September 30, 2022

Latvia Steps Toward a Tarnished Prize, the Euro

FRANKFURT — The small Baltic nation of Latvia received official endorsement for membership in the euro currency union Wednesday, in a move that European leaders clearly hoped would demonstrate the endurance of the euro zone despite its dismal economic performance and damaged reputation.

“Latvia’s desire to adopt the euro is a sign of confidence in our common currency and further evidence that those who predicted the disintegration of the euro area were wrong,” Olli Rehn, the European Union’s commissioner for economic and monetary affairs, said in a statement.

Both the European Commission, the European Union’s main policy-making body, and the European Central Bank said that Latvia had met the requirements for membership, which include limits on inflation and government debt. Latvia also had to demonstrate that its laws on issues like central bank independence are in line with European Union standards.

Latvia’s application still requires review by the European Parliament and endorsement by European Union political leaders, a process that is likely to result in formal approval in July.

Latvia would join on Jan. 1, becoming the 18th European Union country to adopt the euro.

The country, with 2.2. million people and economic output last year worth about 20 billion euros, is often held up as a model for advocates of austerity because the country responded to a severe banking crisis in 2008 by slashing government spending.

Economic output plunged, unemployment soared and wages fell, but the Latvian economy gradually recovered. The country’s economy grew 1.2 percent in the first quarter of 2013 compared with the previous quarter, second only to neighboring Lithuania among European Union countries.

“Latvia’s experience shows that a country can successfully overcome macroeconomic imbalances, however severe, and emerge stronger,” Mr. Rehn said.

However, opinion polls indicate that most Latvians are reluctant to join the euro, even though they have a powerful political incentive to do so. Like Estonia, another Baltic nation, which was the most recent country to join the euro in 2011, Latvia is anxious to tie itself to Europe and distance itself from its former Russian masters.

The Latvian government did not hold a voter referendum on euro membership. In many ways, the country is already a de facto member. The country has kept its currency, the lat, closely tied to the euro. And Latvian bank loans are commonly denominated in euros.

In its report, the European Commission said it had concluded that Latvia “has achieved a high degree of sustainable economic convergence with the euro area.”

The European Central Bank was also generally positive about Latvia, but expressed some concerns about the country’s readiness.

About half the deposits in Latvian banks come from outside the country, primarily Russia. That raises the risk of a sudden exodus of money in the event of a crisis. Earlier this year, Cyprus, another tiny euro zone member, was forced to limit withdrawals to prevent a bank run by Russian depositors.

But Latvia is considered less vulnerable to a Russian deposit flight than Cyprus because most of the money is linked to genuine business ties. Cyprus was regarded as a place where Russians parked their money to avoid taxes or because of fears that Russian authorities might one day seize assets.

The European Central Bank also expressed some concern whether Latvia could continue to meet the inflation targets required of euro members. While inflation has been well below 2 percent lately, Latvia has experienced huge swings in prices during the last decade, the central bank said, ranging from deflation to annual inflation of more than 15 percent.

The governor of the Latvian central bank will automatically join the European Central Bank’s governing council and have a vote in decisions on interest rates and other monetary policy issues. It is unclear who that person will be, since the term of the current governor, Ilmars Rimsevics, expires at the end of this year.

Historically, though, Latvia has stuck to the kind of conservative policies favored by Germany, Finland and other northern European countries. Government debt last year equaled about 41 percent of gross domestic product, well within limits set by treaty and much lower than Western European countries like France or Italy.

Still, recent experience with countries like Greece and Ireland has shown that nations can have trouble maintaining fiscal and economic discipline after they have joined the euro club.

“The temporary fulfillment of the numerical convergence criteria is, by itself, not a guarantee of smooth membership in the euro area,” the European Central Bank said in its report.

James Kanter reported from Brussels.

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Bailout Terms Eased for Ireland and Portugal

But ministers struggled to make progress on a bundle of initiatives to create a so-called banking union intended to break the vicious circle between indebted sovereign governments and shaky banks that helped unleash a string of crises, repeatedly threatening to sink the euro over the past three years.

The most important step taken by the ministers Friday was an agreement in principle to extend the maturities of emergency loans made to Ireland and Portugal by seven years. Prolonging the payment schedules could ease pressure on the countries’ public finances and allow them to obtain better terms from private lenders.

Because some of the bailout loans were granted by a fund backed by all 27 European Union countries, the 10 finance ministers from non-euro member states had to give their approval, too, after they joined the meeting Friday afternoon. The extensions still must be approved by the parliaments of some E.U. countries, including Germany.

“This is another very important step forward towards a sustained return to full market financing for both countries” Olli Rehn, the E.U. commissioner for economic and monetary affairs, said at a news conference after the meeting of finance ministers.

But Mr. Rehn also underlined that officials in Dublin and Lisbon had to stick to promises to overhaul their economies, including the kind of painful belt-tightening that has been criticized for restraining growth, leading to wider deficits and making it harder for governments to pay down debt.

“Ultimately it is the combination of growth-enhancing structural reforms and consistent fiscal consolidation that will firmly re-establish investor confidence and ensure that the Irish and Portuguese people can put this very hard crisis behind them and move on,” Mr. Rehn said.

Jeroen Dijsselbloem, the president of the so-called Eurogroup of finance ministers, said at the same news conference that the authorities in Portugal, where the Constitutional Court recently overturned some austerity measures, would be able to pass “compensatory measures” to control spending.

The ministers are struggling to fend off a return to full-blown crisis mode in the euro zone as the ramifications of the Cypriot bailout become clearer and as other concerns, including the parlous state of the economy of Slovenia, another euro member, rise up the agenda.

The Cypriot bailout raised questions about whether efforts to save the euro are on course. Investors were rattled by terms that included raiding the savings of uninsured depositors, and by a forecast this past week by the troika of international bodies overseeing bailouts that the downturn in the Cypriot economy in the next two years would be far more severe than expected just weeks ago. Unemployment is already near 15 percent.

The worry now is that Cyprus may eventually need another bailout to keep it as a member of the euro area. On Friday the ministers gave their political approval to the terms of the bailout, which involves euro zone member states contributing €9 billion in loans and the International Monetary Fund providing €1 billion. The deal still needs approval by some national parliaments.

Officials said the first payments of aid to Cyprus from the bloc’s bailout fund, the European Stability Mechanism, could take place in mid-May.

Mr. Rehn said that there would be further aid for Cyprus but that it would involve directing more E.U. structural funds to the country, rather than changing the total amount of the bailout.

Cyprus must raise billions of euros to stay within the terms of the bailout, and one option is for its central bank to sell gold reserves. Mario Draghi, the president of the European Central Bank, said at the news conference that that decision would be left to the central bank of Cyprus. But he added that “profits made out of the sales of gold should cover first and foremost any potential loss that the central bank might have” from the emergency liquidity assistance that has been provided by the E.C.B.

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Europe Presses Greek Parties to Commit to Bailout Terms

Though the ministers said they welcomed the deal to form a coalition government in Greece, European officials insisted that political consensus over a tough austerity program was a precondition for payment of the loan. Mr. Juncker said the ministers had “underlined the importance of sustained cross-party support for the program in Greece.”

“We have been calling for a coalition of national unity,” added Olli Rehn, the European commissioner for economic and monetary affairs. “It is essential that the new government will express a clear commitment on paper, in writing.”

He added, however, that provided the assurances were forthcoming, the loan to Greece could be disbursed this month. That could be done by teleconference and without a formal meeting of finance ministers, he said.

The meeting on Monday in Brussels was dominated by the political dramas unfolding in Greece and Italy. Mr. Juncker urged the authorities in Rome to begin the economic reform measures pledged by Prime Minister Silvio Berlusconi in a letter to European Union leaders last month. “What we are expecting from Italy is that Italy will be implementing all the measures which have been announced in Silvio Berlusconi’s letter,” Mr. Juncker told reporters.

The ministers also discussed a seven-page document outlining technical options for quickly expanding the firepower of their bailout fund, including one option that would hope to raise investment from outside Europe. The Dutch finance minister, Jan Kees de Jager, said the discussions remained a “work in progress.”

Officials are struggling to resolve technical details over how the 440 billion euro rescue fund could be leveraged to 1 trillion euros. The document did not refer to the difficulties European leaders have faced in persuading emerging countries to support their plans.

Under one model, the euro zone’s bailout fund would offer first loss insurance to buyers of some new issues of sovereign bonds. The other would set up “co-investment funds,” which would purchase bonds on the primary or secondary markets after attracting external investment.

But fears are growing that, even if achieved, 1 trillion euros will be insufficient if Italy fails to restore confidence in its economic management and cannot reduce its soaring borrowing costs.

The loss of market confidence in the euro zone was demonstrated Monday when its bailout fund, the European Financial Stability Facility, raised 3 billion euros via 10-year bonds to help finance its rescue of Ireland. The yield to be paid to investors was 3.591 percent, much higher than the 2.825 percent for five-year bonds issued in June.

“The yield was the highest we have had so far,” said Klaus Regling, the head of the bailout fund. “In light of the difficult market conditions, it is understandable that yields have gone up.”

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Rescue Aid to Greece Delayed as Pressure Rises for Reforms

Meeting in Luxembourg, the finance ministers made it clear that Greece was now unlikely to receive 8 billion euros ($10.6 billion) before November.

Greece has said it could default on its debt within weeks without the aid — an outcome with potentially disastrous consequences for the euro zone. But on Monday, finance ministers served notice that they intended to push Greece further.

“Full compliance with the agreed conditions is necessary for Greece to receive the funds Greece needs,” said Olli Rehn, the European commissioner for economic and monetary affairs. “A credible push for structural reforms and privatization are essential.”

“It is very likely there will need to be new measures,” Mr. Rehn added, although he said that those might be for aid to be given in 2012 since time was short.

Jean-Claude Juncker, president of the euro zone finance ministers, suggested that the issue of private sector involvement in a deal struck in July on Greek debt might be reopened. He said revisions were being discussed, but refused to say whether this could mean increased losses for private investors.

There was some good news with an agreement to allow Finland to receive collateral for loans to the Greeks, removing an obstacle to a second bailout for Greece agreed to in principle in July. No other nation is expected to request the same arrangements because of the conditions that make them costly, Mr. Juncker said.

Meanwhile Belgium’s finance minister, Didier Reynders, sought to calm fears about the fate of the Franco-Belgian financial group Dexia amid concerns about its exposure to Greek debt and reports that the bank could be broken up.

Dexia called an emergency board meeting late Monday after a 10 percent drop in its share price, and a warning from the credit agency Moody’s that Dexia’s main operating businesses were on review for a downgrade.

That highlighted the impact of the announcement from Athens on Sunday that Greece’s 2011 budget deficit was projected to be 8.5 percent of gross domestic product, down from a forecast of 10.5 percent last year but shy of the 7.6 percent target set by international lenders.

Doubts about Greece’s ability to push through harsh structural changes have led to tense discussions with officials from the so-called troika of international lenders — the European Commission, the European Central Bank and the International Monetary Fund.

Representatives of those institutions, now visiting Athens, have yet to make a recommendation to release the money.

Evangelos Venizelos, the Greek finance minister, said his country was taking “all the necessary difficult measures in order to fulfill its obligations towards its institutional partners.”

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Two-Day Strike in Greece Ahead of Austerity Vote

The strike, organized by the country’s two main labor unions, is the latest in a series of walkouts and the longest strike in more than 30 years, as public outrage has grown over the Socialist government’s relentless austerity drive.

As the strike began, Olli Rehn, the European Union’s top economic and monetary affairs official, urged the Greek Parliament to approve the measures in votes expected on Wednesday and Thursday, so that its foreign lenders could release the aid Greece needs to stave off default.

“The only way to avoid immediate default is for Parliament to endorse the revised economic program,” Mr. Rehn said. “Let me say this clearly: There is no Plan B to avoid default.”

Parliamentary debate on the measures began Monday evening ahead of the vote, one of the most important in recent Greek history. Greece’s euro-zone partners — and, indeed, governments and investors around the world — are keenly watching the proceedings out of fear that a failure to straighten out the country’s financial problems could have repercussions throughout the world financial system.

As recently as last week, it appeared as if the Socialist prime minister, George A. Papandreou, would manage to push the measures through Parliament, where he has a narrow five-vote majority. That was true even after the center-right New Democracy opposition party announced that it would vote against them, saying the measures involved too much austerity and not enough stimulus spending.

But in recent days, a series of dissenters within the Socialist Party and a growing feeling that this government may be short-lived have complicated the picture.

So has the general strike — the first time Greek unions had walked out for more than 24 hours since democracy was restored in 1974.

The strike was aimed at halting all public transportation for two days except the Athens subway, which was running to allow Greeks to attend the demonstrations.

The strike also hit the tourism sector, as air traffic controllers called two work stoppages on Tuesday morning and from 6 p.m. to 10 p.m. on Wednesday. At the country’s main port of Piraeus protesting dockworkers formed a blockade on Tuesday morning, leaving tourists unable to board ferries to the Aegean islands.

After a peaceful start, in which thousands of demonstrators converged without incident on Syntagma Square in front of Parliament in the early afternoon the situation changed suddenly, with groups of youths on the fringes of a rally throwing rocks, firebombs and firecrackers.

Security forces fired multiple rounds of tear gas to thin out the crowds, sending the youths and other demonstrators fleeing into side streets. A police spokesman said it was too early to estimate the size of the demonstration and had no information about injuries.

In the city center, hundreds of police officers in riot gear were mobilized to avert violence of the kind that broke out during the last strike on June 15 and to protect the entrance to Parliament.

Tuesday’s demonstration was one of the first I which labor unions joined with the younger demonstrators who have been gathering in downtown Athens every night for the past month and who have less clear party affiliations.

As she stood in the square near the other so-called “indignados,” or “indignant ones,” named after the Spanish youth who protested in Madrid earlier this spring, Kyriaki Kokkini, 23, a psychology student, said she had mixed feelings about the unions. “On the one hand, we oppose all political parties, but at the same time we need the unions because they’re full of people whose participation we need.”

Stephen Castle contributed reporting from Brussels.

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Uncertainty Over Greece Weighs on Financial Markets

Stocks on Wall Street were mixed in early trading on Thursday. Shortly after the opening, the Dow Jones industrial average was slightly higher, by about 12.41 points. The Dow had closed down 1.5 percent, at 11,897.27 points, on Wednesday as concerns about Greece were compounded by new fears about the pace of the United States economic recovery.

In early trading, the Standard Poor’s 500-stock index was up by 1.44 points, while the Nasdaq composite index fell 3.17 points. Both had closed down more than 1.7 percent on Wednesday.

The euro slipped, Asian and European stocks faltered and the yield on bonds of the more indebted European nations climbed.

Spain sold $4 billion of bonds at an auction Thursday, missing its top target and with average yields creeping upward again.

In Greece, Prime Minister George Papandreou said he would reshuffle his Cabinet and request a vote of confidence in Parliament after talks with the opposition about a unity government foundered.

With just a five-seat majority in Parliament, Mr. Papandreou has been struggling to get his government behind additional austerity measures demanded by its foreign creditors, and to contain growing rifts within his party

Meantime, there remained no agreement among Greece’s euro-area partners over a second emergency loan package. Talks have stalled over the extent to which private bondholders should share the burden in any new rescue.

In a statement Thursday, however, the European Union’s commissioner for economic affairs, Olli Rehn, said that he expected euro-zone finance ministers to sign off on the payout of 12 billion euros ($17 billion) for Greece from the original bailout on Sunday, and to decide on a second bailout in early July as well as the extent of private sector involvement.

“This two-step approach,” he said, “means that the funding of the Greek sovereign debt can now be ensured until September, while we take the decisions for the medium-term, beyond September, in July.”

Mr. Rehn added that he expected the Greek Parliament to agree new austerity measures.

Germany’s insistence on the role of private investors in the next bailout has contrasted with that of France and the European Central Bank, which are backing a position that would be less punishing to bondholders. On Thursday, President Nicolas Sarkozy of France called for a sense of “responsibility” and “compromise” on the issue.

“Everyone in every corner of global financial markets should be keeping a very close eye on upcoming Greek events,” the Deutsche Bank strategists Jim Reid and Colin Tan said in a research note, “The period is resembling the build-up to the Lehman collapse where, although markets were increasingly nervous, virtually everyone expected a last-minute buyer.”

“The only way to arrest the slide is if everyone backs down from their current position or if one side backs down significantly,” the analysts added. “The risks are building as the situation gets ever more difficult.”

China, which has purchased billions of euros in European debt and recently signaled its willingness to buy more, reaffirmed its support Thursday ahead of a visit next week by Prime Minister Wen Jiabao to Hungary, Germany and Britain.

“We hope Greece can realize stability and development through cooperation with the E.U. and the international community,” a foreign ministry spokesman, Hong Lei, was quoted as saying by The Associated Press in Beijing.

The febrile mood in the markets was accentuated by comments late Wednesday from the Irish Finance Minister, Michael Noonan.

He said that Dublin was ready to impose losses on senior unsecured bond holders of Anglo Irish Bank and Irish Nationwide Building Society if the European Central Bank agreed. His comments came after a meeting with the International Monetary Fund, which, he said, understood his position.

The remarks added to negative sentiment surrounding the financial sector following the announcement Wednesday of a review by Moody’s Investors Service of major French banks in the light of their exposure to Greece.

The financial services component of the Euro Stoxx 600 index was down 1.7 percent at midday Thursday. The CAC-40 index in Paris was down 1.1 percent, while the broader Euro Stoxx 50 index of blue chips shed 0.8 percent.

That followed drops in Asian markets, including 1.9 percent in Australia and South Korea and 1.8 percent for the Hang Seng index in Hong Kong.

The Nikkei 225 in Japan sagged 1.7 percent, the Taiex in Taiwan dropped 2 percent and stocks in mainland China fell 1.5 percent.

“There has been a complete loss of confidence,” said Francis Lun, managing director at Lyncean Holdings in Hong Kong. “With Greece on the verge of default, there are now fears that there will be a wider financial crisis.”

The euro was trading at $1.4117 Thursday, down from $1.4180 late Wednesday. Yields on benchmark Spanish, Greek, Portuguese and Italian government bonds climbed, while yields on safer German and British bonds fell.

Christine Hauser contributed reporting from New York, Bettina Wassener from Hong Kong and Stephen Castle from Brussels.

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