Deepening recession heats up talk of Greece exiting Eurozone

European Central Bank President Mario Draghi

When the euro hit wallets and bank accounts on New Year’s Day a decade ago, champagne and fireworks greeted the Europeans' embarking on what was touted as an irrevocable course for prosperity and economic integration.

GlobalFocusOver the years, though, as the economies of Greece, Spain and other Eurozone nations became mired in debt, expectations of a happy commune of affluence have given way to thoughts of breaking off the laggards to save the herd. What the Economist and other journals have referred to as a kind of "Hotel California that you can never leave" now looks to some to be exactly the hellish trap evoked by the Eagles in their 1970s ballad.

Greek officials disclosed this week that their economy shrunk 6.2% from April through June and that unemployment is close to 24% and rising. The shaky coalition government, confronted by strikes and protests against earlier austerity measures, has yet to identify the last $5 billion or so in budget cuts it must make to qualify for the next tranche of bailout funds due in September.

The bad news came as little surprise to the Eurozone’s better-off members, Germany first among them, which have complained for months that Athens has repeatedly failed to demonstrate the will to pare its bloated government payroll and get serious about collecting taxes.

A delegation of the so-called troika of creditors -- the European Commission, the European Central Bank and the International Monetary Fund -- visited Athens last month and is expected to issue a critical report on the Greek balance sheet in September. That has shifted the conversation from whether Greece will exit the Eurozone to how many other common currency users might follow.

Even Greek analysts have become dubious of the country’s prospects for living up to the commitments made to get triple-digit billions in bailout funds. They have been issuing gloomy forecasts of an inevitable Greek exit -- or Grexit, as it has come to be called -- perhaps preparing the public for an eventual return to the drachma.

“The political system once more showed how counterproductive it is. Instead of designing a workable state, it tries to reproduce the one that already exists,” the Greek daily Kathimerini’s columnist Paschos Mandravelis groused Monday. In his analysis, titled “On another planet,” he accused the government of protecting well-connected allies and unproductive state jobs.

A week ago, Greek Finance Minister Yannis Stournaras said the government was still looking for about a third of the $15 billion in cuts to the 2013-14 budgets demanded by the troika in exchange for vital cash infusions. Debt inspectors are due back next month for a final review of whether Athens has gotten its finances in order, a judgment expected to be negative unless the government forces through deeply unpopular budget cuts and privatization plans in the final few weeks.

Elsewhere in the common currency club, the mood has changed from one of steadfast commitment to keeping the 17-nation Eurozone intact to mounting resignation that at least Greece will have to go.

Athens’ potential departure "has long since lost its horrors," German Economy Minister Philipp Roesler told ARD television recently. Luxembourg Prime Minister Jean-Claude Juncker, who chairs Eurozone finance ministers’ meetings, observed last week that a Greek exit would be “manageable.” On Monday, when German Chancellor Angela Merkel returned from a hiking vacation in the Italian Alps, she was confronted with even more dismissive comments by her coalition partners.

“An example must be made of Athens that the Eurozone can also show teeth,” Markus Soeder, Bavarian finance minister and member of a conservative sister party to Merkel’s Christian Democratic Union, told the Bild am Sonntag newspaper. He contended that Germany can ill afford to keep bailing out spendthrift euro members and that “further help to Greece is like pouring water into the desert.”

In the Economist cover story this week, a mock memo to Merkel on a possible Plan B advises her to consider two options to her current course of scrambling to hold the Eurozone together. One envisions Greece's departure, which alone could cost the euro area $398 billion in debt write-offs and transitional aid. The other scenario, in which Portugal, Ireland, Cyprus and Spain would also leave, could cost the rump Eurozone $1.4 trillion but halt the slow bleeding of bailouts to the struggling periphery, the respected London-based publication calculated.

Charles A. Kupchan, a professor of international affairs at Georgetown University and former European affairs director on the National Security Council under President Clinton, attributes the growing Grexit talk to an emerging consensus among economists that Athens' departure is a question of when, not if.

"Behind the scenes the European Union is making preparations for a Greek exit to contain the damage," he said of the latest assessments of the Eurozone's integrity.

Grexit would be manageable because of Greece's small economy and the fact that its finances are unlikely to ever meet Eurozone standards, Kupchan said. But he sees other departures as potentially destabilizing for the whole monetary union experiment.

"When you start talking about the Spanish or the Portuguese or the Irish leaving, that's a new ballgame," he said. "That's not a controlled exit of a member or two; it's a complete overhaul of the Eurozone."


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Photo: Mario Draghi, president of the European Central Bank, has pledged to do whatever it takes to protect the euro common currency. But mounting debts and persistent recession in some of the peripheral countries of the Eurozone have turned the conversation to managing the departure of Greece, instead of preventing it. Credit:  Hannelore Foerster / Bloomberg

PRI figure reported arrested with Mexican drug lord's cousin

MEXICO CITY -- The Mexican press was having a field day Friday with reports from Spain that a cousin of one of the world's most powerful drug lords was arrested in Madrid along with a politician with the party of President-elect Enrique Peña Nieto.

The arrested politician, Rafael Celaya Valenzuela, was a mid-level figure in the Institutional Revolutionary Party (PRI) in the state of Sonora. Newspapers were quick to publish on their websites photographs that Celaya had posted on his Facebook page, showing him with Peña Nieto.

Peña Nieto's people were almost as quick to disavow any knowledge of Celaya's alleged criminal activities (link in Spanish). The candidate posed for "hundreds of thousands" of photographs during the campaign, the PRI said in a statement, and so the pictures with Celaya were meaningless.

Celaya had applied to become the PRI's Sonora candidate for the federal legislature in the July 1 vote, but the party rejected his bid, the statement added. Mexico's Reforma newspaper reported that the candidacy was rejected because Celaya had misspelled his name.

Celaya was arrested in Madrid along with a man identified by Spanish police as Jesus Gutierrez Guzman, cousin of Joaquin "Chapo" Guzman, fugitive billionaire head of the vast Sinaloa cartel. Two other alleged members of the cartel were also captured.

The Spanish El Pais newspaper quoted authorities as saying the men were tasked with expanding the cartel's movement of cocaine into Europe through Spain (link in Spanish). The arrests came as part of an operation dubbed Dark Waters and conducted by the Spanish police and the American FBI, El Pais said.


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Photo: Photos released by Spanish police Friday show four men arrested in Madrid, including the cousin of one of the world's most powerful drug lords and a politician with Mexico's soon-to-be-ruling Institutional Revolutionary Party. Credit: Spanish Police


Confidence teetering in Eurozone, economists warn

German Finance Minister Wolfgang Schaeuble and Treasury Secretary Timothy Geithner
It's been more than two decades since the Iron Curtain fell and Europeans embarked on an ambitious mission to build a powerful economic, political and social union in place of the Cold War divide. And for more than two decades, Germans have been footing most of the integration bill.

GlobalFocusCompassion fatigue set in long ago among the continent's most prosperous people, and the mounting costs of keeping the Eurozone intact a decade after the common currency was introduced have all but exhausted Germans' generosity toward their needy neighbors.

In this summer of economic discontent that is rattling financial markets worldwide, commitment to the 17-nation Eurozone has been a hard sell for German politicians whose constituents see only more expense and uncertainty with the wobbly fiscal union. Investors, too, seem to have increasing doubts about the euro's future and European Union leaders' ability to forge a viable plan for managing collective finances.

All eyes are on the European Central Bank this week following the vow of its president, Mario Draghi, to do whatever is necessary to keep Spain and Italy in the Eurozone despite skyrocketing interest costs for servicing their massive debts. The bank is constrained by European Union treaty provisions from loaning money directly to governments, and Germany has staunchly opposed proposals for funneling bank funds to needy member states through mechanisms meant to provide strictly supervised bailouts, not to bankroll loans.

The ECB “is ready to do what it takes to preserve the euro. Believe me, it will be enough,” Draghi assured investors last week, bringing about a short-lived reprieve in the interest rates demanded by lenders for 10-year bonds to finance Spanish and Italian debt.

"After Draghi's comments, expectations are quite high that the central bank will take action Thursday. But at the end of the day, the ECB cannot solve this problem," said Keith Savard, senior managing economist at the Milken Institute in Santa Monica.

The ECB can fiddle with collateral requirements and the refinance rate for some short-term relief, but what is needed to restore confidence in the euro is coordinated fiscal strategy and collective guarantees that new loans will be repaid, Savard said. It will take years, he noted, to execute the necessary legislation and treaty revisions once agreement is reached, which appears far from imminent as Germany and other Northern European euro users resist exposing their own good credit to the dodgy finances of some of their neighbors.

Uri Dadush, director of the international economics program at the Carnegie Endowment for International Peace in Washington, sees some progress -- "glacial," he said -- toward stabilizing the euro since May, when Greeks voted out the political coalition committed to the euro. Greeks managed to seat a pro-euro government in a second election in June, but they have yet to adopt the belt-tightening measures needed to get vital bailout funds due in August.

"There is urgency -- you see this in the volatility of the markets. But is catastrophe imminent? I don't think so. People know the ECB is there and, when push comes to shove, that the ECB will intervene," said Dadush.

Despite the barriers to direct lending to governments by the central bank, Dadush said it has managed to buy up at least $246 billion in government bonds at below-market interest for heavily indebted euro countries.

"Rules are there to be broken once the politicians decide this is what needs to be done," he said.

German resistance may also be broken, if the crisis escalates and threatens to further damage the market for Germany's cars, technology and other exports, said Fabian Zuleeg, chief economist at the European Policy Center in Brussels.

He is critical, though, of the German government's failure to make a strong case to its citizens about the benefits of preserving the currency union and moving forward with deeper financial integration.

"It's not a very positive way of engaging your citizens when you are scaring them into a situation where you say they don't have a choice," Zuleeg said.

All three economists interviewed Tuesday observed that Washington could help stabilize the euro if it were to buy the bonds of struggling states, demonstrating confidence in the currency that would inspire China, Japan, Brazil and other big economies to do likewise. They also agree there is virtually no chance that will happen, given the United States' own debt issues and a presidential election underway.

U.S. Treasury Secretary Timothy F. Geithner in effect confirmed Tuesday that the euro crisis would be left to the Europeans to resolve.

"This is completely within their financial ability to solve," Geithner said at a Los Angeles World Affairs Council event, although he  acknowledged that the politics of the problem may be a more difficult sell.


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Photo: German Finance Minister Wolfgang Schaeuble, left, meets Monday with U.S. Treasury Secretary Timothy Geithner at a vacation home on the North Sea island of Sylt, where they discussed the outlook for tackling the Eurozone debt crisis. During a Los Angeles visit Tuesday, Geithner made it clear that the euro woes were a matter for Europeans to resolve. Credit: Philipp Guelland / Associated Press

Spain's borrowing cost hits record; worries grow over Greece

Europe’s long-running debt crisis flared sharply as Spain’s borrowing rates jumped to another record high and worries grew over Greece’s ability to keep on qualifying for the emergency loans it desperately needs to stay afloatLONDON -- Europe's long-running debt crisis flared sharply Monday as Spain's borrowing rates jumped to another record high and worries grew over Greece's ability to keep on qualifying for the emergency loans it desperately needs to stay afloat.

Investors skeptical of Madrid's creditworthiness pushed interest rates on Spanish bonds to almost 7.5%, far above the 7% level regarded as the upper limit of what the government can tolerate paying in the long term.

It was the highest yield on record since the common euro currency, which Spain uses, went into circulation in 2002. Although the figure dropped slightly by Monday's end, concern that the Spanish government might eventually be forced to seek an international rescue swept across the continent, sparking heavy losses in the stock markets.

The rise in borrowing rates confounded officials and economists who had thought that a recently finalized deal to bail out ailing Spanish banks, worth up to $121 billion, would assuage investor fears. A new austerity package of tax hikes and spending cuts unveiled last week was also expected to boost confidence in Spain.

Instead, the markets have exhibited serious doubt that Spain's problems -- a tanking financial sector, a shrinking economy, Europe's highest unemployment rate -- are being adequately addressed. Even Madrid's own official forecast doesn't envisage the economy growing again until 2014.

On Monday, Spanish Economy Minister Luis de Guindos insisted that his country would not become the latest, and by far the economically largest, member of the 17-nation Eurozone to require a full-fledged government bailout. But many analysts and investors discount such protestations, because officials in Greece, Ireland and Portugal all said the same before bowing to the inevitable and seeking emergency loans.

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Eurozone officials finalize terms of Spain bank bailout


MADRID -- Eurozone finance ministers on Friday finalized the terms of a bailout for Spanish banks of as much as $122 billion, but the agreement did little to calm markets.

Spain's borrowing costs broke another euro-era record after deeply indebted Valencia on Friday became the first Spanish province to ask the central government for a rescue of its own. The Spanish stock market plummeted and the euro lost value.

The bank bailout was first put together last month by Eurozone leaders worried about the Spanish financial system, which is weighed down by billions of dollars in bad loans from a burst real estate bubble.

"Providing a loan to Spain for the purpose of the recapitalization of financial institutions is warranted to safeguard financial stability in the euro area as a whole," Eurozone finance ministers said after a midday conference call. The zone includes the 17 European Union nations that use the euro currency.

The financial ministers said the Spanish government would retain "full responsibility" for the loan, a statement that appears to address an ongoing tussle between Spain and Germany, Europe's paymaster, over whether Madrid would remain on the hook for the loans if the banks cannot pay back the money themselves.

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More economic pain in Spain as government unveils new cuts

This post has been corrected. See the note below for details.

PAMPLONA, Spain -– Declaring Spain’s deep recession a new “reality,” Prime Minister Mariano Rajoy announced nearly $80 billion worth of spending cuts and sales tax hikes Wednesday to try to pull his government out of the red.

The new austerity measures come a day after Rajoy won European Union approval for an up to $125-billion bailout for Spanish banks, weighed down by bad real-estate loans from the country's housing bubble.

EU finance ministers also agreed to give Spain an extra year, until 2014, to meet its deficit-cutting targets. Madrid’s budget shortfall last year was 8.9% of gross domestic product, nearly three times what EU rules allow.

“We have to get out of this hole, and we have to do it as soon as possible. There is no room for fantasies," Rajoy told the Spanish parliament. "This is the reality. There is no other.”

This is the fourth round of austerity measures Rajoy’s ruling conservatives have introduced since sweeping to power in elections in November.

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Spanish baroness says hard times forced her to sell painting

The-lockMADRID -- A Spanish heiress' sale of a 19th century masterpiece by the British painter John Constable has sparked a high-society family feud in recession-ridden Madrid.

The 1824 oil painting of an English countryside scene, entitled “The Lock,” has long been displayed in Madrid's Thyssen-Bornemisza Museum, alongside works by Raphael, Rembrandt, Monet, Picasso and others. It fetched $35 million at auction Tuesday at Christie's in London, a record for any work by Constable, an English Romantic painter. It now ranks in the top five most expensive British paintings ever sold.

Baroness Carmen Thyssen-Bornemisza, the fifth wife of the late Swiss industrialist who founded the museum, has said she was forced to sell the painting because of lack of “liquidity” in Spain's dismal economy. The unemployment rate tops 24%, and the country has requested a bailout of much as $125 billion from Europe.

“It's very painful for me [to sell the painting], but there was no other way out,” the baroness told the Spanish newspaper El Pais. “I need the money -- I really need it. I have no liquidity. Keeping the collection here is costly to me, and I get nothing in return.”

But the 69-year-old heiress, a former Miss Spain beauty queen who goes by the single moniker “Tita,” is one of the richest women in Spain. She's said to employ 80 servants at four luxury villas and owns a Rolls-Royce and a 175-foot yacht. Both relatives and art aficionados have cast doubt on her claim of hardship.

“She likes to pretend she is a typical Spanish citizen who is struggling just like everyone else, but that could not be further from the truth,” the baroness' stepdaughter, Francesca von Habsburg, told the Mail on Sunday in Britain. “The baroness has shown absolutely no respect for my father and she is simply putting her own financial needs above everything else.”

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Spain's high court launches probe into Bankia failure

Rodrigo-ratoThis post has been corrected. See the note at the bottom for details.

MADRID -- Spain's high court opened a criminal fraud investigation Wednesday into the conduct of 33 current and former executives at Bankia, the conglomerate of Spanish savings banks whose spectacular downfall forced Madrid to request a European bailout.

Bankia, the country’s fourth-largest bank but its biggest real-estate lender, was swamped by unpaid property loans left over from the housing bubble. Too big to fail, Bankia was nationalized by the government in May, using $24 billion in taxpayers' money. But the task proved too expensive, and Madrid was forced to request up to $125 billion in European aid.

The judicial probe names Rodrigo Rato, the former International Monetary Fund chief who recently resigned as Bankia's chairman, and 32 other top executives. They are suspected of falsifying accounts, price-fixing and misleading investors in the lead-up to Bankia's initial public offering last year. Most of the IPO shares were sold to Bankia customers, who have now lost more than 75% of their investment.

After its nationalization, Bankia acknowledged that it had misstated its profits for 2011. The bank initially declared a $387-million profit for that year, which ended up being restated as a $3.7-billion loss.

Bankia was created in 2010, with the merger of seven regional savings banks. Last month, Spain's state prosecutor launched a separate investigation into the legality of that merger.

Rato has close ties to Spain's ruling conservative Popular Party, having served as economy minister from 1996 to 2004 under a previous government. The probe into his conduct could prove embarrassing for Prime Minister Mariano Rajoy’s party, which had previously rejected calls for a public investigation into alleged mismanagement at Bankia. At least two other former Popular Party politicians are named in the investigation.

The case is likely to stir public anger over the conduct of politicians and business elites, while the country's unemployment tops 24%.

The probe was triggered by a suit brought by a small political party called Union, Progress and Democracy. Judges will determine if formal charges should be filed. If convicted of the crimes alleged in the case, defendants could face up to six years in prison.

For the record, 2:47 p.m. July 4: A previous version of this post incorrectly said the bank restated its loss in 2011 as $3 billion. It was $3.7 billion.


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Spain celebrates as number of jobless claims falls

MADRID -- After an all-night party to fete their national soccer team, Spaniards who managed a few winks of sleep woke up Tuesday to even more good news: the biggest summertime jobs rally in 16 years.

Nearly 100,000 fewer Spaniards filed for jobless claims in June, a record compared with the last 16 summers. June usually triggers a hiring spree at the start of Spain's busy tourist season. But government data released Tuesday show last month saw the biggest employment boost since 1996.

It was also the third consecutive month in which Spain's unemployment rate has edged downward, falling 2.1% in June, the Labor Ministry said.

“We have to wait to see if this becomes an overall tendency,” the deputy labor minister, Engracia Hidalgo, said in a statement.

Jobless claims figures were the second piece of good news for the nation this week. Spain swept Italy 4-0 on Sunday in the final of the European Championships, and Spaniards have staged massive street parties since then.

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Spain pauses amid downturn to celebrate soccer win

Spain celebrates Euro 2012 soccer win
MADRID -- The national soccer team's win at the European Championship has given Spain a little respite from its dismal economic news. 

The team arrived home Monday to a massive nationwide party, with hundreds of thousands of Spaniards crowding the capital to wave flags and hug strangers.

Spain has Europe's highest unemployment rate, at nearly 25%, and double that for youth. Its economy in shambles after the collapse of its housing market, Spain recently accepted a bailout of up to $125 billion to rescue its troubled banks.

Soccer fans who couldn't afford a bar tab stood outside and peered through windows at television screens inside Madrid cafes Sunday, when Spain defeated Italy 4-0 in the final match of the tournament, held in Poland and Ukraine over the last three weeks.

Spain is the first team to ever win three back-to-back international tournaments: Euro 2008, the 2010 World Cup and now Euro 2012. It beat Italy with the largest-ever goal margin in any Euro final.

The team arrived home on an Iberia Airlines plane emblazoned with the words "Proud of Our National Team." Players met with the Spanish king and then motored through packed streets in an open-air bus to fans' cheers of "I am Spanish!" and "We are the champions!" A stage erected in front of Madrid's grandiose Cibeles Palace hosted bands that played late into the night.

"For at least these past few weeks, we could think about other things besides the economy -- football!" said 26-year-old graduate student Ignacio Hernando. "But it's true that we're having quite a bad year, and we're going to have another two or three, I expect, before things get better."

"This tournament shows we're the best at something else, at least, besides the economy," Hernando said, holding a beer and wearing a Spanish flag as a cape.

Another fan, 29-year-old Ivan Fernandez, was a bit more somber: "Tomorrow, the crisis will be here again."

But success on the soccer field has sparked jokes about what other tough jobs the Spanish national team, nicknamed "La Furia Roja," or the Red Fury, could take on. A cartoon published Monday in the Spanish newspaper El Mundo shows the team's coach, Vicente del Bosque, and several players dressed in business suits, preparing for a new profession.

"The government of Prime Minister Del Bosque and his ministers," read the caption.


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Photo: Firemen, unseen, spray water on Spanish fans as they celebrate Spain's Euro 2012 soccer championship in Madrid.  Credit: Andres Kudacki / Associated Press


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