Behind the scenes, negotiations are underway to bail out Greece to the tune of 25 billion euros ($33.7 billion dollars.)

The German weekly Der Spiegel is reporting that aid to Greece would be apportioned based on the capital each country holds in the European Central Bank.

It's a good old fashion standoff, and this time it's on the world stage. Germany and the European Central Bank (ECB) want Greece to tighten further. Specifically they want Greece to add 1% to 2% to its value-added tax and cut wages further in exchange for financial assistance.

Greece is balking. They want to postpone any decision on further measures until mid March when officials from the European Union, ECB and the International Monetary Fund complete their inspection of Greece's deficit cutting plans.

As expected, both the European Central Bank and the Bank of England kept their key, short-term interest rates at the same levels Thursday, in decisions that are consistent with a continued, accommodative central bank policy in the world's major economic regions.

The ECB kept its refinance rate at 1.0% and the Bank of England maintained its 0.5% rate. The Bank of England also maintained its 200 billion pound/$315 billion asset buying program at the same level.

So much for the effort to oust Greece from the euro-zone. European Central Bank President Jean-Claude Trichet said the idea of forcing budget deficit-heavy Greece from the euro-zone was "absurd."

Asked by Reuters how realistic he thought the effort to force Greece out was, Trichet said, "I do not comment myself on absurd hypotheses, so that would be my response."

Hawks in the 16-nation euro-zone want mixed capitalist/socialist Greece out of the euro-zone, even though Greece's Prime Minister George Papandreou has committed to a 3-year spending reduction and tax increase plan to cut its budget deficit from the current 12.7% of GDP to 8.7% this year, and 5.6% and 2.8% in subsequent years. The 2.8% total in 2012 would bring Greece in compliance with the euro-zone's 3% of GDP maximum for budget deficits.

The European Central Bank Thursday kept its key, short-term interest rate the same at 1%, a move investors in Europe and around the world no-doubt welcomed, for several reasons.

First, Europe's economy is nowhere near sustainable growth status: euro-zone GDP will likely to show a 3.7-4.0% contraction in 2009, and post only a modest increase in 2010 -- perhaps as low as 0.5-1.0% GDP growth. ECB President Jean-Claude Trichet underscored as much. "We know we have a bumpy road ahead of us," Trichet said, Reuters reported Thursday.

European Central Bank President Jean-Claude Trichet jolted the markets Friday with the announcement that the ECB will gradually withdraw the emergency cash injections it has added to the financial system, in order to prevent an acceleration in inflation.

"Not all our liquidity measures will be needed to the same extent as in the past," Trichet said at a conference in Frankfurt Friday, Bloomberg News reported. "Any non-standard measure whose continuation would pose a threat to the achievement of price stability must be undone promptly and unequivocally."

Seems Wall Street will not be able to extend Wednesday's gains as U.S. stock futures are quite a bit lower this morning, indicating resumption of the selloff is ahead. If on Wednesday investors hoped China would announce more spending, today they were disappointed when China's premier didn't announce more stimulus. In addition, auditors raised doubts about General Motors (NYSE: GM) viability.

Overseas, European markets dropped Thursday after the previous session's strong rally, as investors await key interest rate decisions later in the day by the European Central Bank and the Bank of England. So far, the BOE has cut the benchmark interest rate to 0.5%, the lowest since the bank was founded in 1694. The ECB is also expected to cut rates.

The impossible has happened. The Chicago Cubs won the National League pennant?

No, ECB President Jean-Claude Trichet is now in accommodation mode.

Trichet, a legendary inflation hawk, presided over the European Central Bank as it cut its benchmark interest rate by 50 basis points to 2% Thursday.

It was fourth consecutive monthly interest rate cut for the ECB and it matches the record low interest rate reached during the 2003-2005 period. However, Trichet, at the ECB's regular post-meeting news conference, indicated monetary policy makers will avoid a cut in interest rates at its next meeting in February, Bloomberg News reported Thursday.

Economist David H. Wang said there's a bright side and a downside to the ECB's most-recent action, and he isn't so sure the bank is done cutting rates, even with a prospective February pause.

In most locales around the world, the New Year is a cause for a celebration.

But how about a new year celebration combined with the birthday party? Talk about a celebration.

When the new year dawns, Europeans will be doing just that - - at least Europeans in the euro zone: that's because the euro currency turns age 10 on January 1, 2009.

Euro has strengthened Europe

When launched January 1, 1999, 11 nations comprised the euro zone: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain. Later, Cyprus, Greece, Malta, and Slovenia joined, and Slovakia will become a member on January 1, 2009 to bring euro zone membership to 16.

Further, while some critics still denounce the euro as 'paving the way for end of Europe's broad social safety net' the euro currency has basically achieved its goals, with enormous benefits for Europe's citizens and visitors, so says economist Peter Dawson. The euro traded at $1.3890 Wednesday morning.

Two major central banks took drastic monetary policy action Thursday to further stimulate their economies. The Bank of England unexpectedly cut it benchmark interest rate by a gargantuan 150 basis points to 3%. Meanwhile, the European Central Bank cuts its key rate, the refinance rate, by 50 basis points to 3.25%.

"There has been a very marked deterioration in the outlook for economic activity at home and abroad," the Bank of England said in a statement.

Economist Richard Felson had expected a 75-basis-point cut by the BOE. "We know that several business surveys in the U.K. are pointing to a pronounced contraction, with consumer spending showing little life. I think those facts, and the tighter credit markets, prompted the decision," Felson said. "Few expected as large a cut, but it was the correct move, and there's likely to be additional rate cuts ahead."

The BOE has now cut interest rates by 200 basis points since October 8.

The ECB also took bold action to stimulate growth, with a 50-basis point cut. Felson said continental Europe is likely to experience the effects of the downturns in consumer and business demand later, but the fact that the hawkish-leaning ECB "is in full accommodation mode" is a sign of the scope of the economic slowdown.

Is the dollar's status as the world's reserve currency coming to an end?

It could be, if present trends driven by corrective measures taken to stem the global financial crisis continue, in the view of one monetary official.

European Central Bank council member Ewald Nowotny believes a 'tri-polar' global reserve currency system is developing among Asia, Europe and the United States.

"What I see is a system where we have more centers of gravity," Nowotny said Monday in an interview with Austrian state broadcaster ORF-TV, Bloomberg News reported Monday. "I see for the future a tri-polar development, and I don't think that there will be fixed exchange rates between these poles."

The dollar has served as the world's reserve currency for more than 30 years. A reserve currency is one which financial institutions -- and nations, for that matter -- seek to own during times of financial crisis, stress, or uncertainty. The reserve currency attracts investors in a phenomenon called a 'flight to safety.'

The euro, the currency of the euro zone, this decade has challenged the dollar's reserve currency status, following its introduction into global financial markets in 1999. (Physical euro banknotes and coins began to circulate on January 1, 2002.) A series of U.S. fiscal policy and trade policy errors, among other factors, has caused the dollar to weaken against the euro from about 82 cents per euro in 2001 to the present $1.3317 per euro.

Short-term interest rates continue their downward trek, albeit at a snail's pace.

Overnight interest rates for dollars fell again early Thursday, after central banks provided $254 billion in emergency cash, Bloomberg News reported.

The London interbank overnight rate, or LIBOR, fell 20 basis points to 1.94%, Bloomberg News reported Thursday. The London three-month rate decreased 5 basis points to 4.50%.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Trend indicates liquidity is improving, gradually

Economist Peter Dawson told BloggingStocks Thursday the Bank of England's delay in its closure of emergency borrowing and the European Central Bank's acceptance of lower-rated securities as collateral and its lending of unlimited amounts of euros over the next six months has broadened the credit landscape.

The credit market thaw continues.

Interest rates for three-month loans in dollars fell again early Wednesday, after three major central banks offered lenders unlimited dollars for the first time.

The London three-month rate for dollars decreased 9 basis points to 4.55%, Bloomberg News reported Wednesday. Meanwhile, a comparable euro rate dipped 5 basis points to 5.18% and the London interbank overnight rate, or LIBOR, fell 4 basis points to 2.14%.

The European Central Bank, Bank of England, and Swiss National Bank all offered lenders unlimited dollars for the first time, Bloomberg News reported.

Short-term rates, including overnight rates, are key sources of cash for corporations and other large institutions, which use the cash to pay suppliers, make payroll, roll over debt etc. Hence, very high overnight and short-term rates will discourage corporations from conducting business, restricting commerce and slowing the economy, economists say.

Coordinated dollar offering helps

Economist Peter Dawson told BloggingStocks Wednesday the coordinated dollar offering, combined with Tuesday's $250 billion U.S. bank recapitalization by the U.S. Treasury, should keep short-term interest rates heading in the right direction: lower.

Gosh. Golly. Gee Whiz.

That was the reaction Monday of traders and economists to the European Union's coordinated decision to invest a staggering $2.4 trillion in interbank loan guarantees and bank recapitalizations, ft.com reported, to end the global financial crisis.

(Of course, 'gosh, golly' etc. were not exactly the reactions of traders and economists -- this is a family-appropriate financial blog -- but you get the point.)

Europe's decision sparked a global rally in stocks. The Dow closed up 936.42 points -- the largest one-day point gain in its history -- to 9,387.61.

Europe takes the lead

At minimum, Europe is saying that its economic stake in the current global financial system is so large that it's willing to err on the side of over-committing public funds, economist Peter Dawson said.

"Europe's response is very large, unexpected, and it could prove to be the pivotal move in this crisis," Dawson said. "Europe appears to be saying, 'well the United States is doing what it can do, given its political constraints' now let's do what our political culture allows. Basically, Europe is saying 'the storm of fear starts to lose its strength here.' "

The measures were both sweeping and unprecedented in size and scope, Dawson said. Germany said it offered about $680 billion in loan guarantees and will invest $108 billion in its banking system, ft.com reported. France said it would provide up to $435 billion in loan guarantees and invest as much as $52 billion. The United Kingdom has committed about $70 billion for investment in key banks, along with a guarantee for banks deposits and interbank lending. The Netherlands, Spain, and other nations announced similar plans.

The U.S. Federal Reserve is leading an unprecedented effort by major central banks to push dollars into the global financial system, the Fed announced Monday, backstopping government fiscal policies to restore confidence,

The European Central Bank, Bank of England, and the Swiss Central Bank, will offer unlimited dollar fund auctions with maturities of seven days, 28 days, and 84 days at a fixed interest rate. The Bank of Japan may offer similar measures, the Fed said.

The Fed added that "central banks will continue to work together and are prepared to take whatever measures are necessary to provide sufficient liquidity in short-term funding markets."

Dollar falls on increased currency supply

The dollar fell early Monday against the world's other major currencies on the news, as traders adjusted positions to the increased supply of dollars. The dollar fell one half cent to $1.3615 versus the euro, 1.5 cents to $1.7286 versus the British pound and one-third yen to 100.37 versus Japan's yen.

Economist Richard Felson told BloggingStocks Monday the major central banks' effort is clear: keep financial markets adequately supplied with dollars amid a world that's hoarding dollars.

"It's one of the paradoxes of this current global financial crisis that despite the fact that the crisis originated in the United States, banks and financial institutions around the world are hoarding dollars. The reason is the dollar is still the world's reserve currency and investors are engaging in a flight to safety. The consequence has been a credit crunch," Felson said. "The central banks' policy should help alleviate that crunch by ensuring that there's adequate dollar liquidity. It's the correct move."