From Baku, With Love (And Intolerance)

By Joshua Kucera| Posted Friday, May 25, 2012, at 7:15 AM ET

This year’s Eurovision is in Azerbaijan. Can the conservative country be a good  host for Europe’s wildest party?

The fire towers, shown here under construction, in Baku, Azerbaijan, were finished quickly in time for Eurovision. Photo by Johannes Eisele/AFP/Getty Images.

Baku, the petrocapital on the shore of the Caspian Sea, has been designed under the principle that too much is never enough. Its newest monument is the Flame Towers, a set of three flame-shaped buildings on a hill overlooking the entire city, with LED lights that at night alternate between animations of a flickering fire and a figure waving an Azerbaijani flag. Close by is a TV tower bathed in iridescent purple light. Below that is what was, for a short time, the world's largest flagpole. Baku is kitschy, brash, and over the top.

In other words, it's the perfect place to host the Eurovision Song Contest.

For non-Europeans who might not be familiar with Eurovision: it's American Idol crossed with the Olympics, in which all the countries of Europe compete to determine who has the best song of the year. Each year's winner (chosen by the European public) gets to host the following year's contest, and the victory of Ell and Nikki last year ensured that Baku would get this year’s honors. The finals are Saturday evening; an estimated 125 million people across Europe (it's the largest non-sports TV event in the world) are expected to watch favorites Sweden, Russia, and Italy duke it out.

Azerbaijan's government, relishing its moment in this spotlight, has gone all-out in getting ready for Eurovision. It's built a brand-new performance hall, imported 1,000 purple London-style taxis, and lit up its handsome 19th-century downtown. It wasn't always clear, though, that Azerbaijan would be a natural host for Eurovision. Eurovision is no stranger to politicization, but Azerbaijan's hosting has been especially fraught. The issues were probably best put by one of my colleagues, Giorgi Lomsadze: “the contest will bring along demographics that are not particularly popular in Baku—journalists, Armenians and gays.”

Eurovision has a huge gay following; a piece in Pink News (“Europe's Largest Gay News Service”) called it “the gay World Cup.” Azerbaijan is a culturally conservative country, where gays have to keep their orientation well-hidden, which caused many to wonder if gay Eurovision fans would in fact feel comfortable in Baku. As Pink News put it, “Azerbaijan could be far from welcoming and many fans may decide not to go. People at a high level are worried about this.” Azerbaijan government officials, though, have publicly stated that gays are welcome in Baku, and there is no indication that gays stayed away because of Azerbaijan's reputation.

The problem with Armenians was settled a bit more easily. Armenia and Azerbaijan are still in a state of war over Armenia's occupation of Azerbaijan's territory of Nagorno Karabakh. Armenians are now widely, and virulently, hated in Azerbaijan, and Azerbaijan has been spending billions on its military for what appears to be an inevitable war to take back Karabakh from the Armenians. So there was the potential for some awkardness if Armenia's Eurovision competitors and fans came to Baku. But this crisis was averted by the Armenians themselves who, bowing to pressure from their own nationalists, dropped out of the contest. Prospects for better relations through song were dim, anyway: In 2009, Azerbaijani police actually called in for questioning locals who dared vote for Armenia's Eurovision entry, tracing the votes to their cell phone. (Azercell, the mobile-phone company implicated in that incident, is an official Eurovision sponsor this year.)

Perhaps most vexing of all, however, are the journalists. To say that Azerbaijan has a poor reputation internationally would be an understatement. Its treatment of its own citizens is frequently deplorable, and international and local human rights groups have used the occasion of Eurovision to draw attention to Azerbaijan's many shortcomings in the hopes that journalists visiting Baku to cover the song contest might also write about the grim political backdrop. At a hotel, I picked up what looked like a standard tourist map of Baku only to discover that it was a clever mockup by Human Rights Watch, featuring “sights” where local journalists and activists have been assaulted or killed. One local journalist, Khadija Ismailova, has done strong investigative reporting on how the Azerbaijani president's family has been profiting from Eurovision-related construction projects; for her troubles, she's been the target of a viciously personal smear campaign.

On Monday, two top government spokesmen held a press conference for foreign reporters covering Eurovision, ostensibly to address those sorts of concerns. But it only served to reinforce the thuggish reputation of the government here. To relatively tame questions about Azerbaijan's human rights record, presidential spokesman Ali Hasanov offered improbable theories of anti-Azerbaijani propaganda conspiracies hatched by Germany and Armenia. (German NGOs and the German government have been especially active in criticizing Azerbaijan's human rights record; Baku, with characteristic subtlety, has in response invoked Hitler.) And the local press, far from holding him to account for these claims, only baited him further; one asked about “German neo-colonialism” and another about whether, as a result of anti-Eurovision propaganda, “we know who is our friend and who isn't our friend” and how that will affect Baku's foreign policy in the future.

All this has caused some to question whether Baku is “European” enough to be an appropriate host of Eurovision. Azerbaijanis have long debated whether they belong in Europe or Asia: In the classic novel of the Caucasus, Ali and Nino, Baku's old city—where “the houses were narrow and curved like oriental daggers” and “minarets pierced the mild moon”— was Asia, while the new city, home to the oil companies of czarist Russia, was Europe. “It is partly your responsibility as to whether our town should belong to progressive Europe or to reactionary Asia,” Ali's teacher says. One impudent classmate responds, “Please, sir, we would rather stay in Asia.”

Today, the government likes to use the line that it is a bridge between Europe and Asia, embodying both “European” values like tolerance and “Asian” ones like respect for elders. But with Eurovision coming to town, the government has tried to emphasize its European bona fides. “We are located at the crossroads of Asia and Europe. We could remain in Asia, but we have chosen the way of European development,” Hasanov said at the press conference. In an earlier interview, he said of Eurovision fans: “Having seen with their own eyes the excellent culture of Azerbaijan, the hospitality of our people and our tolerance, they will of course see that the anti-Azerbaijan publications are deliberate provocations.”

So is Hasanov right, that the only people who think ill of the government are foreign journalists and human rights activists criticizing from afar? I took a bus tour of Baku offered to Eurovision fans, and found the tourists surprisingly well-versed on Azerbaijan's dirty secrets. And it seems that the government's attempt to manage Eurovision so tightly may have in fact backfired.

Minutes into the tour, we passed a site where some old houses were being razed. Several of the tourists rushed to the side of the bus and snapped photos; it turns out they had all heard about how the government has illegally expropriated and torn down houses in the rush to modernize and beautify the city. They mockingly pointed out the ubiquitous billboards for Emin, the president's son-in-law who will perform at the Eurovision finals. (The president's wife is also the chairwoman of the event, suggesting an attempt to hijack the event for the personal glory of the first family.

One of the fans was Birgit, a young Swiss woman wearing a T-shirt declaring her allegiance to Jedward, the boy-band duo that is Ireland's entry in the contest. When we got to the Flame Towers, she grumbled, “I heard they spent $5 million just for the lights—it's so stupid.”

I also met a group of five Spanish men, and asked them what they thought of Baku. “It's a very artificial city,” said Pablo, the only English speaker of the group. “It's like you're in Eurodisney—it's very beautiful, but you know it's fake.” He said that on the website of the Eurovision fan club they belong to there was extensive discussion of the land expropriation issue. “The people have no rights, it's terrible.” He said he and other fans also were troubled by the first family's involvement in the contest. “The people here are very nice, but you get the idea that someone told them to be nice.”

This is what happens when you create a Potemkin village: Everything in it, even the real things, seem fake. With a per-capita income of $450 a month, not many Azerbaijanis are participating in the country's wealth. Even casual visitors can see that, besides the fancy taxis, the streets are full of Ladas and decrepit buses; that just beyond the beautiful new buildings are crumbling apartment blocks that only have running water for a few hours a day. The Baku that the government is creating is a triumph of style over substance. Again, the perfect place for Eurovision.

This reporting was made possible by a grant from the Pulitzer Center on Crisis Reporting.

Azerbaijan is playing host to this year’s Eurovision Song Contest - Slate Magazine

Israel, land of Jewish refugees, riled by influx of Africans

By Joshua Mitnick, Correspondent / May 24, 2012

Violent riots broke out in Tel Aviv last night as a growing tide of African migrants strains Israel's ideal as a land for refugees.

An African migrant drives his car with a shattered window after protesters saw him on their way back from a rally against the flow of African migrants into Israel, in Tel Aviv, Israel, Wednesday, May 23. Hundreds of people gathered in south Tel Aviv Wednesday to protest against the government's handling of the flow of African migrants into Israel. Ariel Schalit/AP

Tel Aviv

In an ironic twist, Israel's most tolerant city erupted in violent riots against African migrants last night, eliciting comparisons with "pogrom" attacks on European Jewish communities in the 19th and 20th centuries.

Over the past five years, tens of thousands of African refugees have poured into Israel, particularly into Tel Aviv's more conservative working-class southern neighborhoods. Their presence has fueled a growing moral and policy dilemma that pits the Jewish collective memory of refugeedom against present day fears for the state’s economy and Jewish majority.

"Here is Israel, a country of refugees who gathered here from all over the world after having suffered for hundreds of years from racist persecution, discrimination, blind hatred, pogroms and death camps," wrote Shai Golden, a columnist in the Maariv newspaper, today. "Along come the members of the third generation after the restoration of this nation and they are amassing now against other refugees because of their difference, because of the color of their skin, because of their own economic and social distress, and they are behaving exactly the way the members of the host countries that hosted their parents and grandparents behaved."

In the working-class Hatikvah district of Tel Aviv last night, some 1,000 Israeli right-wing protesters carried placards calling for the expulsion of the Africans – a handful of parliamentarians even called them a "cancer" – and demonstrators smashed the windows of cars with Africans inside, looted stores, and beat others. Prime Minister Benjamin Netanyahu today condemned the violence and the remarks of the Knesset members, saying that Israel needs to deal with the problem "responsibly."

The African migrants crossing illegally into Israel from Egypt are seeking refuge from oppression back home but have been left in a legal limbo by Israeli authorities who refrain from deporting them but won’t grant work permits or residency status.

"It's hard for the Israeli government because of our Jewish guilty DNA and considerations of public diplomacy to put illegal Africans on planes," says Mitchell Barak, an Israeli public opinion expert. "There is a debate raging here like ones raging elsewhere, like Mexicans in the US. We want to have compassion, but at a certain point our compassion is detrimental to our own well being due to the high numbers" of African migrants, he says.

The municipality estimates there are 60,000 Africans residing in a city with a population of about 400,000. That statistic, plus the growing calls of south Tel Aviv residents for solutions, has added a new dimension to the debate. Residents of these neighborhoods complain that the government has left them on their own to grapple with a lack of security and a rising crime rate.

In recent weeks, an attack in which two Africans were accused of raping an Israeli minor, as well a pair of vigilante attacks on African residences in south Tel Aviv, has kicked up concern about rising tensions.

The frustration of south Tel Aviv residents is compounded by decades of ethnic bitterness among the working-class Middle Eastern Jews toward the liberal and more elite European Jews, who are seen as sympathizing with the Africans and ignoring the distress of local Israelis. 

"The government has placed a distressed population on the backs of another distressed population," says Shlomo Maslawi, a Tel Aviv city council member from Benjamin Netanyahu’s Likud Party, several days before the riots. "I am afraid there will be an explosion."

Shoe seller: 'Take them back to the border'

When Israel was established several years after the genocide of European Jewry during World War II, it was envisaged as a haven for Jewish refugees who were being turned away by countries. Few envisaged that the embattled tiny country would one day become a destination for distressed groups fleeing the blight of developing countries.

While the government says the migrants are looking to take low-end jobs to better their standard of living, human rights activists and the Africans insist that they are desperately fleeing oppression and war at home. But residents of south Tel Aviv say they feel unsafe at night and complain the Africans are starting illegal retail businesses without paying taxes.

"Take them back to the border," says Yehezkel, who sells shoes in an outdoor market in southern Tel Aviv. "Israel is for me, not also for Africa."

In south Tel Aviv’s Central Bus Station neighborhood, dozens of migrants spend the days in a public park passing the time sitting on children's jungle gyms or playing soccer. They gather in the park in part because the government has stopped granting work permits. 

"It’s better than Eritrea, but it's not a good life," says Thedros Desta, an Eritrean who arrived three years ago and is among the lucky migrants who got a work permit. "We don’t have any status here."

 

New border fence under construction

In the past year, Israel has sped up construction on a border fence with Egypt to make it harder for refugees to cross over the Sinai desert. Hoping to deter the Africans, it as also amended its "infiltration" law to call for mandatory incarceration for illegals.

But the fence is still incomplete, and Israel has yet to build a detention facility to house the migrants. Calls by Israel’s ultrareligious interior minister, Eli Yishai, to round up and deport the Africans have been challenged by others in the cabinet. Public Security Minister Yitzhak Aharonovitch, who oversees the police, called on the government to let the Africans work while a solution is found. 

But even some liberal advocates who have called on the government to grant the migrants residency status are acknowledging that the sheer size of the African community is posing a social threat.

"No one except a psychotic racist would deny that the overwhelming majority of Africans here are law-abiding," wrote Larry Derfner, a columnist for the left-wing +972 blog. "But with at least 60,000 here and 2,000 to 3,000 more arriving monthly, all of them crowding into a few neighborhoods of poor, conservative, frightened Jews, they are a threat to the fabric of this society. Given their numbers, there’s a limit to how much compassion Israel can show them. At this point, we have to worry about our own first."

Israel, land of Jewish refugees, riled by influx of Africans - CSMonitor.com

China's evolving relationship with 'barbarians'

 

China, which used to officially refer to foreigners as 'barbarians,' has a long history of xenophobia. The issue is at the forefront again after two high-profile incidents with foreigners.

By Peter Ford, Staff writer / May 25, 2012

A Chinese girl (l.) looks at a foreign tourist at Tiananmen gate in Beijing, China, May 22. First, videos of rude foreigners went viral in Chinese cyberspace. Then, a Beijing police crackdown on visitors without valid visas drew fervent applause. And finally, a state TV host urged his countrymen to toss out the "foreign trash." Ng Han Guan/AP

The question of how the Chinese view outsiders has been a vexed one for centuries, dating back well before 1858 when, under the Treaty of Tianjin, the victorious British forbade the Chinese government to refer to foreigners in its official documents as “barbarians.”

And the issue has raised its head here again in recent days, in the wake of two ugly incidents in which foreigners behaved like, well, barbarians.

Both were filmed by witnesses with camera-phones, and the videos went viral on the Chinese web (they were also aired on state-run TV), sparking widespread outrage. In the first, a drunken young Englishman appears to sexually molest a Chinese woman and is then beaten and kicked by bystanders; in the second a Russian man on a train puts his bare feet on the top of the seat in front of him, and responds to complaints from the woman occupying the seat with a torrent of abuse.

Not long after these videos came to light the Beijing police launched a “strike hard campaign” to expel foreigners without the correct visas, work permits, or residence permits, urging Chinese citizens to inform on suspected illegals. Matters got really out of hand when a prominent talk show host on state-run TV posted a vitriolic xenophobic rant on Sina Weibo, a popular Twitter-like social media platform.

Supporting the police campaign, Yang Rui said he hoped it would “clean out the foreign trash,” urging the authorities to “cut off foreign snake heads.” Foreign spies “seek out Chinese girls to mask their espionage” he charged, and he crowed that “we kicked out that foreign [expletive]” Melissa Chan, the Al Jazeera correspondent expelled from China last month. “We should shut up those who demonize China and send them packing,” he concluded.

This sort of sentiment is not uncommon amongst a certain segment of Chinese public opinion – Mr. Yang’s post drew some criticism in subsequent comments by bloggers but it also attracted considerable support – and the government is not above stirring up such feelings on occasion; Yang has not been publicly reprimanded, let alone fired.

At the same time, Westerners and Western products are sometimes presented and esteemed here as bigger, better, and more admirable. Not long ago a young American photographed sharing his McDonald's fries with an old beggar woman prompted much soul searching about Americans' greater sense of social solidarity.

Changing attitudes

But some observers see signs that as more and more foreigners come to live and work in China, and as more and more Chinese travel abroad or follow Western sports and film stars, an increasing number of people here are taking less extreme views of those once derided and feared as “foreign devils” or idolized as exemplars of modernity.

“There is no single strain of thought any more,” says Yu Hua, a prominent writer. “Some people may think foreigners are superior, some may not, but China is becoming a more mature society.”

That is partly because Chinese are becoming more familiar with foreigners, who were an exotic rarity only 20 years ago but can be found today in almost any city of any size. The number of foreigners entering China leaped from 740,000 in 1980 to more than 27 million last year, according to official figures.

“That means the Chinese are developing a more realistic sense of who foreigners are,” says Dan Lynch, a professor of Chinese politics at the University of Southern California in Los Angeles, who has been visiting China for a quarter of a century.

 

Cultural fear

Historically, says Chan Kwok-bun, a Hong Kong-based sociologist, “Chinese people are quite on guard against strangers in a general sense,” and “foreigners are doubly strangers. There is a deep-seated cultural fear of things that are strange.”

That attitude was fed by China’s experience of foreign invasion by British, French, American, Japanese, Russian, and German armies during the 19th century, he points out, during the period known here as the “century of national humiliation.”

Nor has that experience been allowed to gather historical dust. Chinese government propaganda harps on it constantly in a bid to remind citizens of the fate that awaits a weak nation, and “patriotic education” textbooks used in Chinese schools teach a clear lesson, argues William Callahan, author of “China, the Pessoptimist Nation.”

That lesson, he writes in his book, is that “foreigners – especially Westerners and Japanese – are barbaric imperialist invaders who only seek to exploit the Chinese people” and that “China still cannot trust foreigners and their running dogs today.”

China's confidence

But while China’s historic weakness has inculcated a sense of inferiority, that attitude is countered by Chinese people’s pride in their civilization and in their country’s extraordinary economic achievements over the past 30 years.

“There’s a dichotomy between a sense of inferiority and a sense of superiority,” says Professor Chan. “This sudden move from the lowest to the highest sets up inner turmoil in the Chinese mind.”

Xia Xueluan, a professor of Sociology at Peking University, sees no contradiction in Chinese attitudes. Rather, he says, “people are generally happy to accept foreign products and culture, but they are proud of China’s development which gives them more confidence in themselves and their country.”

“The strain of nationalism is still there,” argues Professor Lynch, “but it is based much more on self confidence rather than on a sense of insecurity and inferiority” as it was a decade ago.

That sense of confidence seems to have fed some of the online debate surrounding a poll organized this week by a famous childrens’ author, Zheng Yuanjie, which asked people whether foreigners should be subjected to stricter visa requirements. Ninety-five percent of respondents said yes.

“We should require of them what they require of us” when Chinese citizens travel abroad, read one comment. “We should not lower our standards to be inferior.”

“There is a perception that foreigners, especially whites, are treated better in Chinese society in terms of position, salary, and perks,” says Chan. “Chinese think that foreigners have a much better life than they enjoy. So incidents of foreigners behaving badly set people off very easily.”

The young Englishman is in police custody. The Russian, who turned out to be a cellist with the Beijing Symphony Orchestra, has been dismissed. And the 600,000 foreigners living in China who generally get by without offending local sensibilities can only keep their heads down and hope that the current storm blows over soon.

China's evolving relationship with 'barbarians' - CSMonitor.com

A lesson from Serbia

 

Misha Glenny

guardian.co.uk, Wednesday 23 May 2012 20.30 BST

As the Balkan economies struggle, the temptation for nationalist solutions will grow. Europe must take note

Supporters of Serbia's new president and leader of the Serbian Progressive party (SNS), Tomislav Nikolic, celebrate his victory in the Serbian presidential run-off in Belgrade on 20 May. Photograph: Andrej Isakovic/AFP/Getty Images

Two weeks after the political earthquake in Greece, Serbia has now registered a powerful aftershock with the defeat of its incumbent president, Boris Tadic, at the hands of an erstwhile extreme nationalist on Sunday.

The election may look like a localised Serbian matter but it has the potential to develop into a regional and European problem. Apart from the dramas surrounding the Hague war crimes tribunal, the Balkans region has been away from the limelight for many years now. But several of its most significant political and constitutional problems remain unresolved. And now the corrosive impact of the recession and the eurozone crisis threatens to retoxify some of those unresolved issues.

The tremors of the election aftershock have been felt well beyond Belgrade because the new president, Tomislav Nikolic, was once the loyal servant and designated successor to Vojislav Seselj – self-proclaimed leader of the murderous Serbian Chetnik movement – who has been on trial in The Hague since 2007.

Nikolic's supporters point out that since his public break with Seselj in 2008, he has trodden a resolutely pro-European path and discarded the uncompromising nationalism of his earlier career. Nonetheless, though Bosnia-Herzegovina is a political mess it would look even worse if the winds of nationalism started blowing from its neighbour. Equally, Kosovo's independence remains contested, backed by the key western powers but opposed by both Serbia and Russia.

In recent months, the EU high representative, Cathy Ashton, and her diplomatic team have been making steady progress in closing the gap between Belgrade and Prishtina. But if President Nikolic were to pursue a hardline on Kosovo then this good work could unravel. The stakes are high.

Ironically, Tadic's unexpected loss at the polls does not reflect any resurgent nationalism among the Serbian electorate. Rather he is being punished because the government, led by his Democratic party (DS), has presided over an increasingly calamitous economic downturn. Unemployment now stands at around 25% while in January US Steel pulled out of Smederevo, the metallurgical complex that accounts for 14% of Serbia's exports and on whom some 200,000 Serbs are directly or indirectly dependent.

Serbia's urban middle class, disillusioned by the economic failure and by a series of major corruption scandals, stayed away from the polling booths. Most striking of all was Nikolic's victory over Tadic in Belgrade, the stronghold of liberal Serbs. Now politicians outside Serbia are quietly holding their breath. Will Nikolic allow his erstwhile prejudices to spill out and unsettle regional stability?

In the immediate future, this is unlikely. The west, the US, Britain and Germany in particular put considerable diplomatic effort into persuading Nikolic to break with Seselj in the first place, arguing that unless he embraced the European Union he would always remain a marginal figure. In his first comments to the press, Nikolic stated that Germany was "Serbia's most important political ally", a particular surprise given that Angela Merkel has warned Serbia very publicly that it must soften its position on Kosovo or never achieve its overriding political goal – EU membership.

Furthermore, Nikolic as president does not appoint the government – he merely invites the leader of the biggest party in parliament to try to form a government. His own SNS is the largest party following parliamentary elections two weeks before the presidential runoff, but it will find it hard to find suitable coalition partners. So there is now a strong possibility that Boris Tadic will become prime minister at the head of a coalition government. The buzz word in Belgrade is "cohabitation", which will reduce the possibility of any dramatic shift to the right.

However, Nikolic's victory, combined with the disturbing rise of populism in Hungary, Serbia's neighbour to the north, should act as a wake-up call to the EU. The eurozone crisis has witnessed a rise in nationalist and even fascist parties on most parts of the continent. With some of the highest rates of unemployment and poverty, Balkan countries are susceptible to this creeping sickness. Indeed, one could argue that it is a credit to Balkan electorates that so far they have resisted the lure of nationalism.

But as their economies sag further (as they are predicted to do), the temptation for nationalist solutions will increase. Bosnia, Serbia, Kosovo and Macedonia are all still grappling with profound issues of political identity and stability which could yet turn nasty. It's another very good reason for European leaders to confront the crisis and stimulate economic growth.

A lesson from Serbia | Misha Glenny | Comment is free | The Guardian

Euro crisis: Is Cyprus next for the Grexit?

Patrick Collinson guardian.co.uk, Friday 18 May 2012 23.01 BST

Cyprus, with its out-sized banking sector equal to 835% its GDP, could be the next knock-on from the Greek euro crisis

All at sea: What will the future hold for Cyprus if Greece exits the euro? Photograph: Alamy

One of the mysteries of the Greek financial crisis is that there are any deposits left in the stricken country's domestic banks. Since 2009, it's estimated that €2-€3bn has been withdrawn from Greek banks every month. The pace has picked up markedly in recent days; on Monday alone €700m was taken out of the banks, and the Greek president told reporters: "The strength of banks is very weak right now."

A friend recently returned from a 600km trek across the countryside outside of Athens. Many roadside shops and restaurants were abandoned or locked. Locals were not willing to accept cards. Everything had to be in cash, and she sensed a fear that money tied up in the banking system would be lost should it go into meltdown.

Yet according to Greece's central bank, total deposits held by domestic residents and companies stood at €165.36bn in March. Given the likely sequence of events should Greece leave the euro – accounts frozen, converted into new drachmas and then devalued by around half – it's extraordinary there is any money on deposit at all.

I can add little to the pundits speculating whether there will be a "Grexit". But the lack of focus on Cyprus is surprising, especially given the 80,000 Brits living there. It is, of course, an independent country with its own central bank. A blog for British residents I read this week tried to calm fears about a knock-on from Greece, claiming the island has a robust deposit protection scheme. So did Iceland. Cyprus's out-sized banking sector is equal to 835% of the island's GDP, says the FT.

More worryingly, the operations of the Cypriot banks in Greece alone are equal to 130% of Cypriot GDP. Some claim the island has benefited from flows out of Greece. But when one of the country's leading banks this week required a £2bn cash injection, it doesn't ring true. Economists who talk about contagion from Greece always point to Spain and Portugal. But surely it will be Cyprus next? And if the British in Cyprus have sense they won't rely on articles extolling the island's deposit protection scheme – although savers here with the Bank of Cyprus (UK) are covered by Britain's compensation scheme.

Euro crisis: Is Cyprus next for the Grexit? | Money | The Guardian

UK 'may never recover' if Greece exits euro

Andrew Sparrow, Helena Smith and Larry Elliott

guardian.co.uk, Friday 18 May 2012 21.01 BST

Top forecaster says Britain would face long recession as key Greek politician frames crisis as people v capitalism

Alexis Tsipras, who is said to hold the future of the euro in his hands, photographed in northern Greece as a student

A Greek exit from the single currency threatens to plunge Britain into a second recession equal in ferocity to the record postwar slump of 2008-09, according to the expert responsible for the government's economic forecasting.

Robert Chote, chair of the Office for Budget Responsibility, who was speaking to the Guardian as world financial markets staggered to the end of a week that rekindled memories of the collapse of Lehman Brothers in 2008, warned that there was risk that a fresh downturn would do irreparable damage to the UK. Britain has made up less than half the ground lost when output plunged by more than 7% in 2008-09, and Chote said there was a risk that "you go down and you never quite get back up to where you started".

In a separate exclusive interview, Alexis Tsipras, the increasingly powerful 37-year-old Greek politician now regarded by many as holding the future of the euro in his hands, told the Guardian that he was determined "to stop the experiment" with austerity policies imposed by Germany. He described the tax increases and spending cuts as a "crime against the Greek people".

The leader of the Syriza party, whose success in last month's general election has led to political paralysis in Athens and a second general election, said he wanted Greece to stay in the euro, but was fighting capitalism. "On the one side there are workers and a majority of people, and on the other are global capitalists, bankers, profiteers on stock exchanges, the big funds. It's a war between peoples and capitalism ... it is the international financial system, and more especially banks, that are gaining most".

The head of the UK's OBR said the deepening crisis in the eurozone could force him to tear up his forecasts, made only two months ago, that Britain would post modest growth of 0.8% this year. "The concern is that you end up with an outcome in the eurozone that creates the same sort of structural difficulties in the financial system and in the economy that we saw in the past recession, and that has consequences both for hitting economic activity in the economy, but also its underlying potential," said Chote.

With economic output in the UK still 4% below its peak level when the recession began in early 2008, the prime minister and the governor of the Bank of England, Sir Mervyn King, have expressed concern in recent days about the vulnerability of Britain to the eurozone.

Chote said he was particularly concerned about the possibility that a second deep recession would leave permanent scars. "That means not just that the economy weakens and then strengthens again – it goes into a hole and comes out – but that you go down and you never quite get back up to where you started."

Shares in London closed down for a third week, with the jittery mood in financial markets pushing the FTSE 100 below 5,400 for the first time this year. German and French stock markets were also depressed, with even the much-anticipated stock market debut of Facebook in New York failing to lift spirits.

Greece's caretaker prime minister, Panagiotis Pikramenos, said the German chancellor, Angela Merkel, had suggested in a phone call to the Greek president, Karolos Papoulias, on Friday that Greece hold a referendum on its continued membership of the single currency alongside next month's elections, in an apparent attempt to encourage voters to back mainstream parties who support the current austerity programme.

The German government said that no suggestion of the kind had been made. But the Greek government was insistent, and said that Pikramenos had rejected the suggestion because he does not have the power to call a referendum.

Merkel's finance minister, Wolfgang Schäuble, said the eurozone crisis could last two more years, while financial market speculation that Greece's days in the euro were numbered cast a shadow over the annual gathering of leaders of the G8 western industrial nations at Camp David. Canada's prime minister, Stephen Harper, voiced his frustration at Europe's leaders, demanding tough action to tackle the crisis.

In Brussels, the European commission denied comments by Europe's trade minister, Karel de Gucht, that preparations were being made for Greece's departure from the single currency.

Meanwhile, analysts at Deutsche Bank predicted that the weak state of Ireland's banks could result in the former Celtic tiger requiring a second bailout, and in Spain there were reports that the government would call in Goldman Sachs to help sort out its banks after 16 suffered credit downgrades on Thursday.

In an echo of the months leading up to the Lehmans collapse, Mike Smith, chief executive of Australia and New Zealand Banking Group, said the turmoil in the eurozone meant Australian banks were being frozen out of money markets when seeking funds.

Chote said there were so many uncertainties around what might happen with Greece and the eurozone that trying to produce firm predictions was not "particularly helpful".

But the OBR has tried to quantify the impact of a disorderly sovereign debt restructuring in the eurozone on Britain – and the figures make grim reading. Britain would be plunged into recession for two years, according to the OBR analysis, published in its most recent economic and fiscal outlook report. There would also be deflation and unemployment would reach almost 11% by 2013-14, with debt subsequently reaching more than 90% of GDP.

Chote said these projections were of limited value because the eurozone crisis could develop in so many different ways. "For example, one issue would be, do difficulties in the eurozone make it cheaper or more expensive for the UK government to borrow?" he said. "If it makes investors more nervous about risk in general, it might make it more expensive. If they see the UK as more of a safe haven, it might make it less expensive."

UK 'may never recover' if Greece exits euro | Business | The Guardian

Letters: Greece and the trillion-dollar question

 guardian.co.uk, Thursday 17 May 2012 21.00 BST

It has become clear that the cost of Greece leaving the euro will vastly outweigh the cost of forgiving them their debts ($1,000,000,000,000, 17 May). With the second Greek election looming, the objective of Angela Merkel and the other austerity-loving bullies is to frighten Greek voters into a retreat on their refusal to swallow neoliberal snake oil. Expecting ordinary people to pay such a heavy price for a financial disaster caused by an incompetent political elite, greedy financiers and the tax-dodging rich is a disgrace. The Greek people will see through this bluff and so should we.
Peter Robbins
London

• A swift Greek exit from the euro is not the solution – instead a swift nationalisation of banks in Europe is needed (There is only one way to end this nightmare: Grexit, 16 May). Greece is a symptom and not a cause, certainly not the major cause, of the present nightmare in globalised finance. Greece accounts for less than 2% of EU GDP, and its debt levels are statistical blips in the context of the outstanding assets of the world banking system. A Greek exit does not address the inherent problem in the current architecture of banking, that of amplifying noise in trading in financial services and thus creating massive financial instability. The consequences of such instability cannot be managed in a democratic society.

Banks are borrowing at virtually no interest from central banks to lend to governments at a higher interest rate. This public subsidy has not, however, resulted in much new lending by banks to businesses. This is madness. The banking system that crashed four years ago is now beyond repair. The start of a policy of direct lending to governments by central banks and direct lending to industry by nationalised banks would help as a stopgap measure for a couple of years, until these banks can again be privatised, when legislation is in place to let banks operate under credible supervision.

A nationalised banking sector is not necessarily incompatible with a successful market economy as the experience of Taiwan and South Korea during their years of double-digit growth demonstrates. The current structure of ownership in Europe is only conducive to prolonging the nightmare that worries us all.
SP Chakravarty
Bangor, Gwynedd

• Surely, the logical conclusion to Simon Jenkins's article, which was reinforced by the arguments in Austin Mitchell's letter (Letters, 16 May), is that Germany should be the one to leave the euro, not Greece or the other "southern European economies". When is someone going to argue that Germany's current financial strength is not simply a result of its industrial model, but also arises from the competitive advantage it obtains by being in the eurozone. If Germany was to leave the euro and readopt the deutschmark, the deutschmark would go through the roof and the German economy would become less competitive at a stroke, not only against the other members of the euro, but also against most other currencies, including the pound and the dollar. It would appear Mrs Merkel wants to have it both ways, austerity for everyone else, resting on Germany's export success as a result of a weak euro, not an inherently superior productivity.
Fred Pickering
High Peak, Derbyshire

• Greeks complain they are losing their sovereignty to a German economic "diktat". It would not be the first such loss of control over the nation's finances. In 1879, following Greek military adventures and financial mismanagement, an international financial control commission was appointed. This had representatives from Britain, France, Russia, Germany, Austria-Hungary and Italy. It took over the running of Greece's finances. The commission collected revenues from state monopolies like salt, tobacco, stamps etc, and collected import duties at the port of Piraeus. Would this be worth repeating?
Peter Fraenkel
London

• Your reporter (This is not a quarrel in a faraway land, 17 May) speculates on the consequences of a "Grexit". Presumably this includes the possibility of a Spexit and, in a worst-case scenario, a Frexit. I look forward to being updated by your Guarnalists.
Alan Davis
St Austell, Cornwall

• In Latvia last December we were interested to find both lats and euros were able to be legally used. Why not drachma and euros for Greece? Most of the world has been able to use both dollars and local currency as alternatives for years. Pound and euros could even help our own trading with continentals.
Professor Colin Leakey
Lincoln

• Larry Elliott et al are right ($1,000,000,000,000, 17 May), if only the EU could find another three caryatids as strong as Angela Merkel to support all that capital, Greece could stay in the eurozone.
Syd Caplan
Cricieth, Gwynedd

Letters: Greece and the trillion-dollar question | World news | The Guardian

German stance on Greek crisis softens as eurozone fears mount

Siobhan Dowling guardian.co.uk, Thursday 17 May 2012 17.36 BST

Angela Merkel, under pressure to ease her austerity fixation, has said she is open to stimulus measures to help Greeks

Angela Merkel told CNBC she had 'the will and the determination to keep Greece in the eurozone'. Photograph: Michael Sohn/AP

In the buzzing bars and cafes of Berlin, you would hardly know that the rest of the Europe is embroiled in a crisis that threatens to spiral out of control.

Most talk in the Mitte or Kreuzberg districts this week has been about the debacle of Berlin's new airport not opening on time and a pitch invasion by Düsseldorf football fans on the night the local team Hertha were relegated. On the comment pages and political programmes, most of the chatter is about Angela Merkel's decision to fire her one-time protege and environment minister, Norbert Röttgen.

On the surface it looks as if Germans haven't had it so good in decades, allowing them to engage in navel-gazing while the rest of Europe struggles to cope with mounting debts and the challenges of Berlin-dictated austerity. When the woes of countries such as Greece do come up, it is often framed in terms of lazy southerners who don't work as hard as the Germans, and frustration at having to bail them out.

Yet the tone from the political elite in Berlin has softened somewhat in recent days as concerns mount about the prospect of Greece being pushed out of the eurozone. In a series of interviews, Merkel said she was open to some sort of stimulus measures to help the Greeks. "Europe needs to show solidarity and help particularly with growth, unemployment and development," she told CNN. And in an interview with CNBC, she said: "I have the will and the determination to keep Greece in the eurozone."

Her words were in contrast to recent tough comments from German officials who insist that if Greece were to exit the eurozone then enough of a firewall had been built to prevent contagion. While Merkel may be holding out the prospect of some sort of growth measures for Greece, her government is insisting that the Greeks stick to the terms of the deal agreed with the troika – the European Union, European Central Bank and International Monetary Fund – that allowed Athens to secure a €130bn lifeline in March and avoid default.

Merkel's finance minister, Wolfgang Schäuble, has said there can be no renegotiation of the deal. "There is no comfortable way to solve Greece's problems," he told Deutschlandfunk radio. "If Greece wants to remain in the eurozone – and we all want that – then that is the path that can help Greece," he said, referring to the programme of reforms and cuts to which Athens signed up.

The foreign minister, Guido Westerwelle, called on the Greek people to make a clear decision about their country's future when they go to the polls against next month. "The Greek people should know what they are voting about – it's not about party politics, but about Greece's future in Europe and the euro," Westerwelle said.

There has been deep frustration in Germany at the Greeks' failure to implement the reforms it had signed up to when it received its previous bailout in 2010. Politicians in Berlin are aware that the bailouts are incredibly unpopular among German voters, who see it as throwing good money after bad.

Many Germans feel that they went through their own austerity in the form of tough labour and welfare reforms implemented at the beginning of the last decade. As such, the tough line from Merkel has gone down well with German voters. A poll for Stern magazine last week showed that 61% approved of her firm handling of the euro crisis, and 59% said that any measures to boost growth should not involve taking on more debt.

However, there are also growing calls – particularly from the opposition Social Democrats – for Merkel to ease her austerity fixation. The party is emboldened by its victory over Merkel's conservative Christian Democrats in a regional vote in North Rhine-Westphalia on Sunday. The CDU sought to make an issue of the SPD-led state government's decision to take on more debt, but the strategy backfired badly.

The SPD has for the most part backed Merkel's euro policies, but it is now calling for more growth measures to complement the strict budget discipline as laid down in the fiscal compact. Merkel needs a two-thirds majority in the Bundestag to ratify the pact, and so is dependent on the SPD. This week the party said it would delay a vote scheduled for 25 May, and would only back it if it included measures for stimulating growth.

"We don't dispute the need for consolidation in Europe, but we dispute how this consolidation should be achieved," said Frank-Walter Steinmeier, the SPD floor leader in the Bundestag. "Growth must not collapse in the crisis, and the German government is ignoring this."

German stance on Greek crisis softens as eurozone fears mount | World news | The Guardian

Greek crisis: what happens next?

Jill Treanor guardian.co.uk, Thursday 17 May 2012 22.10 BST

A new election looms, with the possible reintroduction of the drachma to follow

The drachma could make a comeback if Greek elections on 17 June do not provide a solution to the crisis. Photograph: Yorgos Karahalis/Reuters

How would Greece leave the eurozone?

Greeks go to the polls again on 17 June after the vote on 6 May proved inconclusive. The new election is seen as a referendum on the euro. If the anti-austerity Syriza party wins control and cannot force Germany to relax its opposition to lower and slower cuts, there may be no option but for Greece to leave the eurozone – or be kicked out.

So it's down to democracy then?

Not quite. If outflows from the Greek banks continue at this current pace then the instability could force Greece out of the eurozone before the election.

What would happen if Greece left?

It would have to be carried out almost overnight – most likely over a weekend. The banks would have to shut their doors, bank accounts would be frozen and capital controls imposed to stop any more money leaving the country. The new currency would be likely to lose at least 50% of its value relative to the euro so any saver in Greece who has left their money in a bank will instantly find it is worth considerably less. Opinion polls show that while Greeks do not want austerity, most of them want to stay in the euro – which explains why savings are still sitting in Greek banks.

What will the new drachma look like?

Unless a load of forgotten drachma are found in a vault, Greece will need to print a new currency. It is possible that the authorities have thought ahead as Slovakia did when it split from Czechoslovakia in 1993, printing a new currency and hiding it away in London until it was needed. A more likely option could involve tweaking euros already in circulation in Greece. Some suggest a D could be emblazoned across euros, while others suggest corners could be clipped off. It would also need a new symbol for currency traders on the money markets. Before the euro, the drachma was known as GRD and by the numeric symbol 300 for international trading. The financial markets – and their computers – would need a new symbol for the currency quickly so that it could be traded.

Would it only have an impact in Greece?

The key question and hardest to answer. It could cause mayhem, just as the collapse of Lehman Bros did in 2008: sparking a wave of market panic and the biggest global recession since the 1930s. Marchel Alexandrovich, of Jefferies International, is so concerned that he reckons Greece should be "persuaded and paid to stay in the euro, which would much cheaper than the alternative".

Greek crisis: what happens next? | World news | The Guardian

Fitch warns of mass eurozone downgrades as frontrunner to lead Greece rails at 'barbaric' austerity

 

By Damien McElroy, in Athens

7:23PM BST 17 May 2012

All eurozone countries face downgrades to their debt ratings if the risk of a Greek exit rises following next month's elections, a leading credit agency warned last night.

Dark skies. The Greek flag of the Parliament waves under heavy sky as pedestrians walk at Syntagma square, in Athens on Thursday. Photo: EPA

Fitch Ratings downgraded Greece's sovereign rating to CCC from B- and sounded a wider alert for the rest of the currency bloc. It said it would put the entire zone on downgrade watch if after June 17's poll, "Fitch assesses that the risk of a Greek exit from European Monetary Union is probable in the near term."

The agency said it had cut Greece's rating to reflect "the heightened risk that Greece may not be able to sustain its membership of EMU"

It said "the strong showing of 'anti-austerity' parties in the May 6 elections and subsequent failure to form a government underscores the lack of public and political support for the EU-IMF €173bn programme".

Should the voters once again reject austerity and structural reform, Fitch said "an exit of Greece from EMU would be probable". That would be expected to trigger "a widespread default on private sector as well as sovereign euro-denominated obligations".

The agency's warning came as the front runner to become Greece's next leader, Alexis Tsipras, vowed that he would never yield to European demands to impose "barbaric" austerity.

As parliament met for a single session before its dissolution, Mr Tsipras and his principal rival traded warnings over the outlook for the debt-ridden economy.

News that the IMF was suspending its work, and the privatisation programme that was the cornerstone of the international bail-out had been put on hold, laid bare the worsening impact of the political impasse.

A caretaker government was also installed yesterday but the IMF said it would not resume contacts over the €130bn bail-out until the new government is in power.

Rival factions angrily set out their stalls to the voters. Mr Tsipras, the leader of the Leftist Syriza movement, told his supporters that voters would complete the rejection of the bail-out started on May 6 when his surprise second place derailed the austerity programme.

"They are trying to terrorise the people to make Syriza cave in. We will never compromise," he said. "The Greek people voted for an end to the bail-out and barbaric austerity. They ignored the threats and the cheap propaganda. And we are certain they will do the same now."

Mr Tsipras maintains that Greece is "on the road to hell" under the current austerity drive and that Europe will renegotiate rather than force the country out of the eurozone.

However, the conservative figurehead, Antonis Samaras, head of the New Democracy party, told his supporters that wages would halve and property prices plummet if Syriza was forced to bring back the Drachma.

"We can change everything in Greece, together with a Europe that is changing," he said. "Or we can live through the horror and isolation of a euro exit and the collapse of all that we have built."

Economists are united that the prolonged and lingering uncertainty will set Greece back further. "The rationale for what we are seeing is understandable. We are having a very difficult time and are in the fifth year of recession," said economic commentator Christos Konstas.

"But the government has run out of money and to get growth and confidence back we need investment to return in industry and infrastructure. Investors won't come back until the direction is clear."

Outgoing Greek prime minister Lucas Papademos warned it would be "disastrous" for Athens to reject the EU-IMF bail-out, but it could seek adjustments.

"A unilateral rejection of the country's contractual obligations would be disastrous for Greece, leading unavoidably outside the euro and possibly outside the European Union," he said in an open letter. "The decisions we take could seal Greece's course for decades."

Panagiotis Pikramenos, who oversees the caretaker government, said: "The country must honour the obligations it has undertaken. It cannot abrogate its obligations without reason and cause a major crisis. We must not forget that all of Europe is watching us."

Fitch warns of mass eurozone downgrades as frontrunner to lead Greece rails at 'barbaric' austerity - Telegraph

Cost of Greek exit from euro put at $1tn

Larry Elliott, Jill Treanor and Patrick Wintour

The Guardian, Thursday 17 May 2012

UK government making urgent preparations to cope with the fallout of a possible Greek exit from the single currency

The cost of a possible Greek exit from the euro has emerged as Mervyn King warned that Europe is ‘tearing itself apart’. Photograph: Chris Ratcliffe/Getty

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was "tearing itself apart".

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Officials in the United States are also nervously watching the growing crisis: Barack Obama on Wednesday described it as a "headwind" that could threaten the fragile American recovery.

In a speech in Manchester before flying to the United States for a summit of G8 leaders, the British prime minister, David Cameron, will say the eurozone "either has to make up or it is looking at a potential breakup", adding that the choice for Europe's leaders cannot be long delayed.

"Either Europe has a committed, stable, successful eurozone with an effective firewall, well capitalised and regulated banks, a system of fiscal burden sharing, and supportive monetary policy across the eurozone, or we are in uncharted territory which carries huge risks for everybody.

"Whichever path is chosen, I am prepared to do whatever is necessary to protect this country and secure our economy and financial system."

Officials from the Bank, the Treasury and the Financial Services Authority are drawing up plans in the expectation that a Greek departure from monetary union – increasingly seen as inevitable by financial markets – could be as damaging to the global economy as the collapse of Lehman Brothers in September 2008.

With a second election in Greece called for 17 June, King dropped a strong hint that the Bank would take fresh steps to stimulate growth if policymakers in Europe failed to deal with the sovereign debt crisis.

"We have been through a big global financial crisis, the biggest downturn in world output since the 1930s, the biggest banking crisis in this country's history, the biggest fiscal deficit in our peacetime history and our biggest trading partner, the euro area, is tearing itself apart without any obvious solution," he said.

Doug McWilliams, of the Centre for Economic and Business Research, said a planned breakup of the single currency would cost 2% of eurozone GDP ($300bn) but a disorderly collapse would result in a 5% drop in output, a $1tn loss. "The end of the euro in its current form is a certainty," he added.

Alistair Darling, who was Chancellor of the Exchequer under the former Labour administration, said: "This has the seeds of something disastrous. It is madness. If it spreads to bigger countries, this could be really disastrous for Europe. It could consign us to years of stagnation."

Capital flight from Greece has increased since it became clear that a coalition government could not be formed after the election earlier this month. The Greek president, Karolos Papoulias, said citizens were withdrawing their money amid "great fear that could develop into panic" at the risk of a debt default and exit from the euro area, according to minutes of their meetings posted on the presidency's website. In little more than a week following the election on 6 May, €3bn was withdrawn from bank accounts. The central bank reported that €800m was taken out in a single day earlier this week.

The head of the International Institute of Finance banking lobby, Charles Dallara, said money was leaving Greece at a growing pace due to political uncertainty. "There has been a pickup of deposit flight from Greece, but I think that is stabilisable once you get a new government in place, if that government reaffirms its intention to remain in the eurozone." The damage to the rest of Europe if Greece were to leave the euro would be "somewhere between catastrophic and armageddon", he said.

The Spanish prime minister, Mariano Rajoy, told parliament that his country faced trouble financing itself as borrowing costs shoot up to "astronomic" levels. The Irish finance minister, Michael Noonan, said Dublin's plan to return to capital markets in late 2013 might not be achievable because of the uncertainty.

The first meeting between French president François Hollande and German chancellor Angela Merkel helped to calm nerves in the markets at one stage, with suggestions that Berlin might be amenable to initiatives to boost growth in Greece and the other austerity-stricken nations of the eurozone.

But the jittery mood was underlined by a fall in European shares and the single currency late in the day amid reports that the European Central Bank was cutting off its funding lifeline to Greek banks that had failed to amass enough capital to protect them from future losses.

The ECB later said it expected the Greek central bank to use part of the €130bn bailout from the EU and IMF to ensure that the country's banks were safeguarded from collapse, and that they would receive additional help from Frankfurt only once this had happened. Already delayed by the political uncertainty in Greece, €18bn is now expected to be released to recapitalise the banks.

Sony Kapoor, of the Brussels-based Re-Define thinktank, said: "The high-stakes game of chicken between Greek and other EU politicians must end now. Those saying that a Greek exit from the eurozone will not be a big deal either don't know what they are talking about, or have some ulterior motives. The social, political and economic damage to the EU from a Greek exit is potentially incalculable."

At the G8 summit, which starts on Friday, Obama will press Merkel to lean more towards a growth package for Europe, instead of pressing so hard for the austerity measures that were rejected by Greek voters.

But foreign affairs analysts said that Obama's leverage with the European leaders is minimal. Although the US has the economic muscle to help Europe out of its mess, the Obama administration has taken the strategic decision not to become involved directly.

Instead, Obama is to use the Camp David summit for some quiet diplomacy, hoping to sway Merkel to endorse some immediate actions to help growth.

King, speaking at the publication of the Bank of England's quarterly inflation report, said growth in Britain was weaker and inflation higher than Threadneedle Street had expected three months ago. It would take until 2014 for output to return to where it was in 2008, when Britain's deepest post-war recession began.

"What is so depressing about it is that this is a rerun of the debates in 2007/08 – these are not liquidity problems, they are solvency problems," King said. "Imbalances between countries in the euro area have created creditors and debtors and at some point the credit losses will need to be recognised and absorbed and shared around," he said.

"Until that is done, there will not be a resolution. That is why just kicking the can down the road is not an answer. The European Central Bank has performed heroically in trying to buy time but that time hasn't been used to put in place fundamental underlying solutions."

Cost of Greek exit from euro put at $1tn | Business | The Guardian

Greece in crisis: this is not a quarrel in a faraway land

 

Heather Stewart

guardian.co.uk, Wednesday 16 May 2012 22.26 BST

Britain's huge banking sector will find itself on the frontline if Greek voters reject austerity, says Heather Stewart

A replica of a drachma coin in Athens. The shockwaves from a Greek departure from the euro 'would arrive in the UK pretty swiftly'. Photograph: Yorgos Karahalis/Reuters

In September 1938, Neville Chamberlain described the growing conflict between Germany and Czechoslovakia as "a quarrel in a faraway country between people of whom we know nothing". It would be easy to think much the same about the crisis in Greece, but, be assured, that would be as mistaken as Chamberlain was then.

The centre of this crisis – Athens – may be 1,500 miles from Britain, but the shockwaves would arrive in the UK pretty swiftly. Britain's huge banking sector will find itself on the frontline if Greek voters reject austerity and the country dives out of the single currency.

Many banks have shrewdly slashed their direct exposure to Athens over the past 12 months; but the impact of a "Grexit" would be much broader than a drop in the value of Greek bonds. It could hit lending, force up the rates banks charge for finance and make life far more difficult for the exporters so key to recovery.

Italy and Spain (countries in which British banks are far more exposed) have struggled to convince the markets they are capable of tackling their debt mountains and it is likely they would come under intense pressure. Their borrowing costs would spike as investors fretted about another country following Greece towards the exit and spiralling bond yields can rapidly turn a tricky budgetary situation into a full-blown fiscal crisis. Bailed-out Portugal and Ireland would also come under renewed pressure.

As banks across the continent tried to assess their own and each other's exposure to this kaleidoscope of risks, there would be a severe threat to the entire European financial sector.

Britain's financial institutions, owing to their sheer size and heavy international exposure, would find it impossible to escape the collateral damage from a euro meltdown. That would inevitably push up borrowing costs for firms and consumers on this side of the Channel – including mortgages, for example – and could even leave some British banks in need of more government help.

The second route through which the effects of a Greek departure from the euro would arrive in the UK is via slumping overseas trade. Despite the exhortations of Vince Cable and other ministers for Britain's firms to focus on opening up new markets in Asia and Latin America, Europe still accounts for around half of British exports.

Ironically, given that George Osborne has sketched out his position in sharp opposition to his "feckless" European colleagues, rising exports to eurozone countries were one of the few bright spots in the UK's dismal economic performance over the past 12 months. But with the eurozone sliding into recession, sales to the worst-hit countries are now in decline. The latest official figures showed an 8% fall in exports to Spain, and a 7% drop to Italy over the three months to March. That effect will only worsen in the coming months, as the economic downturn deepens, driven by political chaos and plunging business and consumer confidence.

The effect of declining demand from these struggling economies on the UK is likely to be compounded by a rise in the value of sterling against the euro, as investors flee the troubled single currency and seek the safety of alternatives, including the pound, undermining the efforts of exporters.

All this will be hitting an economy that had been flatlining for 18 months, and has now tumbled into the first double-dip recession in decades. While it admits to drawing up contingency plans for the event of a euro collapse, the Bank of England has conspicuously refused to publish estimates of the economic consequences for the UK.

However, independent analysts have been less wary of making predictions; and the consensus is that if the euro implodes, the recession will be longer, deeper and more painful than anyone could have predicted.

Danny Gabay, of Fathom Consulting, for example, predicts that the impact of a euro breakup on the economy would be "roughly half as bad again" as the collapse of Lehman Brothers.

Greece in crisis: this is not a quarrel in a faraway land | Analysis | Business | The Guardian

Greece faces stark election choice – in or out of the euro

Larry Elliott, and Helena Smith in Athens

guardian.co.uk, Tuesday 15 May 2012 20.32 BST

Collapse of coalition talks plunges eurozone into fresh turmoil as EU policymakers work on plans for post-Greek single currency

As Greece's position within the eurozone looks increasingly fragile, a man walks towards a replica of a drachma coin outside Athens town hall. Photograph: Yorgos Karahalis/Reuters

Europe is facing a month of political and economic upheaval after the failure of nine days of coalition talks in Greece prompted fears on Tuesday that a fresh election in the crisis-torn country would herald the start of the breakup of the single currency.

In what was being seen in the financial markets as an "in or out" referendum on membership of the 17-nation eurozone, party leaders in Athens called a second poll next month once it became clear that they were unable to piece together a national unity government to manage Greece's biggest crisis in modern times. Karolos Papoulias, the Greek president, finally admitted defeat in his attempts to form a government and the date of the new election – either 10 June or 17 June – will be announced on Wednesday.

The collapse of talks sent tremors through financial markets and prompted warnings from Germany's finance minister, Wolfgang Schäuble, that Greece would have to stick to its hardline austerity programme in order to continue to receive the bailout cash needed to pay government salaries and support troubled banks.

Europe's policymakers are now actively working on plans to minimise the fallout from a possible Greek departure from the single currency after an election in which the anti-austerity Syriza party is expected to increase its support. Christine Lagarde, managing director of the International Monetary Fund, said she wanted Greece to stay in the euro but said the IMF had to be "technically prepared for anything".

In Berlin last night French president François Hollande and his German counterpart Angela Merkel stressed they were both in favour of keeping Greece in the euro.

"I want to reiterate that we are very united. We want Greece to stay in the euro. We also know that the majority of the people in Greece see it that way," Merkel said. But she underlined that Greece had to stick to its side of the deal regarding its debt management. "We think promises made have to be kept," she said, following brief talks with Hollande who flew to Berlin just hours after his inauguration. "We have said whatever we can do regarding structure and growth we'll do," she added.

Hollande, whose trip to Berlin was delayed for two hours after his plane was struck by lightning, said: "It's my wish that Greece stays in the eurozone … but we have to make it possible for Greece to find solutions to its problems."

Merkel said she wanted to stress the message particularly ahead of the new Greek poll in June. "We'll make clear that we have the expectation or wish that Greece stays in the Euro," she said, adding that she would be happy to hear of "any additional measures for growth either coming from Greece or that we can suggest to them if they want that."

Touching on the topic of encouraging growth which very much shaped his election campaign, Hollande added: "We need to be able to say to Greece Europe is ready to support further growth measures so that growth can return to Greece."

"We know we have an overwhelming and huge responsibility," he said.

He said he wanted Europe to pool its ideas on growth measures by the end of June.

He brushed aside fears that his and Merkel's ideas on how to solve the eurozone debt crisis differed too much to make them workable. Germany and France were united, he said.

"There are many people ... trying to emphasise the things that divide us. But we will work together for the future," he said.

News of the political impasse in Athens put paid to a modest rally in European markets on Tuesday caused by the surprise news that growth of 0.5% in Germany spared the eurozone collectively from the double-dip recession suffered by Britain. Growth in the monetary union area ground to a halt in the first three months of 2012, although the picture would have looked less rosy had statisticians in Europe followed the British tradition of adjusting data for the extra working day in a leap year.

David Owen, economist at Jefferies, said that in Germany alone the leap-year effect would added 0.4 percentage points to growth over a full year.

Official figures released on Tuesday showed that Italy's economy had shrunk by 1.3% over the past year, Spain had contracted by 0.4% and Greece by 6.2%. The length and depth of the slump in Greece – which has seen a 20% drop in output in the past four years – has led to the growing popularity for parties of left and right opposed to the terms of the €130bn bailout package agreed earlier this year.

No group won enough votes, however, to have a working majority in Athens's 300-seat parliament and parties that backed the terms of the bailout lost support.

The euro fell to its lowest in three and a half years against the pound on the foreign exchanges, while concern that a Greek exit from the single currency would have a domino effect pushed shares in Spain to their lowest in nine years. The interest rates paid by the Italian and Spanish governments for their 10-year borrowing were both above the key 6% level as concerns grew that the eurozone's third and fourth biggest economies might need bailouts from the IMF and the European Union.

A caretaker government will replace the outgoing left-right coalition, led by the technocrat banker Lucas Papademos, as the nation prepares for another round of election campaigning.

Attributing the breakdown to "petty party interests", Evangelos Venizelos, who heads the socialist Pasok, said he hoped the next decision of Greek voters would be more mature. "Unfortunately the country is being led again to elections … under very bad conditions," he said. "The country can find its way again," the politician insisted, before urging citizens to read the minutes of the two-hour-long talks. "Let's choose to go towards the better. In God's name, let it not be worse."

Like its longtime rival New Democracy, Pasok was pummelled in the 6 May election, a ballot that will be remembered for reconfiguring Greece's political map.

Athens is not only dependent on rescue funds from its "troika" of creditors – the European Union, the European Central Bank and the IMF – that rushed to prop up its ailing economy in May 2010. It is also running out of money fast.

With an €18bn cash injection for the banking system put on hold, a senior official in the outgoing government admitted there were concerns over whether Greece could "make it" until the next election.

"It is a real issue," he told the Guardian. "The economy is in very bad shape. "The banks have no money. There is no liquidity. It is vital that this cash injection is released by the EFSF [the EU's emergency rescue fund]."

Jonathan Loynes, chief European economist at Capital Economics, said: "There is now a considerable danger Greece simply runs out of money next month – that it can't pay wages, can't run public transport, can't maintain infrastructure and that the country just descends into complete chaos."

Greece's eurozone partners are likely to spend the next few weeks ratcheting up the pressure on the country's voters to back parties prepared to stick to the spending cuts, wage reductions, tax increases and privatisation included in the austerity programme. But the economist Nouriel Roubini said he expected Syriza, which wants to "tear up the barbaric accord" to emerge victorious, leading eventually to default and exit from the euro.

Chris Beauchamp, market analyst at IG Index, said: "The reality now is that there will be elections in mid-June, and at present the anti-bailout, leftwing Syriza party is poised to win a majority.

"If it does, it is pledged to abandon most austerity measures, which would result in the halting of bailout payments and likely result in the exit of Greece from the euro. After two years, this event now seems inevitable, barring some major turnaround in the Greek political climate."

Greece faces stark election choice – in or out of the euro | World news | The Guardian

European leaders and financial markets braced for Greece exit from euro

Larry Elliott and Ian Traynor in Brussels

The Guardian, Tuesday 15 May 2012

Return to drachma nears amid political impasse in Athens and open discussion in Brussels of possible end of single currency

The German chancellor, Angela Merkel, said that Greece would 'always' be in the EU, a statement interpreted as meaning it might not always be in the euro. Photograph: John Macdougall/AFP/Getty Images

Financial markets are hastily making preparations for a Greek exit from the euro after a day of political and economic turmoil ended with Europe's policy elite admitting for the first time that it may prove impossible to keep the single currency intact.

With attempts in Athens to form a government after last week's election looking increasingly doomed, European leaders abandoned their taboo on talking about the possibility that Greece might have to leave the euro.

Shares, oil, and the euro were all sold heavily on Monday in anticipation that anti-austerity parties would garner support in a second Greek election likely to be held next month, bringing the row between Greece and its European creditors to a climax.

Critical talks are scheduled to continue in Athens between all party leaders, although President Karolos Papoulias's decision to prolong the negotiations came despite widespread signs the talks were heading towards collapse. He has until Thursday, when the Greek parliament reconvenes, to broker a deal.

The British chancellor, George Osborne warned that the prospect of Greece crashing out of the euro was damaging economies across Europe.

Uncertainty over the future of struggling eurozone nations was having a "real impact" on growth, he said.

Speaking in Brussels, where he is attending talks over the crisis, Osborne criticised the "open speculation" by some eurozone members.

"The eurozone crisis is very serious and it's having a real impact on economic growth across the European continent, including in Britain, and it's the uncertainty that's causing the damage," he said.

"Of course countries have got to make difficult decisions about their public finances. We know that in Britain.

"But it's the open speculation from some members of the eurozone about the future of some countries in the eurozone which I think is doing real damage across the whole European economy."

Amid claims in the markets that politicians in Athens were playing a dangerous game of bluff, a potential schism in the monetary union saw borrowing costs for Spain and Italy rise over fears that contagion could spread from Greece through southern Europe. The City's FTSE 100 Index lost almost 2% of its value, dropping more than 100 points, and there were big falls in share prices in Paris, Frankfurt, Madrid and Athens.

Chris Towner, director of FX advisory services at currency traders HiFX, said: "The Greeks seem to be playing a game of chicken here, first of all putting party politics above sovereign interests and secondly in the bigger picture questioning whether the European Central Bank are bluffing when it comes to not offering them bailout money if they fail to form a government."

On Monday night city firms were making sure their computer-trading systems could cope with the return of the drachma, and were predicting that a "grey market" in a new Greek currency could be operating within the next few days.

But despite the market turmoil and the anti-austerity mood reflected in the elections in Greece and France, finance ministers meeting in Brussels insisted there could be no softening of the tough conditions that Athens agreed to last year in return for a $130bn rescue package financed by the EU and the IMF. The talks openly discussed the likelihood of Greece quitting or being kicked out of the euro, while also differing over whether Greece would also need to leave the EU.

Maria Fekter, the gaffe-prone Austrian finance minister, said there was no basis in EU law for a country leaving the single currency, but noted that the Lisbon Treaty included provision for a country departing from the EU.

Chancellor Angela Merkel of Germany, by contrast, stressed that Greece would "always" be in the EU, a statement interpreted as meaning it might not always be in the euro.

Following suggestions from Jean-Claude Juncker, the Luxembourg prime minister and eurogroup chairman, that Greece's debt reduction timetable should be relaxed, the Germans made clear that no such loosening could be permitted.

With central bankers across the eurozone openly discussing the pros and cons of a Greek departure, it appeared that the terms of the debate had shifted towards accepting the inevitability of a Greek exit. Talk of the impact of a return to the drachma was predominant, split between those who believed the fallout from an outright Greek default could be contained and those who thought that the knock-on effect, particularly in Spain, would shift the euro crisis into an entirely new dimension.

"The contagion risk would be far, far smaller than one and a half years ago," said the Dutch finance minister, Jan Kees de Jager, of the effect of a Greek exit. Others predicted the result would be "catastrophe".

The debate focused on the financial and banking impact of a country leaving the single currency, with little emphasis being given to the political, social, security or foreign policy implications.

The European Commission said: "We want Greece to stay in the euro." But it emphasised that Athens could only accomplish that by living up to the terms of the bailout bargain with the eurozone.

Markets are braced for figures due out on Tuesday to show that the eurozone is officially in a double dip recession, and fear that the events of the past few days will intensify the slump.

On Monday investors were seeking out safe havens, including German bonds and the pound, as they sold eurozone assets. The boss of PKO Bank Polski predicted that Europe was hurtling towards its Lehman moment, with Portugal, Spain, and Italy being dragged into the slipstream of a Greek exit.

Stephen Lewis, economist at Monument Securities, said: "It may well be that eurozone leaders would raise the threat of Greece being obliged to leave the eurozone if it fails to comply with bailout terms, so as to sway Greek voters to support pro-bailout parties. But if this threat were to be credible, the EU would have to start elaborating measures to facilitate Greece's departure from the eurozone well before the election took place. Otherwise, Greek voters would assume eurozone leaders were bluffing."

European leaders and financial markets braced for Greece exit from euro | Business | The Guardian