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Dominique Strauss-Kahn returned home to a mixed welcome in France on Sunday, for the first time since attempted rape accusations by a New York hotel maid unleashed an international scandal that dashed his chances for the French presidency.

New York prosecutors later dropped their case against Strauss-Kahn, former head of the International Monetary Fund, because of questions about the maid’s credibility.

But the affair cost Strauss-Kahn his job at the helm of the IMF and exposed his personal life to worldwide scrutiny that has stained his image and left the French divided over what he should do next. His high-profile return home Sunday reflects how large he looms here.

Smiling and waving silently, he stepped off an Air France flight Sunday at Paris’ Charles de Gaulle Airport a different man from the one who, just four months ago, had been the pollsters’ favorite to beat President Nicolas Sarkozy in next year’s presidential elections.

Few expect Strauss-Kahn to return to French politics soon _ his Socialist Party is already in the throes of their presidential primary _ but his supporters have been eagerly awaiting his return after a monthslong legal drama in the U.S. that they saw as unfairly hostile to him.

Jack Lang, a former Socialist government minister and a neighbor of Strauss-Kahn, told The Associated Press that his friend would play a “very important role, not necessarily in the campaign, but in the life of France, the life of Europe.”

Lang said that the French people will eventually forget the scandal. “What scandal? In my eyes, he is innocent.”

As head of the IMF, Strauss-Kahn was widely praised for his management of the institution and its role in the European debt crisis _ an expertise some in France may covet as the problems of deficit and debt deepen.

Residents of Sarcelles, a working class Paris suburb where Strauss-Kahn is mayor, were largely enthusiastic and empathetic about his return.

“I’m happy for him. It’s the end of an ordeal. Now … we should leave him alone a little bit,” resident Laurent Giaoui told The Associated Press.

But a prominent member of Sarkozy’s conservative UMP party, Xavier Bertrand, shrugged off Strauss-Kahn’s appearance in Paris. “Like many French people, I have lots of others worries in my head,” he said on Europe-1 radio. “I have a hard time imagining” Strauss-Kahn back in politics, he said.

Strauss-Kahn flew in to Paris from New York’s JFK Airport early Sunday and gave a brief wave upon leaving the arrivals hall. Pushing a luggage cart, he did not speak to the large crowd.

His wife, respected former TV personality Anne Sinclair, was at his side, beaming widely. Riot police protected him and the area. The two then drove to one of their homes, on Paris’ tony Place des Vosges. The crush of reporters was so thick that Strauss-Kahn had trouble reaching and opening his front door.

The last time he tried to take an Air France flight out of JFK, Strauss-Kahn was pulled out of first class minutes before takeoff by police. They were investigating the maid’s claim that hours earlier, Strauss-Kahn had forced her to perform oral sex and tried to rape her payday loan lenders.

He quit his job, spent almost a week in jail, then six weeks of house arrest and nearly two more months barred from leaving the country before Manhattan prosecutors dropped the case last month, saying they no longer trusted the maid, Guinean immigrant Nafissatou Diallo.

Diallo is continuing to press her claims in a lawsuit. Strauss-Kahn denies the allegations.

Strauss-Kahn faces another investigation in France based on accusations by French novelist Tristane Banon, who says he tried to rape her during an interview in 2003. He calls the claim “imaginary.”

Banon’s mother, Anne Mansouret, told the AP that Strauss-Kahn’s return “is a good thing for my daughter’s complaint because he will have to answer to police.”

Banon says she didn’t file a complaint after the incident because her mother, a regional Socialist official, urged her not to.

Mansouret, who now says she regrets that decision, called it “profoundly indecent” that Strauss-Kahn’s homecoming Sunday was like that of a “star.”

The AP does not name people who report being sexually assaulted unless they agree to be identified or come forward publicly, as Diallo and Banon have done.

Strauss-Kahn, known in France by his initials DSK, is also dubbed a “great seducer” by French commentators for his reputation for sexual adventures.

That reputation _ and France’s overall attitude toward keeping politicians’ private lives private _ came under scrutiny after Strauss-Kahn’s arrest. Many called for more openness about questionable private behavior that might reflect on a politician’s public life.

The Socialist Party is now in a fierce campaign for primaries next month to choose its candidate for April and May presidential elections. The front-runners, while relieved that the New York case was dropped, do not appear keen for Strauss-Kahn to make a comeback.

Strauss-Kahn, an eloquent economist and former finance minister, still has many fans in France, and there remains a small chance he could play a role in the presidential campaign. Strauss-Kahn himself has remained silent about his political plans.

In welcoming Strauss-Kahn back Sunday, many French people expressed concern for his wife _ who was more famous in France than her husband before they married 20 years ago _ and what she’s been through in recent months.

One supporter belted out an ode to Strauss-Kahn in a performance at the Paris airport Sunday morning, accompanied by a Verdi opera played on a portable stereo, before police officers asked him to stop.

“Dominique! Dominique!,” shouted Gregoire Vandevelde, who said he was a former student of Strauss-Kahn’s at a prestigious economic institute. “He is extremely brilliant, full of humor and very competent, warm with his students,” Vandevelde said.

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Greece has banned short selling on the stock market for two months from Tuesday, after shares on the Athens Stock Exchange plunged to their lowest level in more than 14 years.

The bourse’s general index sank below the 1,000-point mark Monday, closing down 6 percent at 998.24 _ the lowest level since January, 1997 _ as financial markets were buffeted by worries over the U.S. economy following a downgrade of the country’s debt.

The slide was markedly more than the declines recorded in other markets in Europe.

Greece became the first EU country to seek an international bailout last year, when it saw its borrowing costs spiral out of control as investors doubted it could repay its debts. International creditors agreed last month to extend it a second bailout.

THIS IS A BREAKING NEWS UPDATE. Check back soon for further information. AP’s earlier story is below.

ATHENS, Greece (AP) _ Shares on the Athens Stock Exchange plunged Monday to their lowest level in more than 14 years, with the bourse’s general index sinking below the 1,000-point mark as financial markets remained spooked by a downgrade of U.S. debt.

The Greek index dropped 6 percent to 998.24 points _ the lowest level since January, 1997. That’s markedly more than the declines recorded in other markets in Europe.

Debt-ridden Greece became the first European Union country to seek an international bailout last year, when it saw its borrowing costs spiral out of control as investors doubted the country could repay its massive debts.

The financial crisis has also affected other eurozone countries, with Portugal and Ireland also receiving bailouts.

On Monday, Europe’s central bank is widely thought to have begun buying the depressed-bonds of Italy and Spain to calm investor fears that the two countries won’t be able to pay their debts.

Though that bond-buying effort appears to have worked in the short-term by reducing the two countries borrowing costs, stock markets around the world have been in retreat as investors respond to Standard & Poor’s momentous downgrade of the U.S.’s rating.

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ST. LOUIS

Allstate is reporting a $620 million second-quarter loss, as the property and casualty insurer was hit by a previously disclosed $2.3 billion in catastrophe losses.

Allstate Corp. said Monday that it recorded losses from 33 catastrophic events during the April through June quarter, including five tornadoes, three wildfires and 25 wind and hail storms.

The $620 million loss amounted to $1.19 per share. That compared with a profit of $145 million, or 27 cents per share, in the same quarter a year ago.

Allstate’s adjusted loss for the latest quarter was $1.23 per share. That was a narrower loss than Wall Street had predicted. Analysts surveyed by FactSet had forecast a loss of $1.46 per share, on average.

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Wind Capital Group has agreed to sell 150 megawatts of electricity from a wind farm being developed in Oklahoma to Springfield-based Associated Electric Cooperative Inc.

The wind farm, owned and operated by St. Louis-based Wind Capital, is located about an hour northwest of Tulsa, the company said. Construction is expected to begin this fall and be complete in June.

Wind Capital, founded by Tom Carnahan in 2005, operates 5 wind farms in Missouri with a combined generating capacity of 311 megawatts absolutely free credit score. The company is also developing a $250 million, 150-megawatt wind project in South Florida, and a wind farm in central Kansas.

Associated Electric sells wholesale power to 57 electric cooperatives in Missouri, Iowa and Oklahoma. Terms of the agreement with Wind Capital weren’t disclosed.

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The debt crisis shook Europe’s core on Tuesday as market fears grew over the stability of Spain and Italy, forcing a rethink of the currency union’s strategy to restore trust in its future.

Markets took a nosedive on worries that the eurozone’s third and fourth biggest economies _ both too expensive to save with Europe’s rescue funds _ may become the crisis’ next victims.

On the one hand, investors are concerned by the EU’s determination to get banks to share the burden of bailouts, even at the cost of triggering a Greek default. On the other, they see in EU disagreements over giving Greece more aid the ominous signs of a drop in commitment to the currency union.

The mix of uncertainty proved toxic for markets. The sell-off extended to Italy, one of Europe’s stable core economies, which despite its high debt had so far escaped the turmoil that has crippled the eurozone for a year and a half.

The contagion “could mark the beginning of the end for the single currency union in its current form,” Jonathan Loynes, economist at Capital Economics.

As so often before, the eurozone finance ministers were pushed into action only when the markets gave them no choice.

Italy’s government sped up approval of its austerity plan and the EU opened the door for a complete overhaul of the region’s bailout fund, which has so far focused on handing out rescue loans to countries on the brink of collapse in return for high interest rates and painful austerity measures.

The pledges calmed market nerves _ for the day, at least. The euro bounced back above $1.40 from as low as $1.3885 in the morning and Milan’s stock index swung to a 1.2 percent gain after being down as much as 4.4 percent.

“We said we are ready to test, whether, as part of the private sector involvement, an expansion of the toolkit is necessary and appropriate _ such as prolonging (loan) maturities and lowering interest rates,” said German Finance Minister Wolfgang Schaeuble. “Everything can help to improve debt sustainability and defend the euro as a whole.”

Schaeuble did not exclude new powers for the eurozone’s rescue funds, such as buying up the bonds of troubled countries on the open market, which could lower the debt weight and help stem market jitters, especially for a country like Greece, which few economists believe can stand on its own feet again without substantial additional support.

Until very recently, Germany, the eurozone’s largest economy and the biggest contributor to the region’s bailout fund, had firmly ruled out such expanded powers.

Schaeuble indicated that the heightened market panic may have led to a change in opinion. “We never before had such an intensive and honest debate over the real issues,” he told journalists at the end of a two-day meeting with his counterparts in Brussels Business Card Holders.

But while the promises of more support stabilized European markets by the close of the day on Tuesday, sentiment remains fragile as the eurozone’s top officials _ once again _ remained thin on details and appeared to disagree among themselves.

Calm will return to markets only if “all the countries of the eurozone assume their responsibility, in particular the most powerful countries,” Spanish Prime Minister Jose Luis Rodriguez Zapatero told reporters in Madrid.

The comment seemed to be a direct rebuke to German Chancellor Angela Merkel, whose reluctance to anger taxpayers at home has blocked previous efforts to get ahead of the debt crisis.

Because of the heightened tensions, this week could become crucial to the eurozone’s ability to survive the crisis. EU President Herman Van Rompuy said there may be a special summit of EU leaders in Brussels Friday, the same day as the results of long anticipated bank stress test will be revealed.

While the finance ministers struggled in Brussels, Italy worked to restore confidence in its ability to tackle its debt pile, some 120 percent of economic output and one of the biggest in the eurozone.

Italian Premier Silvio Berlusconi said the government will bring forward the timetable it has for a raft of austerity measures, which are now meant to pass through parliament by Sunday, instead of waiting until August.

Berlusconi said in a statement that the turmoil in Italian financial markets in recent days has prompted the government to accelerate and strengthen the measures, so that the country can have a balanced budget by 2014.

“It is necessary to eliminate every doubt on the efficiency and credibility of the austerity measures,” Berlusconi said in his first public comments since speculators started pushing up the interest rates Italy pays on its debt.

Berlusconi, who has been weakened in recent local elections and referendums on his policies as well as a sex scandal, expressed confidence that the government and opposition would work together “to defend the country.”

The comments helped the Italian 10-year yield drop back down to 5.55 percent from above 6.0 percent earlier, while the Milan stock index turned positive to trade 1.2 percent higher _ its first rise in days.

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Barry reported from Milan. David McHugh in Brussels, Maria Grazia Murru in Rome and Daniel Woolls in Madrid contributed to this story.

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TMX Group

Treasury Secretary Timothy F. Geithner will urge China to allow higher interest rates when he meets with Chinese leaders this week, as the U.S. extends its push for a stronger yuan.

Geithner will say China should relax controls on the financial system and give foreign banks and insurers more access, said David Loevinger, the Treasury Department’s senior coordinator for China. Officials from both nations are meeting in Washington today and tomorrow as part of the annual Strategic and Economic Dialogue.

U.S. officials argue that a yuan kept artificially cheap to help exporters also makes it harder for China to lift interest rates and curb an inflation rate that hit a 32-month high in March. China, led at the talks by Vice Premier Wang Qishan, blames record U.S. budget deficits for contributing to lopsided flows of trade and investment.

“It’s pretty clear that the current system is hurting them in their inflation fight,” said Dan Dorrow, head of research at Faros Trading LLC, a currency trading firm in Stamford, Connecticut. “The reason for that is the improperly priced exchange rate.”

The yuan was little changed at 6.4939 per dollar as of the 4:30 p.m. close in Shanghai, according to the China Foreign Exchange Trade System. The currency touched 6.4892 on April 29, the strongest level since 1993.

Domestic Demand

As the talks opened today, Geithner called on China to shift its economy toward domestic demand and said the goals of the two nations are “not in conflict.” Wang acknowledged that there are some “clashes” in U.S.-China economic ties, while also emphasizing the “shared aspirations” between the two countries.

Senators Charles Schumer of New York and Jeff Merkley of Oregon called May 6 for a “rebalancing” in the U.S.-China economic relationship. The two lawmakers, who just returned from a trip to China, said the Chinese need to open their financial sector, address “abnormally low deposit and lending rates” and allow broader market access to foreign firms.

Chinese production and U.S. consumption shouldn’t be such dominating themes, the two Democrats said. “This situation is not sustainable and harms nearly all involved,” they wrote in a letter to Geithner.

China has raised interest rates four times since mid- October and lenders’ reserve requirement seven times. The benchmark one-year lending rate increased 0.25 percentage point to 6.31 percent on April 5. The one-year deposit rate stands at 3.25 percent.

Inflation Eases

The median forecast of 30 economists surveyed by Bloomberg News is for an annual inflation rate in April of 5.2 percent, down from 5.4 percent in March.

Vice Finance Minister Zhu Guangyao said on May 6 that China is paying “close attention” to U.S. efforts to reduce its budget deficit, and his country will focus on improving the quality of its exchange-rate mechanism.

China says a loose monetary policy in the U.S. has helped lower the value of the dollar, stoking global inflation in food and energy. A commentary today by the official Xinhua News Agency said the “plunging” dollar “has become the source of many current global economic problems.”

China held $1.15 trillion in Treasuries at the end of February, more than any other country. The U.S. trade deficit with China came to $18.8 billion in February.

Top Officials

Geithner and Wang will meet alongside Secretary of State Hillary Clinton and State Councilor Dai Bingguo at this week’s meetings, which will draw about 30 top Chinese officials.

The Obama administration and U.S. lawmakers say China’s currency policy gives the nation’s exporters an unfair competitive advantage, costing American jobs. Geithner is trying to convince Chinese officials that a stronger yuan has benefits for their economy.

Geithner said last week that allowing the yuan to rise and making the financial system less dependent on government- controlled interest rates would give Chinese leaders an “enhanced” ability to damp inflation.

The Treasury argues that higher interest rates on deposits will also encourage consumer spending in China, another way to reduce imbalances.

“We’re going to encourage China to move more quickly in lifting the ceiling on interest rates on bank deposits in order to put more money into Chinese consumers’ pockets,” Loevinger said at a briefing last week in Washington.

Limited Gains

Investors are betting the yuan’s rise may be limited over the next 12 months. Twelve-month non-deliverable yuan forwards dropped 0.81 percent last week to 6.3520 per dollar on May 6, their biggest weekly loss of the year, on speculation that China won’t allow faster appreciation to reduce inflation.

John Frisbie, president of the U.S.-China Business Council, said support for a stronger yuan among Chinese leaders has increased in the past year.

“The strong hand has switched over to those who are saying that the exchange rate can help us fight inflation,” Frisbie said in a telephone interview. He said his group, whose members include companies such as Apple Inc. (AAPL), JPMorgan Chase & Co. (JPM) and Coca-Cola Co. (KO), wants China to resume opening its financial services sector to allow more foreign investment.

Foreign lenders’ market share in China has dropped since the government first opened the industry in December 2006. Banks such as New York-based Citigroup Inc. (C) and London-based HSBC Holdings Plc (HSBA) want to tap household and corporate savings that reached $10 trillion in January as China overtook Japan to become the world’s second-biggest economy.

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Increased revenues from its hospital and rehabilitation divisions helped RehabCare Group Inc. raise profits in the first quarter.

The Clayton-based provider of rehabilitation services and owner of dozens of hospitals reported a net income of $20.8 million, or 83 cents a share, compared to $15 million, or 61 cents, a year ago. Revenue rose 13 percent to $364.6 million.

Rehab Care is being acquired by Kindred Healthcare Inc., which is based in Louisville, Ky.

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In May 1931, a Viennese bank named Credit-Anstalt failed. Founded by the famous Rothschild banking family in 1855, Credit-Anstalt was one of the most important financial institutions of the Austro-Hungarian Empire, and its failure came as a shock because it was considered impregnable.

The bank not only made loans, it acquired ownership stakes in companies throughout the empire such as sugar producers and new automobile makers. Its headquarters city, Vienna, was a place of wealth and splendor, famous for its opera, balls, chocolate, psychoanalysis, and the architecture of the Ringstrasse. The fall of Credit-Anstalt, the dominoes it helped topple across Continental Europe and the confidence it shredded as far away as the U.S. wasn’t just the failure of a bank, it was a failure of civilization.

Once again, Europe’s banking system, and by extension its social fabric, is threatened by bad loans. What had been slow- moving fiscal disasters in Greece, Ireland, and Portugal have gathered speed in recent weeks despite rescue packages designed to calm markets and prevent spreading the contagion to Spain, Belgium, and beyond.

Portugal’s 10-year borrowing costs hit a record 9.3 percent on Apr. 20, up from 7.4 percent just a month before, even as authorities met in Lisbon on an 80 billion euro ($116 billion) financing package. The higher that creditors drive up interest rates, the more unaffordable the debt becomes — creating the conditions for the very failure they fear.

‘Adverse Feedback Loop’

“All of the rescue packages don’t really ensure that we can escape this adverse feedback loop that these countries are being trapped in,” Christoph Rieger, head of fixed-income strategy at Frankfurt-based Commerzbank, told Bloomberg Television on April 19.

With weak banking systems still resisting aggressive treatment, it’s worth revisiting Credit-Anstalt for any applicable lessons. Long before 1931, Credit-Anstalt had begun to develop cracks invisible to the public. When the Austro- Hungarian Empire broke up after World War I, the bank continued to do business throughout the old empire without recognizing that the world had changed. Suddenly, more knowledgeable local lenders were getting the best deals, leaving Credit-Anstalt with the loans no one else would touch, says Aurel Schubert, an Austrian economist who wrote a 1991 book on the episode called The Credit-Anstalt Crisis of 1931.

Austria Stumbles

The hyperinflation of 1921-23 that made the price of a beer rise to 4 billion marks badly damaged the finances of Credit- Anstalt as well as Austria itself. The nation was propped up by a 1923 loan from the League of Nations, the predecessor of the U.N. A Dutch citizen was appointed by the League to supervise the Austrian budget. He devised plans to raise taxes while cutting government jobs, pay, and pensions, the same prescription being urged on the weak members of the euro zone today. But Austria continued to stumble.

Bank regulation, meanwhile, was thin. Regulators began to demand a balance sheet just once a year, instead of every six months, says Schubert. As weaker banks failed, Credit-Anstalt took them over at regulators’ insistence, becoming more bloated and less profitable with every merger. And the weakening of the economy was damaging lenders’ ability to repay.

The tipping point came early in 1931 when a bank director named Zoltan Hajdu refused to sign off on Credit-Anstalt’s books without a comprehensive reevaluation of the bank’s assets. The bank revealed losses that it kept revising upward as the weeks passed. Depositors withdrew funds. The Austrian government stepped in to guarantee all the bank’s deposits and other liabilities, which only brought the government’s own creditworthiness into question. “In today’s language,” says Schubert, “Credit-Anstalt was too big to fail, but too big to save.”

‘Viennese Panic’

Harold James, a British historian at Princeton University, described what happened next in his 2001 book The End of Globalization: Lessons from the Great Depression. “The Viennese panic brought down banks in Amsterdam and Warsaw cash till payday advance. In June and July the scare spread to Germany, and from there immediately to Latvia, Turkey, and Egypt (and within a few months to England and the U.S.).” Austria got an undersized loan from the Bank for International Settlements and some help from the British branch of the Rothschild family. But French politicians rejected an international rescue without political concessions from Germany that weren’t forthcoming.

Global Depression

Thus the failure of Credit-Anstalt accelerated the financial panic that turned a recession into a global depression. Economic distress in Austria contributed to the outbreak of conflict between socialists and fascists in 1934. Jews became scapegoats. In 1938, Nazi Germany occupied Austria, and Adolf Hitler was received by adoring crowds in Vienna. Albeit indirectly, the failure of Credit-Anstalt helped clear the path for some of the darkest events of the 20th century.

Today’s Europe is far from a series of events resembling this tragic cascade. But the experience of the 1930s and 1940s has made European policymakers and economists more aware of historical precedents.

The current debate is about how to avoid a repeat. To those who believe hyperinflation was the key policy mistake in Credit- Anstalt’s fall, keeping a lid on inflation is priority No. 1. Others stress the lack of international coordination, or the failure to regulate, or even the handcuffs on government policies from adherence to the gold standard represented today by the euro zone’s reliance on a common currency. As in most car crashes, the witnesses have a hard time agreeing on just what they saw.

Peripheral Country

The scariest thing about the Credit-Anstalt default is that it occurred in a small, peripheral country, just as today’s worst problems are concentrated so far in Greece, Ireland, and Portugal, which combined make up just 5 percent of the 27-nation European Union’s gross domestic product. “Austria is a tiny, tiny little place, and you wouldn’t imagine it could set off a chain of domino reactions. But it did. I do see exactly that potential now,” says James.

For that reason, German economist Holger Schmieding says Europe should do everything in its power to prevent or at least delay defaults by national governments. Schmieding, chief economist of the German private bank Joh. Berenberg Gossler & Co., says keeping Greece and others from defaulting for as long as possible will give banks in Germany, France, and other nations that have lent to them the time they need to rebuild their capital so they can withstand the hit from loan losses.

Exposure Level

The Bank for International Settlements says that as of last September, German banks had over 220 billion euros worth of exposure to Greece, Ireland, and Portugal, and French banks had over 150 billion euros worth. For all of Europe’s bickering over aid to Greece, Ireland, and Portugal, the Continent is more united and financially stable now than in the interwar period.

“Unlike Austria in 1931, the euro zone has the resources to bail out the threatened banks without really triggering a full-blown debt crisis,” says Michael D. Bordo, an economic historian at Rutgers University in New Brunswick, New Jersey. The more Europe takes the lessons of Credit-Anstalt to heart, the less likely it is to make the same mistakes again.

The introduction of Schubert’s book begins with the famous line of George Santayana, the Spanish philosopher, who said, “Those who cannot remember the past are condemned to repeat it.” J. Bradford DeLong, an economist at the University of California at Berkeley, thinks Europe has absorbed Santayana’s message to an extent. “Because we remember the Credit-Anstalt, we will not make that mistake,” DeLong says. “We will make different ones.”

(Peter Coy’s column will appear in Bloomberg Businessweek’s April 25 issue. The opinions expressed are his own.)

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