have already put France on notice that it could lose its AAA rating in the event of a European recession in 2012.

Without six AAA rated countries to back it, the Stability Fund idea won't be able to raise enough money and won't be believable in the markets.

But first a rare good bit of news about the eurozone and the way Ireland is using its 85-billion euro bailout to recover.

It passed its latest review by the IMF, EU and European Central Bank (ECB) with flying colours.

It's not out of the woods, but the deficit is falling (from 32 per cent of gross domestic product last year to less than 10 per cent in 2011).

It's earning its way with a trade balance (but that could vanish if there's a global economic slowdown next year), but there have been little of the riots and moans and groans we have seen in Greece, Spain and Italy (and the UK for that matter).

Whether Ireland will escape a new bailout remains to be seen.

Certainly the odds are growing that Portugal will need a second bailout next year as it struggles to cut debt and find ways of reducing spending and its budget deficit.

But complicating the five days of discussions in Brussels between EU and eurozone leaders, finance ministers and government officials, is the continuing tensions between France and Germany, and the reluctance of Britain to be drawn into any further bailout.

Some members of the Conservative Party in the UK Government want to use the present situation to reduce their country's involvement in Europe. Prime Minister, David Cameron is strongly opposed.

Media reports said France retreated in an argument with Germany over how to expand the power of Europe's bailout fund.

France's had wanted (but no longer according to some media reports) the European Financial Stability Facility to get a banking license enabling it to borrow from the European Central Bank (Which is close to economic madness as you can get, seeing France refuses to admit that its existing banks do not have enough capital even before a possible Greek default).

Euro-area finance ministers received an assessment from the auditor team sent to Greece that the country's finances have taken a "turn for the worse," requiring more official aid and deeper investor write-downs.

Hence talk of cuts of 50 per cent to 60 per cent or more in the debts (which would bankrupt all Greek banks, forcing them to be supported. two Greek banks are owned by two big French banks, SocGen and Credit Agricole).

But there's talk the euro finance ministers (which include the UK) have agreed that the banks need more capital (from the UK Government for its troubled two, Lloyds and RBS?).

However, there are no details. Banking industry officials say no agreement has been reached, but some European governments have claimed there is the outline of a deal on the table.

The key to all this remains Greece and its stricken economy.

According to media reports, lenders and governments were told on Friday night that new analysis had shown Greece could need 254 billion euros in new bailout loans in a package that would last until this end of this decade (2021, actually).

That compared to the 109 billion bailout package agreed to in July, which was lifted from the previous one of less than 90 billion.

That new estimate is based on banks taking a loss of 60 per cent or more on their loans, which would in turn mean some 200 billion euros of new capital, would be needed to keep EU banks solvent and afloat.

At a 50 per cent write off Greece would need a minimum of 4.5 billion euros more on top of the 109 billion from July, and banks would have to find 120 billion euros of new capital.

There was talk overnight that European banks would need 108 billion euros of new capital ($150 billion), which seems to be not enough.

There were also stories that the banks had offered a 40 per cent cut, up from the 21 per cent agreed to in July.

The best report is in the Financial Times: it makes very depressing reading.

The bottom line is that the talks this week are misplaced and unrealistic.

On that basis, a further question should be asked: should Greece be saved at all, or will it be better to start preparing for default?