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As Greece Closes Banks, Fear Spreads Of A Eurozone Implosion

As Greece Closes Banks, Fear Spreads Of A Eurozone Implosion

By Henry Chu, Los Angeles Times (TNS)

LONDON — As the Greek debt drama hurtles toward a nail-biting climax, fears are mounting that the outcome could sink not just Greece but the euro and the idea of the European Union itself.

Athens is dangerously close to bankruptcy after days of fruitless negotiations with international lenders over a new bailout package to keep it afloat. A Greek collapse could leave European leaders scrambling to prevent turmoil from spreading to other vulnerable Eurozone countries such as Italy and Portugal.

On Sunday night, Greek officials announced that Greece’s ailing banks would be closed Monday, and perhaps as long as a week, to prevent a further hemorrhage of cash from the financial system, after the pullout of billions of euros by worried depositors in recent weeks. ATM withdrawals could be capped.

The turmoil caused the euro’s value to drop sharply in early trading in Asia on Monday.

In a brief television address — his second in less than 48 hours — Prime Minister Alexis Tsipras assured his compatriots that their savings and pensions were safe. But the extraordinary step, following an emergency Cabinet meeting, sent residents scurrying to join long lines at ATMs, some of which were empty.

Tsipras blamed the situation on Greece’s creditors for refusing to extend his country’s current bailout past its Tuesday deadline — the latest verbal volley in what has become a high-stakes game of chicken between Athens and fellow members of the 19-nation Eurozone.

Without a new funding deal in place, Greece will almost certainly fail to pay the $1.8 billion that is due the International Monetary Fund on Tuesday, becoming the first developed country in history to default on an IMF debt.

That could cause Greece to crash out of the Eurozone, an unprecedented step whose potential consequences have officials and investors on edge.

In such an event, the Greek economy would be thrown into chaos as the government imposed heavy capital controls, rushed to reintroduce the drachma and tried to placate angry citizens and businesses whose savings suddenly plummeted in value.

Finance officials are hopeful that they could contain the fallout and keep borrowing costs for bigger countries such as Spain from rising to unsustainable levels.

But even if they succeeded, the damage to the euro’s credibility as a safe currency — and to the EU’s cherished ideal of “ever closer union” on a continent torn apart by two world wars — could be irreparable.

“The objective of the euro was to deepen economic integration between member states, foster a closer common polity and European identity,” said Simon Tilford, deputy director of the Center for European Reform in London. “It has not done any of those things. It has actually undermined all those things. Forcing Greece out will only exacerbate that damage.”

European leaders are eager to avoid a potential doomsday scenario. President Barack Obama has also weighed in: The White House said the president and German Chancellor Angela Merkel agreed in a phone call Sunday that “it was critically important to make every effort to return to a path that will allow Greece to resume reforms and growth within the Eurozone.”

But European officials have also expressed exasperation with Tsipras’ government, which abruptly walked out of bailout talks in Brussels on Friday. The two sides have been unable to agree on what Greece must do to raise revenue and cut spending if it wants to continue receiving aid from international lenders.

Tsipras stunned his Eurozone partners by announcing Saturday that he would put their bailout proposals to a public referendum next weekend. Moreover, he and his left-wing Syriza party plan to urge voters to reject those proposals, denouncing them as a recipe for more hardship, especially for the poor and elderly, in an economy decimated by years of forced austerity.

Athens has proposed higher taxes on the wealthy and big corporations instead, but creditors worry that that would hamper growth.

The other 18 Eurozone nations quickly closed ranks, warning that they would not extend Greece’s current bailout package past its expiration Tuesday. That means that Athens could run out of money and tumble into default well before voters even had a chance to cast their ballots in the plebiscite.

In a measure of how much trust has broken down, European officials took the unusual step Sunday of releasing their bailout proposals to show that they had made some concessions and were prepared to address other Greek demands, such as debt relief, when Athens’ negotiators abruptly pulled out.

For his part, Yanis Varoufakis, Greece’s outspoken finance minister, publicized remarks he made to his Eurozone counterparts at a closed-door meeting Saturday. He complained that the Greek government’s counterproposals were “never taken seriously,” and that “common ground was thus sacrificed in favor of imposing upon our government a humiliating retreat.”

In many ways, Tsipras’ administration is caught in a bind of its own making. He swept to power after elections in January on the strength of campaign promises that many critics warned were irreconcilable.

“They’ve developed a narrative of ‘We can have our cake and eat it. We can be in the Eurozone and end austerity,’ ” said Kevin Featherstone, an expert on Greece at the London School of Economics.

Those goals are essentially mutually exclusive in the present climate. Led by Germany, Greece’s creditors have shown virtually no willingness to deviate from their prescription of heavy public-spending cuts in exchange for bailout funds.

There were a few signs Sunday that Greece’s creditors were trying to coax it back to the bargaining table.

Pierre Moscovici, the EU’s top economic official, said via Twitter that Greece “should stay in (the) euro. … The door is still open for negotiations.”

But it is unclear whether the Greek government has responded.

(Times staff writer Jim Puzzanghera in Washington contributed to this report.)

(c)2015 Los Angeles Times. Distributed by Tribune Content Agency, LLC.

Photo: A man walks past a graffitti with a EU flag reading in German, “NO” concerning Greece’s referendum on the latest offer of a debt deal by the country’s EU-IMF creditors, in Athens on June 28, 2015. (AFP / Aris Messinis)

IMF Chief Charged With Negligence In French Arbitration Case

IMF Chief Charged With Negligence In French Arbitration Case

By Clare Byrne, dpa

PARIS — International Monetary Fund (IMF) chief Christine Lagarde has been charged with “negligence” over a 400-million-euro state payout to a businessman when she was French finance minister, French media reported on Wednesday.

Lagarde was questioned Tuesday for a fourth time over the affair by a court that investigates ministerial wrongdoing, Mediapart news site reported.

At the end of the session, Lagarde told AFP news agency, the court’s commission of investigation had decided to charge her with negligence.

Asked whether she would resign her post Lagarde, who has always denied any wrongdoing, replied “No.”

“I’m returning to work in Washington as of this afternoon,” she said, adding she had instructed her lawyer to challenge the decision.

Neither Lagarde’s lawyer nor the prosecutor’s office were available for comment.

The case revolves around Lagarde’s decision to refer a long-running dispute between the government and businessman Bernard Tapie over the sale of his sportswear company Adidas to an arbitration panel.

The mediators ordered the state to pay Tapie 400 million euros in compensation — a figure far in excess of the amount he might have expected to win had the matter been left to the courts.

Lagarde overruled her advisors in pushing for a settlement.

Tapie’s support for then president Nicolas Sarkozy during his 2007 election campaign sparked suspicion of a sweetheart deal to benefit the businessman.

Five people, including Tapie and Lagarde’s former chief of staff in the finance ministry, France Telecom boss Stephane Richard, have already been charged in the case.

Lagarde’s role in the affair is being investigated separately by the Court of Justice for the Republic.

Until now, the court had declined to bring charges, placing her instead under the status of key witness in the case.

A person is charged with an offence in France when the investigating magistrate is satisfied there is “serious and corroborating evidence” of wrongdoing.

At the end of the investigation the person is either ordered to stand trial or the charges are dropped.

So far the IMF has backed Lagarde, who took over the job after her French predecessor, Dominique Strauss-Kahn, quit in 2011 to fight charges of sexual assault.

Photo via Wikimedia Commons

IMF Cuts 2014 U.S. Economic Growth Forecast To 1.7 Percent

IMF Cuts 2014 U.S. Economic Growth Forecast To 1.7 Percent

Washington (AFP) – The International Monetary Fund on Wednesday lowered its U.S. economic growth forecast for 2014 after severe winter weather in the first quarter delivered a sharp contraction.

The IMF projected that the world’s largest economy would grow a “disappointing” 1.7 percent this year, after a 1.9 percent expansion in 2013.

The forecast marked another downgrade from the IMF, which estimated U.S. growth of 2.0 percent for the year in mid-June, down from a 2.8 percent estimate in April.

“An unusually harsh winter conspired with other factors, including an inventory correction, a still-struggling housing market, and slower external demand” to lead the economy to contract by 2.9 percent in the first quarter, the 188-nation global lender said.

Although activity appears set to pick up in the rest of the year to well above the country’s growth potential in a range of 3.0-3.5 percent, it would not be able to offset the first-quarter drag, the worst contraction in five years.

“This means growth for the year as a whole will be a disappointing 1.7 percent,” the IMF said in a statement following its annual report card on the member economy, known as an Article IV consultation.

But the following year should see a strong rebound, with 2015 growth picking up steam to the fastest annual pace since 2005, it said.

The IMF predicted the improvement would be driven by strong consumption growth, a declining fiscal drag, a pickup in residential investment, and easy financial conditions.

“Risks around this outlook include slowing growth in emerging markets, oil price spikes related to events in Ukraine and Iraq, and earlier-than-expected interest rate rises.”

AFP Photo/Joe Raedle

IMF Approves $17 Billion Aid For Ukraine

IMF Approves $17 Billion Aid For Ukraine

Washington (AFP) – The International Monetary Fund approved a $17 billion aid deal for Ukraine, even as Kiev fought to prevent pro-Moscow separatists from grabbing another chunk of the country.

Greenlighting a rescue program for an interim government which took power after an uprising two months ago, IMF chief Christine Lagarde said it was crucial to strengthen Kiev’s economy.

“Urgent action was necessary,” the Fund’s managing director said, after her executive board’s approved of the plan.

“Deep-seated vulnerabilities together with political shock have led to a major crisis in Ukraine,” she warned.

“The economy is in recession, fiscal balances have deteriorated, and the financial sector is under significant stress.”

The global crisis lender’s decision opens the way for an immediate deployment of $3.2 billion to Kiev, which the Fund said has pledged to implement tough reforms.

Those include slashing subsidies for fuel, cutting a large fiscal deficit, getting more control on salary increases, reducing corruption, and strengthening a frail banking system.

The plan also assumes a quick resolution to the country’s fight with Russia over some $2.2 billion owed to Gazprom, and agreeing a new price for gas purchases from the Russian energy giant.

Some of the money from the IMF loan could go toward repaying Gazprom.

“Decisive measures were taken by Ukraine and decisive measures have just been taken by the IMF,” Lagarde said.

But Lagarde conceded that the rescue of Ukraine — which totals $27 billion with additional aid from the World Bank, the European Union and others — faces deep challenges, especially geopolitical.

“Risks to the program are high. In particular, further escalation of tensions with Russia and unrest in the east of the country pose a substantial risk to the economic outlook.”

“We’re trying to mitigate the risks as much as we can,” she said.

The Fund has moved quickly to aid the country, under immense economic and political pressure since February’s overthrow of the pro-Russia government of president Viktor Yanukovych.

It warned that the Ukraine economy faces a 5.0 percent contraction this year, even with external support.

The IMF has been wary about lending to Ukraine after two previous loan plans since 2008 failed because of the government’s failure to meet reform conditions set by the global crisis lender.

Prime Minister Arseniy Yatsenyuk has promised to implement new IMF-proposed reforms, including the fuel price hike that will be unpopular and politically difficult.

The IMF points out that natural gas prices in Ukraine are half those of Russia, which produces and exports gas, and less than a quarter of Poland’s.

Reza Moghadam, director of the IMF’s European Department, said some fiscal austerity is necessary to stabilize government finances.

Without a “moderate” amount of austerity, he said, the combined deficit of the government and the state energy company Naftogaz would rise to an “impossible-to-finance” 12 percent of GDP.

“The authorities see the program as a historical break with a past marked by crony capitalism, pervasive corruption, and poor governance which weighed heavily on the economy,” he said.

“They believe that there is a window of opportunity for bold and ambitious reforms.”

At the same time, the ongoing siege in economically important eastern Ukraine poses a more immediate danger.

Moscow has already engineered the secession of Crimea, which Russia then annexed, and Russian forces are massed on Ukraine’s border, threatening to join pro-Moscow secessionists in the east.

On Wednesday, Kiev said its forces were on “full combat alert” against a possible Russian invasion.

But authorities admitted they were “helpless” to prevent pro-Kremlin insurgents tightening their grip on the eastern region.

Adding fuel to the situation are Russia’s threats to cut off gas supplies to Ukraine, and the heightened sanctions against Russia by the U.S. and Europe.

“On the geopolitical front, clearly, the bilateral support and the cooperation of all parties will be extremely helpful to reinforce the position of the economy of Ukraine,” Lagarde said.

“Anything that undermines the economic situation of the country will jeopardize the implementation of the program.”

Sergei L. Loiko/Los Angeles Times/MCT