BBC News - Latvia to become 18th eurozone member from 2014

Latvia will become the 18th country to use the euro after being approved for membership by the European Commission.

Shops like these in Latvia's capital, Riga, will trade in euros from 2014

In a report, the Commission confirmed that the Baltic state had met the criteria for joining the single currency.

Latvia is keen to strengthen ties with western Europe and reduce its dependency on Russia.

Officials said the eurozone had defied those who predicted it would collapse under the sovereign debt crisis.

'Widespread enthusiasm'

The country will start using the currency at the beginning of 2014 after meeting the criteria for membership, including low inflation and long-term interest rates, as well as low public debt.

EU Economic and Monetary Affairs Commissioner Olli Rehn said Latvia's desire to adopt the euro was a sign of confidence in the single currency.

"Those who predicted a disintegration of the euro...were simply wrong," Rehn told a news conference.

The BBC Brussels correspondent, Matthew Price, said that unlike some established members of the zone, Latvia was well within the economic limits set by Brussels for joining.

"In much of Eastern Europe there's widespread enthusiasm - certainly among policy makers - for joining the single currency," he noted.

"However, polls suggest that many in the country are worried the switch could drive prices higher."

Anti-euro parties won more than half of the vote in elections in the capital, Riga, last weekend.

Financial risk

Latvia underwent one of Europe's toughest austerity programmes after the 2008-2009 financial crisis knocked a fifth off its GDP.

It received a 7.5bn euro bailout in 2008, but it has now repaid the loans.

The membership still has to be approved by EU leaders and the European Parliament, but that is seen as a formality.

EU finance ministers are expected to sign off the accession in July.

The European Central Bank (ECB) also gave its blessing to Latvia on Wednesday ahead of the Commission's announcement, but warned high foreign deposits in its banks were a risk to financial stability.

"The reliance by a significant part of the banking sector on non-resident deposits as a source of funding, while not a recent phenomenon, is again on the rise and represents an important risk to financial stability," the ECB said.

Sky News - Net Lending Falls by £300m As Banks Cut Loans

Business leaders express concerns about a lack of credit to small firms, and call for more competition among lenders.

The Bank of England projects a pick-up in lending later this year

The number of loans offered to businesses has fallen - despite lenders drawing down billions from a state-subsidised cheap credit scheme designed to revitalise Britain's sluggish economy.

The Bank of England reported a £300m fall in net lending by banks and building societies taking part in its flagship Funding for Lending Scheme in the first three months of 2013.

Part-nationalised Lloyds Banking Group lent almost £1bn less during the quarter, despite having borrowed £3bn from the project.

Taxpayer-backed Royal Bank of Scotland also shrunk its net lending by £1.6bn in the quarter, but has borrowed £750m from the Bank of England and Treasury scheme.

Spanish-owned bank Santander cut its net lending by £2.3bn as it continued its retreat from riskier parts of the mortgage market.

The FLS offers lenders discounted loans in return for boosting the flow of credit to the economy, and was recently beefed up to extend more loans to credit-starved small businesses after criticism over its impact.

Three banks - Lloyds, RBS and Santander - cut their credit to the economy

While the scheme has been deemed a success in terms of cutting the mortgage rates for first-time buyers, it has so far failed to boost net lending to businesses.

Since the introduction of the scheme £16.5bn has been issued to banks, while net lending has dropped by £1.8bn during the same period.

The BoE blamed the credit squeeze on lenders shrinking their "non-core" portfolios, such as commercial property loans.

It did not split out lending to homebuyers and businesses, but said flows to individuals had been "typically positive", while credit to businesses had "mostly been negative".

However, it added net lending to companies was "less negative" than a year ago, and that it would "take time" for the scheme to feed through to bigger lending volumes.

Paul Fisher, executive director for markets at the BoE, said the net lending fall was "broadly as expected".

He added: "The plans of the FLS participants suggest that net lending volumes will pick up gradually through the remainder of 2013."

Barclays borrowed £6bn from the FLS and increased its lending by £1.1bn during the quarter, while Nationwide Building Society also hiked its lending by £1.2bn after drawing £2.5bn from the scheme.

There were also major credit injections from firms including Tesco Bank, Virgin Money and Coventry Building Society.

John Longworth, director general of the British Chambers of Commerce (BCC) criticised the scheme for failing to boost credit to businesses.

He said: "The real test for Funding for Lending is whether it is able to get credit flowing to young and fast-growing businesses.

"Unfortunately many of these growth firms are still being left out in the cold when it comes to accessing finance, which prevents them from expanding, creating jobs and helping to drive a business-led recovery."

Bloomberg News - Ignatiev Sees Russian Easing Hindered by Economy’s Crosscurrents

Russia’s central bank faces a “very difficult choice” when it meets next week to review interest rates as conflicting economic data undermine the case for monetary stimulus, outgoing Chairman Sergey Ignatiev said.

“The decision won’t be simple because the situation in the economy isn’t that simple,” Ignatiev, who steps down as chairman later this month, said today at a banking conference in St. Petersburg. “Some economic indicators count in favor of one decision, others support another.”

Economic growth in Russia, the world’s largest energy exporter, has slowed to the weakest pace since a contraction in 2009 as a record-long recession in the euro area saps exports of oil, metals and and natural gas. While corporate investment is sagging and car sales fell in April, signaling the need for monetary stimulus, inflation above the central bank’s target range is confounding policy makers, according to Ignatiev.

“It’s possible we’ll keep all interest rate unchanged,” Ignatiev said. “I don’t rule out another decision, under which some interest rates will be reduced and others kept unchanged.”

Bank Rossii kept its main lending rates unchanged for an eighth month on May 15 and reduced by a quarter point the costs of some longer-term loans, including those backed by gold and non-marketable assets. Ignatiev said the central bank won’t consider raising borrowing costs at their next board meeting on June 10, the last one headed by him before Elvira Nabiullina, PresidentVladimir Putin’s economic aide, takes over two weeks later.

Investor Bets

Investor bets are pricing in a smaller reduction in rates. The three-month MosPrime rate, which large Moscow banks say they charge one another, may drop 9 basis points, or 0.09 percentage point, in the next three months, according to forward rate agreements tracked by Bloomberg. That compares with a cut of 49 basis points, the most since October 2009, forecast May 22.

The central bank may keep the refinancing rate unchanged at 8.25 percent at the next meeting, according to 18 of 25 economists surveyed by Bloomberg. Seven predict a quarter point cut.

Lending to companies and households increased 19 percent as of May 1 compared with a year earlier, Ignatiev said. In real terms, the advance was 11 percent, which is “much faster” than the pace of the economy. That suggests the pace of lending isn’t weighing on the economy, Ignatiev said.

Inflation Spike

Consumer price growth, which Ignatiev helped drive down to a record low 3.6 percent pace in April and May of last year, has surged to more than double that level to above this year’s target range of 5 percent to 6 percent, preventing policy makers from using easier borrowing costs to shore up the stumbling economy. Inflation accelerated for a second month in May to 7.4 percent, the highest since August 2011, the Federal Statistics Service in Moscow said yesterday. Economists projected the rate would increase to 7.3 percent.

The surge in prices is largely related to a quick rise in some consumer costs because of a bad harvest last year, Ignatiev said. While price growth will probably start slowing in the second half, Ignatiev said he sees a risk that inflation expectations may rise, further fanning prices.

The central bank has held the overnight and one-week repurchase rates, the main tools used to provide banks with cash, at 5.5 percent since September, when they were raised a quarter point. The refinancing rate, used as a signal rate by the bank, has been held at 8.25 percent over the same period. Bank Rossii reduced rates on lesser-used instruments by a quarter point at the last two meetings, which Ignatiev said in April was a “first decision” toward easing.

Ignatiev’s Tenure

Ignatiev, 65, has led the regulator since 2002, seeing the country’s banking system through the 2008-2009 financial crisis that toppled Lehman Brothers Holdings Inc. and allowing the ruble to trade more freely.

Ignatiev has said he plans to accept Nabiullina’s offer to remain at the bank as an adviser once she becomes chairman. The handover to Nabiullina, 49, a former economy minister comes as the central bank prepares for a merger with the main markets regulator and the introduction of Basel III requirements for capital adequacy later this year.

Ignatiev, who left after more than a decade of teaching in what was then Leningrad to join the government as a deputy economy and finance minister in 1991, also worked in 1992 and 1993 as a deputy head of the central bank. He was Alexei Kudrin’s first deputy at the Finance Ministryin 2002 when Putin nominated him for the first of three terms as chairman.

By Scott Rose

BBC News - US targets Iranian currency with fresh sanctions

The US has unveiled fresh sanctions against Iran, targeting its currency, as it increases the pressure on Tehran to abandon its nuclear programme.

The Iranian rial has been highly volatile amid sanctions imposed against Tehran

These include penalties on anyone facilitating "significant" transactions in the rial or holding significant amounts of the currency outside Iran.

A US official said the move would force institutions to dump rial holdings and weaken the currency further.

This is the first time the US has directly targeted the Iranian currency.

"This promises to make Iran's weak currency, even weaker and more volatile," the US official was quoted as saying.

"The idea here is to make the rial essentially unusable outside of Iran."

The Iranian currency has fallen significantly against the US dollar over the past couple of years, hurt by a slew of sanctions against Tehran's key sectors.

'Serious escalation'

This is the ninth set of sanctions that President Barack Obama's administration has imposed against Iran.

The latest ones also include sanctions targeted at Iran's automobile sector, one of the key employers and contributors to Iran's economy.

The US has banned the sale or transfer of goods or services to be used in Iran's automobile manufacturers.

"It's a serious escalation of sanctions because the administration is blacklisting the auto sector which is the second largest employer in Iran after the energy sector," said Mark Dubowitz, of the Foundation for Defense of Democracies.

Mr Dubowitz added that the move against the auto sector indicated that the US was concerned it could be used to procure "dual use" technologies such as parts for centrifuges which are involved in the uranium enrichment process.

Meanwhile, White House spokesman Jay Carney said that while the US had been increasing its pressure on Iran, it was still open to a "diplomatic solution that allows Iran to rejoin the community of nations if they meet their obligations".

"However, Iran must understand that time is not unlimited," he said.

"If the Iranian government continues down its current path, there should be no doubt that the United States and our partners will continue to impose increasing consequences."

Reuters News - Insight: North Korean economy surrenders to foreign currency invasion

. North Korean leader Kim Il-sung is seen on this 5000 North Korea won banknote in this photo illustration taken in Shanghai May 23, 2013.

Credit: Reuters/Carlos Barria

By John Ruwitch and Ju-min Park

CHANGBAI, China/SEOUL | Sun Jun 2, 2013 9:32pm EDT

(Reuters) - Chinese currency and U.S. dollars are being used more widely than ever in North Koreainstead of the country's own money, a stark illustration of the extent to which the leadership under Kim Jong-un has lost control over the economy.

The use of dollars and Chinese yuan, or renminbi, has accelerated since a disastrous revaluation of the North Korean won in 2009 wiped out the savings of millions of people, said experts on the country, defectors and Chinese border traders.

On the black market the won has shed more than 99 percent of its value against the dollar since the revaluation, according to exchange rates tracked by Daily NK, a Seoul-based news and information website aboutNorth Korea.

North Korea is one of the most closed countries in the world, so it is difficult to determine what impact this could ultimately have on Kim's regime.

But experts said the growing use of foreign currency is making it increasingly difficult for Pyongyang to implement economic policy, resulting in the creation of a private economy outside the reach of the state that only draconian measures could rein in.

For now Pyongyang appeared to be capitulating, rather than trying to stamp out foreign currency use, they said.

Estimates of how much hard currency is in circulation vary, but an analyst at the Samsung Economic Research Institute in Seoul put it at $2 billion in an April study, out of an economy worth $21.5 billion, according to some assessments. Pyongyang doesn't publish economic data.

The use of dollars and yuan is now so pervasive there is little Pyongyang can do about it, said Marcus Noland, a North Korea expert at the Peterson Institute for International Economics in Washington.

The government would increasingly have to force people to provide goods and services to the state and get paid in won, added Noland, who closely studies the North Korean economy.

"It's been a tug of war for 20 years where the state would like to get control of the economy, to quash the market and to get everyone to use the North Korean won, but it just doesn't have the capacity to do any of those things," he said.

"It just makes it harder and harder for them to govern. Nobody wants what they're selling."

SECRET VIDEO

In the Chinese town of Changbai in Jilin province, just across the border from the hardscrabble North Korean city of Hyesan, one Chinese trader said North Korean officials he dealt with wanted yuan more than anything else, even food.

The yuan they earned from doing business quickly gets circulated into Hyesan, a city of roughly 190,000 people whose industry-based economy has slumped since the 1990s.

"The only thing they want is foreign currency," said the trader, who sells products including medicine and tea in Changbai. He declined to be identified because he did not want to jeopardize his business or endanger his North Korean partners.

In April, Daily NK posted video it said was shot secretly in February at an open-air market in Hyesan. The shaky footage showed vendors openly quoting prices in yuan for products like gloves and jackets, and one accepting payment in yuan.

Pyongyang has waged periodic campaigns to try to stop the use of foreign currency but with no success.

North Korea made circulating foreign currency a crime punishable by death in September 2012, the Paris-based International Federation for Human Rights said in a report last month.

Another group, Human Rights Watch, recently interviewed more than 90 defectors who had fled North Korea in the past two years about punishment they had received for economic crimes. None said they were penalized for using or holding hard currency.

Nevertheless, ordinary North Koreans are very careful.

"I have heard multiple stories of people hiding foreign money under the floorboards in the house, or burying it up the hill in the woods out back," said one person in northeastern China who has lived in Pyongyang and regularly interacts with North Koreans.

"Nobody puts it in the bank because nobody trusts the government."

THE WORTHLESS WON

Faith in the North Korean won crumbled when Kim's father, Kim Jong-il, ordered the sudden revaluation of the currency in November 2009.

The government chopped two zeroes off banknotes and limited the amount of old money that could be exchanged for new cash. The move, seen as an attack on private market activity at the time, spurred a rush to hold hard currency.

It also quickened inflation and according to South Korea's spy agency, sparked rare civil unrest in one of the world's most entrenched authoritarian states after North Koreans realized the won was not a safe store of value.

The government is widely believed to have executed the economic official who oversaw the revaluation.

Dollars have circulated in North Korea for decades, partly because of the cash siphoned off from official foreign trade.

The rise in the use of yuan is a more recent phenomenon and reflects a surge in trade and smuggling between North Korea and China along their 1,400 km (875 mile) land border, where a lot of the currency changes hands. Official trade with China is worth $6 billion annually.

Black market rates illustrate how far the won has fallen since the revaluation. It has plunged from 30 to one U.S. dollar to about 8,500, according to exchange rates tracked by Daily NK. The current official exchange rate is about 130 won per dollar.

Daily NK has sources in North Korea who report every fortnight on rates in Hyesan, the city of Sinuiju opposite the Chinese border city of Dandong and also the capital Pyongyang.

In border areas some 90 percent of transactions occur in hard currency, said Christopher Green, Daily NK's manager of international affairs. Elsewhere, foreign cash accounts for 50 to 80 percent transactions in private markets, he estimated.

INFORMAL ECONOMY EXCEEDS FORMAL - EXPERT

North Koreans increasingly did not refer to prices in won, Dong Yong-Sueng, senior fellow at the Samsung Economic Research Institute in Seoul, wrote in the April study on the use of foreign currency in the country.

Prices were marked in U.S. dollars for beer, university preparation courses and apartments, Dong wrote.

South Korea's central bank estimated foreign currency in circulation at $1 billion in 2000. Dong reckoned $2 billion in foreign cash was now sloshing around the economy. Around half was in U.S. dollars, 40 percent in yuan and 10 percent in euros, he told Reuters.

Dollars seeped into the market because trading firms exploited government quotas for exports and imports, making profits when prices diverged from those set by the state, Dong said.

It was not possible to estimate the amount of North Korean won in circulation, Dong added.

He said the North Korean informal economy was now bigger than the formal, state-led economy.

"Without foreign exchange, the economy would stop functioning," Dong said.

U.S. officials have previously accused North Korea of making extremely high-quality counterfeit $100 notes. This money is believed to have been used to raise real cash for the regime abroad rather than get cycled into the economy.

"JUCHE" IN NAME ONLY

Despite purporting to follow an ideology of "juche", or self-reliance, Pyongyang did not have the will to stop the circulation of hard currency even if it had the means to do so, said Yang Moon-soo, an expert on the North's economy at the University of North Korean Studies in Seoul.

Ordinary North Koreans wanted yuan while the elite preferred dollars, said Yang, who has carried out a study on the use of both currencies based on interviews with North Korean defectors.

One official at a European embassy in Pyongyang, who has been visiting North Korea for more than a decade, said the most noticeable change had been the increased use of yuan. Most shops carried prices in dollars, yuan or euros, said the official.

"People ... pay in yuan at the market for rice and other daily necessities," said Ji Seong-ho, a defector living in South Korea who stays in touch with friends in the North.

An estimated 70 percent of defectors in South Korea also send cash back to family in North Korea, according to the Organization for One Korea, a South Korean support and research institute on North Korean defectors.

A Reuters report last year showed how this money was getting to North Korea via underground agents in China, mostly Chinese of Korean descent. They use ties on both sides of the border to funnel around $10 million into the North each year, usually in yuan given the defectors send money to banks in China where it is collected by agents.

Use of the South Korean won is unheard of in North Korea. Even in the recently closed Kaesong industrial zone between the two Koreas, which employed 53,000 workers from the North, wages were made to a North Korean management committee in U.S. dollars, not the South's legal tender.

There are small signs some in the North Korean government may be coming to grips with the hard currency reality.

In the Rason special economic zone in the far northeast of the country on the border with China, the government-run Golden Triangle Exchange Bank changes yuan into North Korean won.

The rate - according to people who visited the bank recently - was 1,200 won per yuan, or 7,350 won per dollar. That's a long way from the official rate of 130 won for one dollar.

Sky News - Swiss Bank Secrecy Veil Falls Over US Fine Fear

Switzerland once had immense pride in its strict banking secrecy laws, but now they have become a major international liability.

Switzerland was proud of its banking secrecy but is now under pressure

Notorious Swiss banking secrecy laws are to be circumvented as part of a resolution to a long-running battle with US officials over tax evasion.

The Swiss government said it will let banks circumvent strict client secrecy laws as part of the effort.

Finance minister Eveline Widmer-Schlumpf said that Switzerland is acting because US patience is running out with the country's banks suspected of aiding American tax cheats.

The aim, she said, is to "restore stability" to the Swiss banking industry.

The banks will decide for themselves if they want to negotiate with US authorities to settle legal disputes over suspected American tax evaders.

Calling it a pragmatic solution, Ms Widmer-Schlumpf acknowledged the talks with American negotiators have been difficult but said that Switzerland wanted to avoid a retroactive law.

The deal was agreed to by the Swiss Cabinet and will go to parliament for approval later this year.

She declined to provide further details of the agreement, but dismissed reports that the Swiss government will pay billions of dollars upfront to cover fines the country's banks can expect to receive from US authorities.

In a statement, the Cabinet said it "wants to create the legal basis for resolving the tax dispute with the United States" by enabling banks to make their own agreements with the US justice department.

"The solution chosen will allow legal closure to be achieved without having to enact new legislation with retroactive effect or indeed applying emergency law," the statement said.

Banks that cooperate with US authorities, it added, would be obliged to provide maximum protection for their employees against discrimination or dismissal.

UBS agreed to pay $780m (£515m) to the US in 2009 over secret accounts held by Americans.

The country's oldest bank, Wegelin, which was established in 1741, agreed to pay a fine last January over similar secret accounts.

Reuters News - How the Fed could ruin your summer holiday

Federal Reserve Board Chairman Ben Bernanke testifies before the Joint Economic Committee in Washington May 22, 2013.

Credit: Reuters/Gary Cameron

By Luciana Lopez

NEW YORK | Sun May 26, 2013 9:28am EDT

(Reuters) - Have your summer vacation all booked? Hoping to ignore your phone for a while, feeling safe in your investments and secure in the knowledge that the world's financial authorities aren't planning any surprises just yet?

Think again.

U.S. Federal Reserve Chairman Ben Bernanke made it clear in congressional testimony this week that the central bank could very well entertain a change in policy sooner than many had predicted. That would mean providing less stimulus to the economy by cutting back on its bond buying program.

The result was an unsettling bout of volatility, with Treasury yields jumping while stocks slid, as investors feared the Fed's support might start to recede.

And that means this could be a summer when investors may find the waves are not only on the beach.

While Fed-watchers are hard-pressed to see a turning point at the bank's June policy meeting, there are plenty of other spots this summer when the Fed could start to prepare markets for change.

Besides the June meeting, there is a policy meeting in July and the release of minutes from both those meetings that will follow. There are three Fridays where monthly jobs data will be released, and plenty of inflation readings and other, lesser economic datapoints.

And of course, there are other potential flashpoints. Will an heir to Bernanke emerge? Will the annual monetary policy symposium in Jackson Hole, Wyoming, this August matter without Ben Bernanke?

Here's what to watch for this summer on the Fed front.

FED MEETINGS AND MINUTES

Fed policymakers meet twice more before the September 2 Labor Day holiday this year: June 18-19 and July 30-31. In addition, the minutes of those Federal Open Market Committee meetings will be released three weeks later.

The June meeting is likely "as good a target as any" for a signal from the Fed about their future plans, said Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, D.C.

The Fed doesn't want to startle investors, because that would be disruptive. Expect plenty of flags, through meeting statements and minutes, before policymakers make any movements.

DATA DELUGE: JOBS VS INFLATION

The Fed's dual mandate means that both jobs and inflation data will be key. Labor data has been more encouraging of late, with the unemployment rate down to 7.5 percent. The Fed has said it wants to see the rate fall to 6.5 percent before it raises interest rates.

The data has been spotty enough that policymakers could want more consistency. Nonfarm payrollgrowth has averaged about 208,000 monthly over the past six months but has dipped below that level in some months. Chicago Fed President Charles Evans said he would like to see growth of 200,000 each month before cutting back on bond purchases, also referred to as quantitative easing.

Also far from target is inflation. The Personal Consumption Expenditures index, which is the measurement most watched by the Fed, was only at 1 percent in March. The April reading is due on May 31.

"They would be more comfortable with inflation at 2, 2.5 percent," said Wilmer Stith, co-manager of the Wilmington Broad Market Bond Fund in Baltimore.

With inflation hardly threatening, there are few price pressures to argue for ending the flood of easy money, and the data only goes to underscore the relative weakness of the economy, Stith noted.

THE NEXT FED CHAIR?

Bernanke hasn't officially bid adieu to the Fed, but he is clearly eyeballing the door. His second term ends in January, and there has been no official announcement about his future at the Fed.

"I don't think that I'm the only person in the world who can manage the exit (from quantitative easing)," he said earlier this year.

WITH OR WITHOUT BEN: JACKSON HOLE

Bernanke may be opening the way for possible successors by skipping the Jackson Hole gathering later this year due to an unspecified scheduling conflict.

While Fed Vice-Chair Janet Yellen is emerging as the favorite to hold the position next, Bernanke and company have so far been quiet.

The Fed honcho's absence could mean Jackson Hole offers little in the way of news, in which case, head to the beach and read that trashy novel you've been meaning to get through.

But maybe not.

Bernanke's absence on the schedule could open up a spot for an heir-apparent to take the spotlight instead.

If that is Yellen, "perhaps that is going to be the platform for her to gain even more recognition nationally," Stith said.

DEBT CEILING DEBATES - YES, THIS AGAIN

One thing investors and traders may not have to worry about is a debt ceiling crisis in Washington. The government probably won't breach its congressionally authorized borrowing limit until at least Labor Day.

The perfect bookend to summer, in other words.