An urgency to rein in budget deficits seems to be gaining some traction among American lawmakers. If so, it is none too soon. Perceptions of a large U.S. borrowing capacity are misleading.

Despite the surge in federal debt to the public during the past 18 months—to $8.6 trillion from $5.5 trillion—inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.

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As members of our two houses of Congress reconcile their differing financial regulatory bills into one piece of legislation that they hope will bring more transparency and supervision to Wall Street, you have to wonder: Where is the debate about reforming the fiscal practices of government?

If one thing is clear as the world financial situation proceeds from one crisis to another, it is that politicians have been as crafty in their fiscal maneuvers as any Wall Street trader, as opaque in the deals they construct as any maker of swaps contracts, and as motivated by short-term self interest as any investment banker who puts together a complex security likely to explode shortly after he’s peddled it.

By now, for instance, many people understand that Greek politicians kept two sets of books for some time in order to hide the true nature of their deficits, and to give workers a higher standard of living than the country could actually afford.

Less well understood, perhaps, is how the rest of the European Union encouraged that bad behavior when it allowed banks to load up on the debt of Greece and other EU nations by not requiring the bankers to carry this national borrowing on their books in quite the same way they account for other loans, because of course countries don’t default on their debt (except when they do). The capital charade helped make a farce of the EU’s guidelines on national deficits. It also made it necessary for Germany to bail out Greece because Germany was really bailing out its own banks.

But why pick on Europe when we have so much glaring fiscal malfeasance in the U.S.?

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The euro sank to its lowest level since October 2008, trading below $1.24 on Friday after new economic data showed core inflation in Spain turned negative in April, potentially making it harder for Spain to grow out of its debt woes.

Some analysts questioned whether austerity measures announced this week in Spain and Portugal could lead to civil strife, and Deutsche Bank Chief Executive Josef Ackermann told German television Thursday evening that there are some doubts about Greece’s ability to repay debt.

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[A] public poll in Greece has shown that the majority of Greeks will accept sharp austerity cuts to avert a bankruptcy of their debt-ridden economy.

The poll in the To Vima newspaper showed 55.2 per cent of respondents would accept austerity measures, 56.3 per cent would take wage cuts and 71.3 want squabbling Greek political parties to cooperate on raising the mandatory age of retirement and imposing a uniform retirement age of 65 for men and women.

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Investors see Lehman shadow on bankrupt country.

Markets and investors remained nervous on Monday, despite the green signal from eurozone finance ministers for an historically unprecedented bailout of debt-ridden Greece to the tune of 110 billion euros. The euro dropped against the dollar in both Asian and European markets, continuing the currency’s five-month-long downward trend. Since a December high of above $1.50, the euro has fallen more than 12 per cent.

Analysts say that both long and short term concerns remain unaddressed by the much-delayed eurozone-International Monetary Fund (IMF) joint rescue package announced on Sunday. There are serious doubts being expressed over whether Athens can in fact sustain the austerity measures it has committed to in exchange for the aid.

Large-scale protests from unions and workers erupted in Greece over the weekend at the prospect of salary cuts, tax hikes and more stringent work conditions. Greece is aiming to bring its fiscal deficit down to the EU limit of 3 per cent of gross domestic product by 2014, from 13.6 per cent in 2009. Other long-term concerns relate to whether the bailout will be enough to avoid the spread of debt contagion to other bigger European economies like Spain and Ireland. The threat of a similar crisis in Portugal is already imminent.

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April 29 (Bloomberg) — Harvard University Professor Martin Feldstein said Greece will eventually default on its bonds and other euro-area nations may follow, most probably Portugal.

“Greece is going to default despite all the talk, despite the liquidity package,” Feldstein, who warned almost two decades ago that the euro would prove an “economic liability,” said in an interview with Tom Keene on Bloomberg Radio today.

Greek officials are hammering out the terms of a three-year rescue package with European Union and International Monetary Fund officials that will probably give the country a loan of 45 billion euros ($59 billion) for 2010 alone. Greek bonds have plunged on concern about the country’s ability to pay its debt despite denials from officials that a default is in prospect.

Greece’s fiscal turmoil is now infecting other markets, with Standard & Poor’s this week downgrading Portugal and Spain, as well as Greece. Feldstein said other members of the 16-nation euro area may also default, with Portugal the main candidate.

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Standard & Poor’s downgraded Greek ratings into junk territory on doubts about its ability to implement reforms needed to address its high debt burden. For details, see [ID:nWNA9645]

The agency also downgraded Portugal’s ratings earlier on Tuesday, citing concerns about its ability to deal with high debt levels given its weak economic outlook. [ID:nWNA9638]

“There is such a fear of contagion in the euro zone between the downgrades of Portugal and Greece,” said Carol Hurley, senior market strategist at Lind-Waldock in Chicago. “There is a lack of resolution on Greece and how aid will go to Greece and how it will affect other countries.”

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IMF Managing Director Dominque Strauss-Kahn is scheduled to meet with German members of parliament Wednesday to make a case for launching a financial rescue for Greece. Jean-Claude Trichet, president of the European Central Bank, also will be present.

The senior officials will make their pitch amid strong popular opposition in Germany to bailing out Greece. A survey by Dimap institute for Die Welt newspaper and France 24 television published Tuesday showed that 57% Germans regard financial aid to Greece as a “bad decision” while only 33% support it.

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Not so fast, Germany replied to Greece’s request today for a massive bailout.

German Chancellor Angela Merkel, who has long resisted monetary support for the indebted Mediterranean nation, said today that the European Commission, the European Central Bank, and the International Monetary Fund still needed to determine if a bailout for Greece is necessary.

And even then, she told reporters here today, Greece would need to fulfill “very stringent conditions” and establish a “credible savings program” to be eligible for the aid.

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