Eurozone crisis: A love-hate relationship imperils the currency

The Irish voted "with a heavy heart" this week to tough out the hardships of remaining a member of the Eurozone. Greek and French voters protested the pain of austerity last month by throwing out leaders who had been slashing jobs and services to reduce debt. Spain and Italy may be more committed to the belt-tightening required to shore up the euro, but skeptical investors could undermine those sacrifices by waging a run on their banks.

Europeans have been lurching from one crisis to another for the last four years as recession wreaked havoc with many of the 17 Eurozone economies that have too little in common beyond the coins and banknotes they use. Some of the world's most influential economists now worry that crisis could escalate to catastrophe if Greeks heed the siren song of a fiery leftist telling them they can keep their euros but renege on austerity measures they promised in exchange for bailout funds.

A German-led effort to get the bloc's financial houses in order has exposed flaws in the common currency's management and ambivalence among euro users about the continent's ambitious goals for economic integration. What is accepted by frugal, savings-minded Northern Europeans as laudable restraint in public spending has sown resentment in Eurozone countries ravaged by high unemployment, teetering banks and withering cuts in social services.

Ireland's vote to approve the fiscal treaty signed this year by 25 of the European Union's 27 member states was a convincing 60.3% in favor. But politicians on both sides of the issue acknowledged that it was a hard pill to swallow for a country struggling to meet its obligations after being bailed out by Eurozone colleagues in 2010.

Ireland had one of the highest deficits in the Eurozone three years ago, but it has cut spending and debt enough to see prospects for emerging from a four-year recession. Small signs of economic improvement -- a marginal drop in unemployment last month and a hint of growth over the last year -- were enough to push the Irish to commit to the Eurozone's collective debt-reduction goals by endorsing the treaty.

"The astonishing thing about this campaign was that lots of people voted 'yes' with a heavy heart, and many voted 'no' with a heavy heart," said Joan Burton, Ireland's social protection minister, citing concerns in both camps about the treaty's potential constraints on spending to create jobs.

The long-term good may not be so prominent in the minds of Greek voters when they go to the polls June 17 to choose among candidates making brash and contradictory promises about Greece's future in the Eurozone. Alexis Tsipras has moved his radical left Syriza party to the political fore, according to the latest poll, with his vow to bail on the bailout terms and his dubious assertion that Greece would nevertheless retain use of the euro.

“The first act of a government of the left, as soon as the new Parliament is sworn in, will be a cancellation of the bailout and its implementation laws,” Tsipras told boisterous supporters Friday when he outlined the party's economic platform.

All recent polls in Greece have shown Syriza and the conservative New Democracy Party running a close battle for popular support, but neither likely to get enough votes to form a government on its own. That threatens a repeat of the fractured May 6 vote and futile attempts among the irreconcilable parties to form a coalition government. The latest survey -- and the last before a two-week moratorium on polling ahead of the election -- on Friday showed Syriza almost doubling its share of the vote captured last month, with 31.5% support compared with 25.5% for New Democracy, which finished first on May 6.

In a sign of the disarray afflicting Greece, the country didn't manage to update its unemployment statistics for the last three months for an EU report released Friday showing a euro era-high 11% joblessness across the currency union. In February, the last month for which Athens has released figures, 21.7% of Greeks were out of work.

More job cuts and tax hikes were due to be imposed this month ahead of the next payment of bailout money from Brussels. Those cuts have been essentially suspended in the absence of an elected government.

As Eurozone residents hold their breath awaiting the next Greek vote, more immediate worry has settled on Spain, where national leaders are urging fellow Europeans to help rescue Spanish banks saddled with defaulted loans issued during a building boom in the years before recession hit in 2008. Spain last week promised troubled lender Bankia nearly $24 billion to keep it afloat, but borrowing rates have soared to record highs -- nearing the 7% rate that pushed Ireland, Portugal and Greece over the edge and forced them to seek bailouts.

Spain, the fourth-largest economy in the Eurozone, may be too big to bail out, economists say, spreading fears for the future of the entire common-currency project.

The EU commissioner for monetary and economic matters, Olli Rehn, warned during a speech in Helsinki, Finland, on Friday that "the way things are going and under the current structures, the euro area has a significant risk of breaking up."

Eurozone states have "extremely tough decisions ahead, and it’s important to face the truth,” Rehn said, alluding to suggestions among other financial leaders that contingency plans should be drawn up to cope with the worst-case scenarios being threatened from several euro states.

Earlier this week, the European Commission called for creating a "banking union" that would allow the bloc's financial institutions to invest directly in troubled national banks, rather than force already indebted states to take on further obligations at unsustainable interest rates. But Germany has resisted the idea of pooling its sterling credit with other euro users, and Chancellor Angela Merkel also remains steadfast against loosening the spending shackles on struggling states to allow them to invest in growth.

The standoff amid possibly impending catastrophe has alarmed financial experts around the globe.

"The Eurozone is experiencing three crises at the same time -- a fiscal crisis, a banking crisis and a growth crisis," said former U.S. Treasury Secretary Robert E. Rubin, now at the Council on Foreign Relations, citing weak political leadership in Europe and deep concern for the situation in Spain. "If the Eurozone continues to unravel, not only will that have very serious consequences for the Eurozone, but I believe it will have serious and maybe even severe consequences for the entire global economy, including the United States."

In a commentary Friday in Britain's Financial Times, World Bank President Robert Zoellick drew disturbing parallels between what is happening now in Europe and the financial crises that were the bellwethers of the 2008 collapse on Wall Street.

"Events in Greece could trigger financial fright in Spain, Italy, and across the Eurozone," Zoellick wrote, saying that the summer ahead had "an eerie echo of 2008."

Eurozone leaders need to be ready to recapitalize banks if spooked investors rush to withdraw their euro-denominated assets, he said.

"There will not be time for meetings of finance ministers to discuss the outlook and debate the politics of incrementalism," Zoellick said. "In panicked markets, investors flee to safe assets, sparking other flames."

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Photo:  Alexis Tsipras, leader of Greece's radical left Syriza, presents the party's economic program in Athens on Friday. Tsipras vowed to cancel harsh austerity measures demanded by the Eurozone leaders in return for bailouts of Greece's heavily indebted economy. Credit: Simela Pantzartzi / European Pressphoto Agency.

Ireland votes on treaty aimed at controlling Europe's deficits

LONDON -- Irish voters went to the polls Thursday in a referendum on a treaty aimed at controlling the runaway deficits of European Union countries.

The voting is being watched throughout Europe. Ireland is the only country to put to the EU plan, instigated by Germany early this year, to a public vote. Irish constitutional law requires public approval on major reforms.

The treaty calls on member states to limit spending and stick to budgetary targets. It aims to coordinate EU fiscal and budget policies and hold annual structural deficits within 0.5% of gross domestic product, with bailout funds from the European Stability Mechanism available to those who ratify.

Fines are to be imposed on those who fail to comply with debt targets.

Of the 27 EU nations, Britain and the Czech Republic have opted out of the treaty, which must be ratified by 12 of the 17 Eurozone states by next March. So far, Romania, Slovenia, Portugal and Greece have approved it. 

Polls indicate that the treaty will pass, but Ireland has a quixotic record on EU treaties.  Two previous referendums -- on EU enlargement in 2001 and a more streamlined EU administration in 2008 -- were rejected by Irish voters, then accepted in a second vote after amendments. This time there will be no second vote for Ireland.

But Irish voters are expected to reluctantly favor more austerity and continued access to EU rescue funding. Ireland has already been saved by a massive European bailout of $108 billion in 2010.

Although one poll shows the treaty passing with 60% support, there is also the specter of low turnout. 

In a last appeal before the balloting, Prime Minister Enda Kenny urged Ireland's 3.1 million voters to "vote yes on Thursday, yes to stability, yes to investment," and give greater credibility to Ireland when it takes over the EU presidency in January.

Fierce criticism of the measure has come from the Sinn Fein opposition party, once the political arm of the outlawed IRA revolutionaries of Northern Ireland but now a legitimate and popular left-wing force in Northern Ireland and the Irish republic. Party leader Gerry Adams told voters not to give up their say over Irish economic policy and "not to write austerity into the Constitution."

Results of the vote are expected to be known by Friday.

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Photo: Posters for and against the EU fiscal treaty are seen outside government buildings in Dublin, Ireland. Credit: Peter Morrison / Associated Press

Euro crisis imperils recovering global economy, OECD warns

Most major economies are enjoying growth and recovery after four years of turmoil but the improvements are uneven and the Eurozone crisis could spill outside Europe "with very serious consequences for the global economy," the Organization for Economic Cooperation and Development warned Tuesday.

The report by the chief economist for the bloc of developed nations urged its member countries that use the euro currency to consolidate lending and spread the pain of tight and expensive credit in nations like Greece, where austerity measures have forced deep cuts in jobs and government services and tapped out banks.

"The crisis in the euro area has become more serious recently, and it remains the most important source of risk to the global economy," wrote chief economist Pier Carlo Padoan. He noted the elections earlier this month that brought anti-austerity President Francois Hollande to power in France and toppled a Greek government committed to staying in the Eurozone but did not leave an alternative in place.

At a news conference in Paris, OECD chief Angel Gurria laid out a hopeful forecast for the United States and Japan, whose economies are predicted to grow by 2.4% and 2%, respectively, while the Eurozone,  the 17 nations that use the euro, expects a 0.1% contraction.

Spain overhauls its banks to help avoid bailout

MADRID -- In a bid to strengthen its finances and avoid a European rescue, Spain moved to overhaul its entire banking system Friday, forcing lenders to come up with $40 billion to cover real-estate losses and allowing them to set aside their toxic assets.

With one in four workers out of a job, Spain has slashed spending and raised taxes to comply with European Union fiscal rules, but its borrowing costs remain near levels that sent Greece, Ireland and Portugal into bailouts. Investors fear Spain may be next. Its banks are the weakest link, weighed down by unpaid loans left over from a housing boom that went bust in 2008.

The government nationalized the country's largest real-estate lender, Bankia, late Wednesday.

The danger is that once foreclosed homes and other assets are devalued to current market prices, the losses could bankrupt the lenders and sabotage the entire Spanish economy.

Under the new rules unveiled Friday, Spanish banks will collectively have to come up with $40 billion to balance out bad property loans, or acquiesce to government loans at a 10% interest rate. Banks will also be allowed to move non-performing assets -- unpaid loans or foreclosed properties -- off their balance sheets into separate entities, for resale at market prices. 

Economy Minister Luis de Guindos acknowledged that Spain's economic health depends on these actions. 

"Without certainty about the solvency of the banking sector, economic recovery is much more difficult," he said at a news conference Friday.

He said the 10% government interest rate would mitigate the cost to taxpayers. But many economists say the cost of banking reforms could be in the tens of billions of dollars, mostly shouldered by the state. 

"It is very difficult for the banks to be able to come up with capital or additional funding on their own, because the markets are dried out," said Fernando Fernandez, an economist at Madrid's IE Business School. "The euro debt crisis has deteriorated, the growth picture has also deteriorated and the aversion of investors to invest in real estate or banks in Spain is very high."

Carving off bad assets from banks' balance sheets might help in the short term, Fernandez said, "but the loss will still be there. The government -- and taxpayers -- will eventually have to pay for this."

Any expenses could make it harder for Spain to comply with EU spending rules. Spain's deficit was 8.5% last year, nearly three times the mandated limit. On Friday, the EU issued its twice-yearly economic report, forecasting that Madrid would miss its 2012 and 2013 targets by a wide margin.

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Photo: In Madrid, Spanish Economy Minister Luis de Guindos unveils an overhaul of Spain's troubled banking sector on Friday. Credit: Jaime Reina / AFP/Getty Images

U.S. blacklists sons of 'Chapo' Guzman, fugitive Mexican drug lord

 
MEXICO CITY -- The U.S. Treasury Department on Tuesday added two sons of drug lord Joaquin "El Chapo" Guzman to its "designated kingpin" list, which bars all U.S. companies, banks and individuals from doing business with them.

The sons, Ivan Archivaldo Guzman Salazar, 31, and Ovidio Guzman Lopez, 22, play "significant" roles in their father's vast drug-trafficking empire, officials said in a statement. Guzman Salazar was arrested by Mexican authorities in 2005 on money-laundering charges but released, the statement added.

The blacklisting also freezes any assets the men might have under U.S. jurisdiction. "Chapo" Guzman, a fugitive billionaire and Mexico's most-wanted criminal, has been on the kingpin list for a decade. He heads Mexico's largest and oldest cartel, based in the Pacific state of Sinaloa. In 2005, the U.S. offered a $5-million reward for information leading to his arrest.

The U.S. government has held up its blacklisting program as one of its main tactics for fighting powerful drug cartels. More than 1,000 individuals and companies have been targeted. However, an investigation last year by The Times showed that many blacklisted firms and people continue to thrive and do business in Mexico, relatively undeterred.

The senior Guzman has numerous children by several women, including twin girls born last year in Southern California with a former beauty queen he married when she was 18.

Targeting two of his sons appears to be part of a drive to penetrate Guzman's inner circle. A number of senior aides have been arrested recently, and authorities report near-misses in capturing the capo himself.

The Treasury Department "will aggressively target those individuals who facilitate Chapo Guzman's drug-trafficking operations, including family members," Adam J. Szubin, head of the blacklisting program that operates under what is officially known as the Office of Foreign Assets Control, said in the statement. "With the Government of Mexico, we are firm in our resolve to dismantle Chapo Guzman's drug trafficking organization."

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Photo: In a 2005 wanted poster for Joaquin Guzman, U.S. authorities offer a bounty of $5 million. Credit: U.S. Justice Department

Romanian government is latest victim of EU austerity

Romania's government fell after a no-confidence vote and the leadership of the Czech Republic narrowly survived a similar challenge Friday in the latest challenges to European efforts to heal the Continent's debt crisis with tough spending cuts and higher taxes.

Jobless rates also rose this week in Spain and France, where austerity measures are angering citizens and undermining faith in the government officials trying to balance budgets and shore up the euro common currency.

The governments of Ireland, Portugal, Greece, Italy, Spain, Slovenia, Slovakia and Finland already have fallen as the European Union struggles to restore economic stability to its 27 member states. Now, the  Romanian parliament by a narrow margin has declared no confidence in the 2-month-old leadership of Prime Minister Mihai Razvan Ungureanu.

Romanian opposition to belt-tightening swelled to an intensity not seen since the 1989 pro-democracy revolution as the government boosted a sales tax to 24% and cut the salaries of government workers. The spending constraints are an attempt to satisfy conditions imposed after a 2009 bailout by the European Union, the International Monetary Fund and the World Bank.

President Traian Basescu later nominated opposition leader Victor Ponta to succeed Ungureanu, the national news agency Agerpres reported. Ponta, 39, had been a critic of government actions that have hit Romanian civil servants with major pay cuts and raised the cost of living for many others. He will have to submit his own proposal to parliament for meeting the country's bailout obligations.

In Prague, where the Czech Republic's three-party coalition collapsed earlier this week, Prime Minister Petr Necas won grudging endorsement to continue his program of tax hikes and spending cuts on services including higher education, pensions and healthcare. Necas won 105 votes from 198 deputies after a nine-hour debate dominated by critics demanding his resignation and early elections, the CTK news agency reported.

Some lawmakers who defected last week nonetheless stood by Necas, heeding the warnings of respected economists that essential austerity measures will only be more painful if postponed.

More than 100,000 people protested the cuts at a rally in Prague a week ago, one of the largest outpourings of discontent since the Velvet Revolution that ended Communist rule 22 years ago. 

Hungary's economy is also hobbled by a credit crunch, and Prime Minister Viktor Orban urged the IMF on Friday to swiftly negotiate an emergency borrowing option for Budapest in case of turmoil in the European bond market.

The Netherlands was at risk of missing the EU's budget-deficit target for a fifth year before the government of Prime Minister Mark Rutte cut a deal with the opposition this week that will keep austerity measures in place until new elections in September. 

Both Greece and France are in the throes of heated election campaigns in which opposition candidates are gaining traction because of hardships brought about by budget-balancing measures.

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Photo: Romanian Prime Minister Mihai Razvan Ungureanu at the parliament session in Bucharest Friday that ousted his government with a no-confidence vote. Credit: Vadim Ghirda / Associated Press

Mobile money a 'bright spot' for billions lacking bank accounts

Half of the world's population does not have a bank account, with many people saying they make too little money to bother with the cost or hassle of opening one, a new Gallup survey from the World Bank found. Instead, many turn to cheaper alternatives to save or transfer money, including their cellphones.

Banking can help people save, open up access to credit and make it easier to transfer money, the World Bank said. Although 89% of people polled in wealthy countries have a financial account, only 41% in developing countries do, said the Gallup poll of about 150,000 people. Across the globe, women are less likely to have bank accounts than men are, especially in South Asia, the Middle East and North Africa.

Nearly a third of the people who didn’t have a bank account said they didn’t have enough money to get one, and a quarter said opening an account was too expensive. Others said someone else in their family already had an account, the banks were too far away, or they didn’t have the right documents.

Banking fees, for instance, can be dauntingly expensive in poorer countries. In Sierra Leone, such fees cost more than a quarter of the average annual income, the World Bank report said. Some workers are unable to drum up wage slips or official proof of residence, barring them from getting an account.

Barriers to traditional banking have led to some creative alternatives. To save without turning to a bank, people around the world do a variety of things, including buying gold and starting a savings club, in which people pool their savings and give the whole amount to a different member each week.

"Mobile money" also has taken off in much of Africa, a trend that the report called a "bright spot" in expanding access to financial services. More than two-thirds of Kenyans surveyed said they had used a cellphone to send or receive money in the last year, accessing accounts that may not be tied to traditional banks or require the same kind of document. Some of the "unbanked" rely on mobile money instead.

However, governments have increasingly pushed for regulations putting banks in charge of such services. India now requires mobile money to be run through banks, which may have slowed its growth there, the report said. The World Bank contends that phones and other technology should be used to increase access to banks.

“Providing financial services to the 2.5 billion people who are ‘unbanked’ could boost economic growth and opportunity for the world’s poor,” World Bank President Robert B. Zoellick said.

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Image: A map of the world shows the percentage of adults with an account at a bank or other formal financial institution, based on a Gallup survey of about 150,000 people. Credit: World Bank / Measuring Financial Inclusion

Jailed oligarch says tax rich Russians: 'the Khodorkovsky rule'

Tuesday wasn't the deadline for filing income tax returns in Russia, but raising rates for  the rich was nonetheless on one oligarch's mind.

From his prison cell in remote northwest Russia, jailed tycoon Mikhail Khodorkovsky proposed his own version of the "Buffett rule," the brainchild of Berkshire Hathaway chief executive and billionaire Warren Buffett to ensure that households with more than $1 million in income each year pay at least as high a rate as middle-class Americans.

Khodorkovsky, who has been penning his thoughts on life on the outside in recent years in the tradition of exiled writers and political activists banished before him, called for the Russian government to tap as much as 40% of inheritances worth more than $30 million to better fund services for the masses.

In his latest lecture carried by Novaya Gazeta on Tuesday, the former head of the now-defunct Yukos oil empire said Russia's tax system is cumbersome, overstaffed and stifling to  entrepreneurism.

"The tax policy looks as if its authors have set themselves the task of creating the best environment for corrupt government executives and putting pressure on businesses by manipulating the ambiguity of the tax code," said Khodorkovsky, a staunch opponent of once- and future-President Vladimir Putin.

The accusations that have kept him behind bars for eight years are widely seen as politically motivated;  among his purported crimes was tax evasion.

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Photo: Mikhail Khodorkovsky under guard in a glass cage at Moscow's Khamovnichesky court Dec. 29, 2010.  Credit: Sergei L. Loiko / Los Angeles Times