Debt Rattle, April 17 2008: Al Capone's Soup Kitchen

Chicago, Nov 16 1930-Outside Big Al's: Al Capone's soup kitchen

Ilargi: Fresh assessments of losses waiting in the pipeline are emerging rapidly. $2 trillion looks more realistic to me than anything I’ve seen up to this point, especially when it’s specifically stated that this concerns only US consumer and commercial loans. The inevitable derivatives A-bomb blast that waits in the wings will make that number look like a 3-year old's broken piggy-bank.

The developments in the UK are fast becoming downright scary. The taxpayer is about to get saddled with hundreds of billions in debt, just so the housing market can get a kick-start. That market is dead, and no jolt can revive it. Down the line, this is simply one more massive shift of money from the public to the private sector, with debt going the opposite way. Gordon Brown is a dangerous man.

Forecast: $2 Trillion in US Originated Credit Losses

Yves Smith presents a note by Frank Veneroso, Market Strategist for the Global Policy Committee of Allianz Dresdner Asset Management, which gives a top-down and bottoms-up estimate of credit losses. "Note that this estimate is based strictly on US consumer and commercial borrowing. It does not allow for knock-on effects, such as counterparty defaults in the credit default swaps market."

My assessment is that we currently have a solvency problem on a huge scale and that the prevailing systemic illiquidity is a response to the recognition of such a large scale solvency problem by all classes of economic agents.... Furthermore, so far I am discussing dead weight losses on the credit instruments that underlie structured products. There are several overlying derivative structures. I believe that there may be further large scale losses that may beset core institutions above and beyond the dead weight losses on the underlying that credit default will bring....

One macro assessment can be gained by looking at the level of aggregate private debt to gross domestic product (which is a proxy for private income). Below are two charts. One presents the ratio of all private debts –both household and corporate – to GDP; the other focuses only on the household debt to GDP ratio.



....it is possible to say that much of the increase in the ratio of household debt to GDP from 100% in 2000 to 137% in 2007 occurred only because loans were being made to people who could not pay on a massive scale. Household loans equal to perhaps 20% or 40% of GDP were excess private debt by 2007. This is a debt excess of the household sector that, relative to GDP, could be 5 or 8 more times that of the period 1989-1992,even after making some allowance for rising sound private indebtedness resulting from greater affordability of lower nominal interest rates and the increase in penetration of financial intermediation.



So far I have focused on the household sector. The ratio of corporate debt to GDP regained its 1989 peak level by 2000. Another wave of corporate credit difficulties then ensued. In this cycle it is widely believed that there has been a reduction in the ratio corporate debt to GDP. In fact the flow of funds data shows that this ratio was as high in 2007 as it was at its prior cycle peak.... However, it is a fact that the lowest grade corporate debt – junk bonds and leveraged loans – have doubled in nominal terms in this cycle when nominal GDP only rose by 35%. So it would appear that there might be a much greater excess of corporate debt relative to income in this cycle relative to both the late 1980’s and late 1990’s cycle peaks....

If the total aggregate of such excess private debt is more than 30% of GDP, we are talking about more than $4 trillion in defaulted loans. As recoveries tend to average 40%, we are talking about $2.5 trillion in dead weight credit losses by all classes of holders of such credit instruments over perhaps a several year period of “workout”.

Okay, okay. That sounds too large. So let us say the debt excess is only 20% of GDP. That implies defaults on almost $3 trillion of loans and dead weight credit losses of almost $1.8 trillion. The IMF just estimated such credit losses will be almost $1 trillion over this episode. I would put the eventual total at twice that given my macro financial perspective.

Could the problem really be that bad? I believe if we look at various components of the private debt superstructure of the U.S. economy we will see that it can easily be that bad...

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Fed Accepts Dodgy Collateral in Race to Bottom

It was 135 years ago that the British economic journalist Walter Bagehot laid out the guiding principles for a central bank acting as lender of last resort: Lend freely at a penalty rate against good collateral. The Federal Reserve has the "lend freely" thing down pat. As for the rate on the loan and the quality of the collateral, that's a different matter.

Last week we learned that banks were taking advantage of the Fed's largesse -- extending credit to non-banks via its Primary Dealer Credit Facility, or discount window by any other name -- by bundling high-yield corporate loans into securities that would qualify as collateral at the PDCF. When the music stopped, banks were left holding loans they'd underwritten for buyouts. Imagine the glee when they realized they could borrow at 2.5 percent against dodgy collateral at a time when no one else was willing to lend, at least not at a comparable rate with a comparable haircut.

Not that there's anything inherently bad about aggregating a group of securities or loans into a pool that generates income or dividends. It's called diversification. It's what mutual funds do. And it's also what many investors want: protection against default or bankruptcy by an individual entity by buying a basket of stocks, bonds, mortgages or loans. The issue here is the credit risk the Fed is assuming by selling or lending out its holdings of U.S. Treasuries in exchange for asset- and mortgage-backed securities. One year ago, Treasury securities accounted for 92 percent of the Fed's assets. Now it's down to 65 percent.

Both the idea of accepting collateralized debt obligations and the timing of such an action strike many observers as bizarre. "We just went through a period of bundling lousy mortgage loans into pools and on the theory that few would fail, and labeled the package AAA," said blogger Mish Shedlock, an investment adviser at Sitka Pacific Capital Management, in a post on the latest Fed Swap-O-Rama. "That experiment didn't go so well. "Now we see CLOs being created for the express purpose of swapping to the Fed," he wrote. "There is no market for the underlying loans. Yet Moody's, Fitch and S&P are supposed to rate this garbage investment grade so it can be swapped with the Fed."

Borrowing at the PDCF averaged $32.6 billion last week, according to the Fed. Federal Reserve Bank of New York spokesman Calvin Mitchell said the Fed "will not disclose or comment on the use of this facility by individual institutions." Lehman Brothers Holdings Inc. Chief Financial Officer Erin Callan had no such constraints at the firm's annual meeting yesterday, telling attendees she planned to securitize more loans to use as collateral.

The Fed isn't alone in broadening the range of collateral it is willing to accept in response to the credit crisis. In December, the Bank of England added asset-backed securities to its eligibility list. The European Central Bank, which has extended the term of its loans in recent months, has always accepted a range of marketable and non-marketable assets as collateral. The European press is abuzz with stories about Spanish banks tendering boatloads of asset-backed securities as collateral for ECB loans.

As property bubbles implode in some of the smaller Eurozone countries, credit availability has dried up, sending commercial banks to the ECB even though "there is no formal lender of last resort in the European Monetary Union," said Bernard Connolly, chief strategist at Banque AIG in London. "The need to rescue banks in particular countries would create political problems for EMU: which country's taxpayers are going to bail out another country's lenders?" So the Fed is in good company in the race to the bottom on collateral quality.

Assessments of the degree of credit risk the Fed is assuming by outsourcing its balance sheet run the gamut from a lot to a little to not much. The not-much argument didn't register until I talked to Neal Soss, chief economist at Credit Suisse. "If you look on a dollar bill, you will see two important phrases," Soss said. "One is `Federal Reserve Note.' If this is the Fed's liability, maybe I should care about the asset," he said. "The other is: `This is legal tender for all debts, public and private.' The police power of the state says, this will be money."

It's money because the government says it's money and the public has confidence it is. The purchasing power of the dollar -- what it buys in world markets -- is a completely different matter. "That's a question of the size of the Fed's balance sheet, not its composition," Soss said.

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Mr Mortgage - Here Comes The Alt-A Crisis

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Mr Mortgage on CNN

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S&P may cut $57 billion subprime debt, reviewing loss

Standard & Poor's on Tuesday said it may cut $57.1 billion of subprime-related debt due to continuing delinquencies and a worsening outlook, the rating company said. S&P will likely lower many of the ratings over the next few weeks because monthly performance data shows delinquencies and foreclosures continue to rise for deals issued in the first half of 2007, the rating company said.

"Today's rating actions incorporate our most recent economic assumptions and reflect our expectation of further defaults and losses on the underlying mortgage loans," S&P said in a statement. S&P said it is reviewing loss expectation for more than 17 percent of U.S. subprime debt deals issued in the first half of 2007, due to the latest delinquency trends, loan risks and deterioration in the rating firm's macroeconomic outlook.

It is also reviewing its rated collateralized debt obligation transactions with exposure to the affected U.S. subprime mortgage debt and will take action in a few days.

A completed global review of its rated asset-backed commercial paper conduits and structured investment vehicles, or SIVs, with exposure to these U.S. subprime bonds confirms that the ratings on the so-called conduits are not adversely affected by the rating actions, S&P said.

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JPMorgan Quietly Raising $6 Billion

Just hours after suggesting the credit crisis was nearing an end, and reporting a 50 percent drop in net income tied largely to mortgage and credit woes, JPMorgan Chase & Co. filed a curious-looking preliminary prospectus with the Securities and Exchange Commission Wednesday night.

Bloomberg News noticed the filing too, and reported that data it had compiled showed that JPMorgan is quietly planning a $6 billion offer of perpetual preferred stock — the biggest such offering in the company’s history. Which means, of course, that it may be time to do a double-take on the company’s earlier suggestion that sunny days are on the horizon; after all, this isn’t exactly the best credit market in which to go hunting for capital, unless there is a real need to do so.
From the report at Bloomberg:

The non-cumulative securities priced to yield 419 basis points more than U.S. Treasuries due in 2018 and pay a fixed rate of 7.9 percent for 10 years. If not called, the debt will begin to float at 347 basis points more than the three-month London interbank offered rate, a borrowing benchmark, currently set at 2.73 percent.

Press representatives at JPMorgan did not immediately respond to a request for comment, and had so far declined to speak with other media agencies as well when this story was published. JPMorgan Chase & Co. said earlier on Wednesday that 2008 first-quarter net income fell to $2.4 billion, or $.68/share, compared to $4.8 billion, $1.34/share, one year earlier.

Driving the drop in income were sizeable mortgage-related losses, including $1.1 billion in loan loss provisions tied to JPMorgan’s home equity portfolio, and another $2.6 billion in write-downs tied mostly to mortgages spanning all credit classes and underwriting programs. The hush-hush plans to raise capital at the Wall Street bank would certainly seem to contrast against remarks made by JPMorgan CEO Jamie Dimon earlier Wednesday, who had said that the credit mess was “working itself out.”

No mention was made on the earnings call about raising $6 billion, and a source that spoke with HW reacted to the news with stunned silence upon hearing of the plan. “I can’t imagine that a $6 billion capital raise would just have slipped the minds of the execs [at JPMorgan],” said one source, who asked not to be named. “I really don’t know what to say.”

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JPMorgan warns credit crunch will run all year

The chief of banking giant JPMorgan Chase warned that the credit crisis will be felt for the rest of the year, a less optimistic outlook that some Wall Street rivals. Chief executive Jamie Dimon said "Our expectation is for the economic environment to continue to be weak and for the capital markets to remain under stress… possibly through the remainder of the year, or longer."

He sounded a less optimistic note than Lehman Brothers' Dick Fuld and Goldman Sachs' Lloyd Blankfein, who have both intimated in the last week that they believe the end of the credit crisis is in sight. Mr Dimon made the comments as JPMorgan Chase reported a 50pc fall in the bank's profit after tax in the three months to March, down from $4.8bn to $2.4bn.

The decline was partly linked to $5.1bn of credit provisions and write-offs, highlighting that even the most successful of banks are not immune from the current cycle. Mr Dimon said the results, which do not include the bank's planned acquisition of fallen investment bank Bear Stearns, reflected the firm's "solid business momentum". He stressed that the bank's capital position remains strong.

The Wall Street bank's results included $2.5bn of provisions for future credit losses, taking its total reserve in this area to $12.6bn. The latest increase includes $1.1bn in relation to the bank's mortgage portfolio. In addition, the bank has taken a $2.5bn hit by writing down the value of certain leveraged loans, as well as so-called Alt-A and sub-prime mortgages. However its financial position was boosted by a $1.5bn pre-tax gain from the successful float of credit card network Visa on the New York Stock Exchange last month, in which the bank was one of the largest shareholders.

Shares in JP Morgan rose $1.61 to $43.73 in morning trading in New York, as investors breathed a sigh of relief that the reduction in profits and the financial write-downs were not as bad as they could have been. Across the bank, investment banking was worst hit, making a loss after tax of $87m compared to a record profit of $1.5bn in the same period last year.

The result was a mixture of a 30pc decline in investment banking fees, as mergers and acquisitions slowed, reduced debt underwriting fees, and a significant drop-off in the bank's fixed income revenue, down 82pc. But its Chase retail banking franchise also suffered, making a net loss of $227m against a net profit of $859m last time, as it posted a $2.1bn provision for credit losses in mortgage and sub-prime mortgages in its regional banking business.

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JPMorgan's Dimon Says Real Estate Is 'Getting Worse'

JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said he expects U.S. home prices to drop as much as 9 percent this year as even borrowers with the best credit have difficulty keeping up their mortgage payments. "Real estate is getting worse," Dimon said in a conference call today with investors after the bank, the third largest in the U.S., reported first-quarter earnings. "Home prices we still expect to go down."

The bank reported a 50 percent drop in net income on $5.1 billion in writedowns and loan-loss reserves linked to home-equity loans, subprime mortgages and financing for leveraged buyouts. The bank last month agreed to pay $2.4 billion for Bear Stearns Cos., which had been the biggest mortgage bond underwriter, after a two- day run on the firm pushed it to the brink of bankruptcy.

Dimon's forecast is more optimistic than many homebuilding analysts and executives. Deutsche Bank analyst Karen Weaver said in February that prices may fall as much as 26 percent from the third quarter of 2007 before hitting bottom. PMI Group Inc., the second-largest mortgage insurer, last week said U.S. housing prices will probably fall by an average 20 percent from their peak in 2006.

The National Association of Realtors predicts a 1.4 percent decline in the median price of existing homes this year and a 3.6 percent decline for new homes. In 2007, the NAR lowered its housing and economic forecast every month.

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Wall Street futures point to loss

Stock index futures dipped before the start of Wall Street trading on Thursday, pointing to a downward recoil after the previous session's strong rally. Quarterly earnings are due from more than 30 S&P 500 companies. Europe-based traders and analysts singled out Merrill Lynch, due before U.S. stock markets open at 1330 GMT, and Google, after Wall Street's close, as the day's two key reports to watch.

At 5:30 a.m. EDT, Dow Jones futures were down 0.3 percent, S&P 500 futures were down 0.4 percent and Nasdaq futures traded 0.3 percent lower. The indicative Dow Jones index, which tracks how the Dow stocks trade in Frankfurt, was 0.2 percent in the red.

"The (U.S. stock) market will stop for breath," said Heinz-Gerd Sonnenschein, equity markets strategist at Germany's Postbank. "We could see a little bit of profit taking after yesterday's strong rise." All three major U.S. indexes .DJI .SPX .IXIC advanced more than 2 percent on Wednesday, propelled by reassuring earnings reports from the likes of chip maker Intel and banks JPMorgan and Wells Fargo.

Sonnenschein said, however, that Thursday's dip in U.S. stock index futures could reflect a degree of investor caution triggered by JPMorgan Chief Executive Jamie Dimon's remarks that financial markets face a long period of uncertainty and that these markets, and an economy that may be in recession, will weigh on results all year, if not longer.

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Merrill Reports Loss on $6.5 Billion of Writedowns

Merrill Lynch & Co. posted its third-straight quarterly loss and will cut about 3,000 jobs after at least $6.5 billion of writedowns and a 40 percent drop in investment-banking fees. The first-quarter net loss of $1.96 billion, or $2.19 a share, compared with earnings of $2.16 billion, or $2.26, a year earlier, the third-biggest U.S. securities firm by market value said today in a statement. Analysts had estimated a loss of $1.72 billion, based on the average of six estimates compiled by Bloomberg.

John Thain spent his first four months as chief executive officer selling more than $12 billion of equity to bolster capital and overhauling risk-management practices after more than $20 billion of credit-market losses. Merrill's stock has fallen 50 percent in the past 12 months, trailing larger New York-based rivals Goldman Sachs Group Inc. and Morgan Stanley.

"The current environment is still tough," said Rose Grant, managing director in the investment-advisory division of Boston-based Eastern Bank Corp., which owns about 66,000 Merrill shares. "People are still reluctant to buy certain types of assets, and I don't think we'll see the end of that until later this year."

The first-quarter writedowns included $2.6 billion to account for the plummeting value of mortgage-related bonds including collateralized debt obligations. Merrill also reduced the value of bond insurance contracts by $3 billion, and lowered the value of leveraged loans by $925 million. Merrill's total revenue fell 69 percent to $2.9 billion in the first three months of 2008 from a year earlier. That includes a 7 percent increase to $3.3 billion at the brokerage unit, the world's biggest with a network of 16,660 financial advisers.

Fixed-income trading revenue was negative $3.38 billion and equity-trading revenue was $1.88 billion, down from $2.39 billion a year earlier. Debt underwriting generated $231 million in revenue, down 61 percent, while stock underwriting revenue dropped 45 percent to $199 million. "Merrill Lynch has to show profitability," said Ken Crawford, senior portfolio manager at Argent Capital Management in St. Louis, which owns about 160,000 Merrill shares. "They can't have negative return-on-equity quarters and expect to make investors happy."

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Iceland first to feel the blast of global cooling

Tiny country is like a canary in a coalmine signalling crises in toxic economies

Locals call it the shadow district: a strip of waterfront at the bottom of a hill, a short walk from Reykjavik's main shopping street. It used to be largely warehouses but today is home to some of the most expensive real estate in the city. Towering apartment blocks have sprung up, with views across the bay to snow-capped mountains. Flats cost up to £1.5m apiece. Where a cluster of new blocks is going up, the bright yellow cranes against the dazzling blue Icelandic sky look like a patchwork of Swedish flags flying above the city.

For much of the past decade, Iceland, with its tiny population of little more than 313,000, has been one of the fastest growing economies in Europe, making Icelanders the sixth richest people in the Organisation for Economic Cooperation and Development. Its big banks, Kaupthing, Landsbanki and Glitnir, have become international players and a new breed of companies has been buying up businesses overseas, led by Baugur, which owns much of Britain's high street, including Warehouse, Whittard of Chelsea and Karen Millen.

Signs of the new wealth in Reykjavik are hard to miss. Expensive four-wheel drives creep down the narrow main street, announced by the crunching sound of metal-studded tyres, for better grip on Iceland's frosty roads. Overhead is the near constant hum of private jets. There is building work throughout the city. On the harbour, a £50m concert hall will have spectacular views when it is finished this year.

For the first time, Iceland has had an influx of foreign workers. House prices have doubled since 2001 and a generation has known nothing but the good times. But those good times have come to a juddering halt. Iceland has become the latest flashpoint in the global financial crisis. Critics have compared the country to a "toxic hedge fund" built on debt that could be about to go spectacularly wrong.

Officials in Iceland argue that the country is under siege by unscrupulous speculators looking for the next quick buck. Despite its size, a meltdown in Iceland has the potential to severely damage confidence in the markets; one economist compares it to the canary in the coalmine. The concern is that the banks and corporations that have put Iceland on the map expanded too rapidly, borrowing during the years of readily available money. Now they face problems refinancing that debt.

The banks in particular have been facing astronomical costs for insuring their debt (credit default swaps or CDSs) as the markets speculate that they could be in deep trouble. Based on recent prices in the credit markets, Kaupthing was seven times more likely to default than the average European bank. The chief worry appears to be whether or not the Icelandic Central Bank would have the muscle to rescue one of the banks if things went wrong. Iceland is facing some unfavourable comparisons. Bear Stearns recently suggested the tiny nation was about as safe an investment as Kazakhstan.

Asgeir Jónsson, chief economist at Kaupthing, sees the spiralling cost of insuring the bank's debt as a modern version of a bank run. "Instead of seeing people queueing in lines you see speculators, hedge funds, betting against the banks in anticipation that the central bank in Iceland would not be able to supply the liquidity support. The Icelandic banks have not experienced any losses, they are extremely well capitalised, but if you see a line in front of a bank, you go and join it."

Risk-averse investors have begun pulling out. Since the beginning of the year, the Icelandic krona, the smallest independent currency in the world, has fallen by 25%. The main stockmarket index has fallen by about 40% from its peak last summer, inflation in the overheated economy is running at 6.8% and interest rates reached 15.5% last week. The country has also been running a large trade deficit, partly because of rampant consumer spending.

But in Reykjavik, people have suddenly stopped spending. A Mercedes-Benz dealership that opened on the outskirts of downtown in 2004, claims to have sold more of the top-of-the-range marque last year than were sold in the whole of Sweden. But sales have ground to a halt. "The prices for a new car have gone up between 25% and 30%," says Leifur Orn Leifsson, general manager of the dealership. "All people are talking about right now is the krona."

Glyfi Magnussen, an economist at the University of Iceland, says: "I think it is fair to call it a crisis. What we have is a country or an economy that has gone a little too far in some respects, especially the banking system. The growth of the banking system was very rapid and until last year the banks didn't really have trouble financing themselves and rolling over their debt at quite favourable rates, but the international financial crisis has hit Iceland very adversely and made this situation very rapidly almost unsustainable."

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Ilargi: Let me get this straight: the US dollar loses 28% of its value, and we write that “maybe” that has an effect on the price of oil, a commodity traded solely in USD? Come on, Ambrose, it’s not that hard. Then again, the effect of the plunging dollar on oil prices remains unnoticed all over. Record oil prices? Doubtful. Record lows for the dollar? You bet.

Oil surges as investors hunt an 'anti-dollar'

Oil prices have surged to almost $115 a barrel as China builds up stocks before the Olympics and hedge funds pour money into commodity futures as a way to exploit the collapse of the dollar. The Opec producers cartel yesterday defied calls from Gordon Brown for a boost in output to help ease the global shortage, sticking to its target of 32m barrels per day (bpd) for the next three months.

There is some evidence that Opec has actually cut output by 350,000 bpd since the start of the year - a hostile move in the current climate. It blames the latest spike on "speculators", claiming that world demand will fall 1.4m bpd to 85.7m this quarter as the US grapples with recession. Nobody else can step into the breach. Output is falling in the non-Opec trio of Britain, Norway and Mexico. Russia's production slipped 1pc in the first quarter.

The cost of developing oil fields worldwide has doubled in three years. The cost of operating an oil rig per day has risen from $200,000 to $600,000 since 2003. "The system is operating flat out," said Chris Skrebowski, editor of Petroleum Review. "We have been very lucky for the past few years that there has not been any major war or revolution to disrupt supplies. The market is incredibly tight as it is."

Société Générale said the near $30 spike in prices since early February is largely due to money pouring into commodity index funds, now worth some $200bn. Crude has taken on a "safe-haven" role for investors fleeing the dollar, or those betting that central banks will let rip with excess liquidity.

"This is now entirely investor driven," said Dr Frederic Lasserre, the bank's head of commodities research. He added that most of the money is coming from pension funds, insurers and other long-term investors. They view the US recession as a mere hiccup in a powerful upward cycle, convinced that Chinese and Mid-East demand will hold up long enough for America to recover. "They are all convinced by the fundamental tightness of the market," he said.

Hot money funds are also playing a role, trading oil as a sort of "anti-dollar". Crude is moving in reverse lockstep with the greenback, pushing ever higher (with double or triple leverage) as the dollar reaches fresh lows against the euro. Surging oil prices are in turn stoking inflation, causing investors to bet yet more on oil futures as an inflation hedge. "This has entered a vicious spiral," Dr Lasserre said. Analysts say it is no coincidence that oil punched higher on the same day that the euro reached a record of $1.5979, up 28pc in two years.

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Ilargi: Think it’s just me? I wouldn’t trust Gordon Brown to babysit my cockroaches. It’s time for Brown’s own Johnny Rotten. He has run Britain into the ground, and he’s still digging. Someone may force the secret hand of the banks, but I’m willing to bet it won’t be Brown.

Gordon Brown: Banks must admit the truth

Banks must disclose the size of their debts from poor quality home loans, Gordon Brown said on Wednesday night, amid signs that the impact of the global credit crisis may be even worse than suspected. In a meeting with leading Wall Street bankers, the Prime Minister called on lenders to be more open about the bad debts that have created turmoil in the mortgage markets in the past six months.

His intervention came amid fears that the banks are becoming more wary of lending to one another than even the official data suggest. The crisis, which has left banks and building societies short of money to lend to home buyers, is now so severe that the Treasury is preparing to approve a multi-billion pound emergency loan package for mortgage lenders next week. Senior officials are ready to agree the plan, whereby the Bank of England will lend billions of pounds to banks - secured against their residential mortgage portfolios.

However, critics said that taxpayers could be saddled with large losses if the housing market falls and the Bank ends up with the bad debts.The developments came on another troubled day for the market, during which:

• The biggest mortgage lender, the Halifax, increased the rate on its two-year deals by half a percentage point - one of the biggest single increases since the start of the credit crisis - adding £1,000 a year to a £200,000 home loan.
• The market for buy-to-let mortgages suffered a blow as 16 lenders, including NatWest, were found to have pulled out of the market - including four in the past week.
• A study by Equifax, a credit research agency, showed that half of all first-time buyers were considering pulling out of potential house purchases, which could have a serious impact on the market.
• Figures suggested that 150,000 home owners could have their properties repossessed this year.
Mr Brown told the bankers: "We have to see more international action to ensure there is proper disclosure so that the write-offs that have got to take place as a result of off-balance-sheet activities can happen quickly and expeditiously and openly."

The Prime Minister's intervention came amid growing evidence that banks are increasingly wary about lending to one another and that official interbank borrowing rates are becoming meaningless. A senior investment banker said that the "Libor" - the official rates at which banks lend to each other - now had "credibility problems".

Paul Calello, the chief executive of investment banking at Credit Suisse, indicated that the real rate charged between banks was often higher than Libor, which stands at 5.92 per cent - much higher than the Bank of England base rate of 5 per cent. The concerns have prompted the British Bankers' Association to bring forward a review of the system.

This is significant because it suggests a reason for banks failing to pass on to borrowers cuts in the Bank base rate. In many cases, the cost of home loans has been increased. This has undermined the credibility of the central bank. In an attempt to alleviate the crisis, Alistair Darling, the Chancellor, and the Bank of England have provisionally agreed to the Bank taking over mortgage loans that are on lenders' balance sheets in order to increase liquidity in the market.

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Bank of England to take on banks' loans to help mortgage market

The Treasury is set to give the go-ahead for a Government-backed plan to help mortgage companies start lending again in the wake of the credit crunch. Alistair Darling, the Chancellor and the Bank of England have provisionally agreed to the Bank taking over mortgage loans sitting on lenders' balance sheets in order to increase the liquidity in the money markets.

The Bank would grant Government bonds in exchange for securities backed by UK mortgages. It is the first time that the British government has acted so clearly to try to kick-start the markets. Gordon Brown will tomorrow meet Ben Bernanke, the chairman of the US Federal Reserve, in Washington to discuss what more can be done. Today in New York he met a number of Wall Street bankers and urged them to be more open about the write downs and the true exposure of their losses.

Mervyn King, the Governor of the Bank of England, has been working for at least six weeks on the plan. He has consulted widely, including among senior financiers in America to gauge how the plan would work and its knock-on effects. While the Bank has been keen to push ahead with the plan, the Treasury has voiced what one insider called "real concerns about the impact on the tax payer."

The issue is politically sensitive coming so soon after the Government was forced to nationalise Northern Rock. That deal exposes the tax payer to as much as £100bn in liabilities. In that climate, Treasury officials are anxious that they are not seen to be squandering more public money and last night they were seeking final guarantees.

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Bank of England poised for action to ease mortgage market misery

A ground-breaking plan aimed at easing the gridlock in the mortgage markets is being finalised by the Bank of England and Treasury after months of pleading by the major lenders for help from the authorities. Under the scheme, which is still subject to negotiation, the banks would able to use home loans as collateral to raise cash in the money markets which can in turn be used to lend to would-be home owners.

Top bankers urged Gordon Brown to endorse the plan at a meeting at Downing Street on Tuesday at which he was told of the pressures facing the mortgage market where deals are changing daily because of the precarious state of the financial markets. Abbey and Woolwich, part of Barclays, are the latest to announce changes to their ranges.

Following the Downing Street summit, Brown met bankers on Wall Street today where the sub-prime crisis started and continues to reverberate as illustrated by JP Morgan Chase which saw its profits halve today. The US investment bank that bailed out Bear Stearns last month warned the financial crisis was far from over.

The plan is expected to allow lenders swap mortgages for government bonds or similar instruments which they could then use to provide collateral for raising cash in money markets. "We are working very closely with the banks and very collaboratively at options for providing more liquidity to markets," said a government source. "Things are not quite finished but we are not far off."
The scheme would only cover the overhang of mortgage securities created up to the end of December last year as a way of thawing frozen money markets but not supporting new lending or creating risks for taxpayers.

The mortgages parked with the Bank of England would be at a significant discount to their face value. They would still be owned by the commercial banks to ensure that they, not the Bank of England, retain the risk attached to them. Brown has taken charge of the government end of the negotiations, reflecting the seriousness of the problem. The chancellor, Alistair Darling, admitted today that the government had to "sharpen up" its act on communicating its strategy to combat the credit crunch, something his critics leapt on.

Vince Cable, the Liberal Democrat shadow chancellor, said: "This isn't an economic strategy, this is a sketch from Yes, Minister."

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Ilargi: Nice headline, but trust me, dude from the Telegraph, you have no idea how high that price will be.

We have paid a high price for cheap money

The Bank of England's injection of liquidity into the money markets on Tuesday, backed by a package of measures allowing lenders to exchange mortgages for government securities, seeks to address the most immediately pressing domestic problem created by the credit crisis, by trying to free up the mortgage market.

But the focus of attention is moving increasingly to the way global banking is regulated and the lessons that can be learned from the most serious financial crisis since the Thirties. Some are depicting this as a crisis of capitalism, a catastrophic failure of the free market system.

In reality, the crash of 2007 has its roots in the distortion of the free market through political interference. It was caused by a lethal combination of negligent government oversight and political decisions (implemented through central banks) to keep money cheaper than it should have been. This was particularly true in the US, where rates were held at one per cent for too long, but was also the case this side of the Atlantic.

In their anxiety to ride out downturns, governments allowed an unsustainable credit bubble to be inflated. The most valuable weapon in the market, the cost of credit, was casually devalued. There was only ever going to be one outcome. The other aspect of the crisis that requires attention is a climate in which bankers are lavishly rewarded for lending money without sparing too much thought about what happens to those loans.

The banks themselves are, belatedly, recognising that their short-term reward culture has helped fuel the debacle. They are also admitting that their risk management mechanisms are not up to snuff and, perhaps most important of all, that their dealings have lacked transparency. Such wisdom after the event is of little comfort, but it would be unforgivable if corrective action were not now taken. In the City of London, there is already much talk of a return to "old-fashioned banking values", and not before time.

But this is a global problem and any new regulatory framework must reflect that. These issues were touched upon by Gordon Brown in his discussions with Wall Street bankers. Given the degree of pain that has been suffered, there will be the danger of a rush to over-regulation. That must be avoided, for the global financial system will always work most efficiently when on a light rein. But the regulatory machinery has to be responsive, targeted and effective.

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Ilargi: don’t know to what extent you have followed this, but I’ve always thought that the UK “buy to let” phenomenon was a solid proof of countrywide brain damage, and the best indication one could ask for that the UK is in for one hell of a disaster. They asked for it. Ponzi all the way.

Buy-to-let mortgages under threat

Sixteen lenders have now pulled out of the buy-to-let market, with four - Britannia Building Society, Scarborough Building Society, The Mortgage Works and UCB Home Loans - closing their doors to landlords in the past week.

On Wednesday NatWest pulled all its buy-to-let rates (replacements have yet to be announced), while Woolwich introduced a 1.5 per cent fee for landlords wanting its standard variable rate mortgage and raised rates by as much as 0.7 percentage points on other deals. The last 90 per cent buy-to-let mortgage has already been killed off. Now loans offering up to 85 per cent of property value are under threat, with dozens disappearing each week.

The past month has seen a vicious cull. Twenty lenders have pulled out of offering 85 per cent LTV mortgages for buy-to-let borrowers in that time, almost halving the number of players at that level. There were only 145 such products available on Wednesday, according to Moneyfacts, compared with 806 one month ago - a loss of almost five in every six of these types of loan.

In the buy-to-let market as a whole, there were 620 mortgage products available on Wednesday, down from 1,539 one month ago. At the peak of the market last summer there were 3,662 buy-to-let products. "Potentially, this market could reduce significantly until there are few, if any, lenders offering 85 per cent loan-to-value on buy-to-let loans," says Melanie Bien, director of mortgage broker Savills Private Finance.
"For now landlords can still get a mortgage with a 15 per cent deposit, but I can see the number of mortgage products going down further, and the 85 per cent loans will be the next to go."

Alan Harper of financial data firm Moneyfacts agrees. "With 85 per cent the next line of defence I’d expect to see those going next, if lenders continue to pull buy-to-let products." What has shocked observers is how deep the cut in the supply of buy-to-let loans has been. "There were always indications that the current situation might occur but no-one anticipated it happening so quickly," says Lynsey Sweales of specialist broker The Money Centre.

Katie Tucker, of mortgage broker John Charcol says the important thing is not the number of products, but the number of good deals. "Even if there were only five loans, if they all offered 90 per cent LTV and had great rates, there would be no issue," she says. "But all that remain are the safest loans. The best rates and highest ltvs have gone."

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Fed Risks Higher Prices With Low Rates, Yellen Says

The Federal Reserve, while trying to revive credit markets and fuel economic growth, should ensure that reductions in the benchmark interest rate don't spur inflation, said San Francisco Fed President Janet Yellen. The Fed "will have to be careful not to leave monetary accommodation in place longer than it is needed," Yellen said to reporters after a speech today in Alameda, California. Otherwise, policy makers may "put upward pressure on inflation" or create "a bubble" of speculation in the economy.

Yellen's view follows that of Minneapolis Fed Bank President Gary Stern, who said last month the Fed may need to prevent excessive market speculation that could damage the economy. Some investors have said the Fed under former Chairman Alan Greenspan left rates too low, encouraging asset bubbles in stock markets in 1999 and in housing markets this decade. "We have had a very serious set of shocks to the U.S. economy," Yellen, 61, said to reporters. "The aggressive easing we have had in monetary policy is appropriate."

The Fed, under Chairman Ben S. Bernanke, has reduced the benchmark rate by 3 percentage points to 2.25 percent since September in an attempt to limit damage from the collapse of the subprime-mortgage market. A decline in housing prices and record foreclosures have led to $245 billion in asset writedowns and credit losses by the world's biggest financial companies since the beginning of 2007.

In the text of her speech, Yellen repeated her view that the economy may shrink in the first half of this year.
"It appears that growth in consumption and business- investment spending has slowed markedly after years of robust performance and, as a result, the economy has all but stalled and could even contract over the first half of the year," Yellen said. The comments were similar to those she made on April 3.

Yellen's view reflects the estimate of "many" Fed policy makers, who at their March 18 meeting believed that a contraction was "likely," minutes of the session showed last week. Traders anticipate the central bank will lower its benchmark interest rate at least a quarter point this month.

The odds of a larger, half-point reduction in the fed funds rate on April 30 have decreased from 80 percent a month ago to 22 percent today. That suggests "financial conditions are a little more stable" since the last FOMC meeting, she told reporters. "It's helpful to see some signs that the liquidity measures we put in the marketplace are working."

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Sallie Mae Can Only Lend At Loss, Weighs Options

SLM Corp. (SLM) swung to a first-quarter loss and warned it can't make profitable loans at this time, prompting the nation's largest student lender to assess its operation and call for a "system-wide liquidity solution." The company, known as Sallie Mae, also said tightened credit markets have " dramatically" increased the cost of funds.

The comments, while not specific, were a dramatic indication of the turn in fortunes for both the one-time powerhouse and the market for student loans more broadly. The credit crunch and recent cuts in federal subsidies have forced a number of student lenders to stop making federal student loans and tighten their credit standards on private student loans. Last week, Sallie Mae said it would stop offering federal consolidation loans, under which borrowers combine loans into a fixed-rate loan.

"Today's environment is the most difficult we have seen in our 35-year history of student lending," Chief Executive Albert Lord said in a release. "It has become obvious that we can only meet the enormous student credit demands we are seeing at Sallie Mae if there is a near-term, system-wide liquidity solution."

In Senate testimony Tuesday, Senate Banking Committee Chairman Chris Dodd said he would send a letter to Treasury Secretary Henry Paulson to direct the Federal Financing Bank to purchase participation interest in pools of newly originated student loans backed by the federal government.

He also planned to write Federal Reserve Chairman Ben Bernanke to allow student-loan-backed debt to be used as collateral for the recently created Term Securities Lending Facility. The facility, introduced in mid-March to boost capital market liquidity, accepts a wider range of collateral, such as mortgage- backed debt, in exchange for Treasurys.

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SLM Has Loss as Student Loan Business Looks 'Broken'

SLM Corp., the largest U.S. student- loan provider, recorded its third consecutive quarterly loss as gains from selling loans to investors dried up. The company said its new loans are unprofitable. SLM, known as Sallie Mae, recorded a first-quarter net loss of $103.8 million, or 28 cents a share, compared with net income of $116.2 million, or 26 cents, a year earlier.

The Reston, Virginia-based company said in a statement that so-called core earnings, which exclude gains and losses from derivative instruments, fell to 34 cents a share, missing the 37-cent average estimate of eight analysts surveyed by Bloomberg. Sallie Mae has been pounded by the collapse of a $60-a-share buyout bid for the company and investors' shunning of asset- backed debt, including bonds the company relies on to finance new student loans.

Sallie Mae didn't have any first-quarter gains from packaging student loans for investors, compared with a $367.3 million infusion the year before. "The business model is fundamentally broken until they can find out a way to fund the business at economical levels," Richard Hofmann, an analyst with CreditSights Inc. in New York, said in an interview. "New loans are unprofitable and that's not a great business."

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The Fed and Democracy

Former Fed chair Paul Volcker recently sounded off against the current Fed for toeing the edge of its authority, exercising powers that are, in Volcker’s words, “neither natural nor comfortable for a central bank.” It’s the first time I recall a former Fed chief criticizing his successor. Justified?

Think of it this way. You probably learned in school the United States government has three branches. Actually there’s a fourth, in some ways more powerful than the other three. It’s called the Fed, and it pretty much runs the American economy. Yes, Congress and the executive occasionally pass laws like the little stimulus package that’s about to send you a few hundred dollars, and appropriate taxpayer money for other purposes.

But the Fed can expose taxpayers to hundreds of billions of dollars of potential losses without a single appropriation hearing, as it did recently when it allowed Wall Street’s major investment banks to exchange tainted mortgage-backed securities for nice clean loans from the Treasury. And the Fed can do amazing things – like decide one big bank, JP Morgan, is going to take over another, Bear Stearns, backed by $29 billion of taxpayer money.

Even its ongoing decisions about interest rates affect us more than anything the other branches do. The Fed has decided the threat of recession is bigger than inflation so it’s been lowering interest rates. This has made the dollar drop further and faster than otherwise, which means you’re paying more for gas and food. Can you imagine if Congress caused this to happen?

Five years ago the Fed decided to make money so cheap lenders shoved it out the door to anyone capable of standing up, and Alan Greenspan pooh-poohed the idea that regulators should be especially vigilant. What happened? We had a housing bubble, millions of Americans are losing their homes, tens of millions are watching their major asset (their home) drop in value and their pensions shrink.

So does this mean the Fed should be more accountable? Are its decisions so important that citizens have a right to more say in what it does? Problem is, most people don't understand what it does, and have no idea how it makes decisions. And partisan politics could do terrible damage. Yet we don't want the Fed to refrain from doing what it's doing. Paul Volcker to the contrary notwithstanding, government has to make sure there aren't runs on our banks and that our financial system is strong.

The first step in reconciling democracy with the Fed is for people to become better educated about it. Most Americans don’t even know where the Fed is located. (It’s on 20th Street and Constitution Avenue in Washington.) And most have no idea who runs it. (Besides the chair, now Ben Bernanke, are openings for six other members of the board of governors, each appointed for fourteen years. Five regional bank presidents join them on the Open Market Committee. Who appoints the regional bank presidents? If you don’t know, you ought to find out.) These twelve people have more power over your daily life than your congressman and Senator, maybe even your president.

Robert Reich is the nation's 22nd Secretary of Labor

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China Stocks Tumble, Set for Biggest Weekly Decline on Record

China's stocks tumbled, putting the benchmark index on course for its biggest weekly decline on record, on concern rising costs and government measures to quell inflation will erode profits. China Minsheng Banking Corp. dropped after the government ordered banks to set aside more money to slow lending. Huaneng Power International Inc. plunged after saying higher coal prices will more than halve profit.

Yunnan Copper Industry Co. tumbled by the daily limit for the second day after saying profit missed its forecast on higher expenses. "Sentiment is already fragile and the hike in reserve ratio, coupled with profit misses, are compounding things," said Chan Kum Kong, a portfolio manager at DBS Asset Management Ltd. in Singapore, which oversees the equivalent of $15 billion, including yuan-denominated A shares.

The CSI 300 Index, which tracks A shares listed on China's two exchanges, fell 107.39, or 3.1 percent, to 3,386.63 at the close in Shanghai. The gauge, which more than doubled in 2006 and 2007, has plunged 10 percent this week, on course for its biggest weekly decline since its introduction in April 2005. The gauge has slumped 37 percent this year.
All 10 of the benchmark CSI 300 Index's industry groups declined today.

China's central bank yesterday raised the proportion of deposits that banks must aside as reserves to a record 16 percent, reducing funds available for lending, in an effort to slow down growth. The economy expanded 10.6 percent, faster than estimated, and inflation was close to the quickest in 11 years, according to figures released by the statistics bureau yesterday

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Potash price rises more than 300%

Potash Corporation of Saskatchewan Inc. said on Wednesday that the marketing company for Saskatchewan potash producers and a leading fertilizer company in China have agreed to set potash pricing this year at about US$576 a tonne - some US$400 higher than last year. "Significantly higher potash prices and extraordinarily tight supply have become much more firmly entrenched since China's previous contract was signed 14 months ago," said Potash Corp chief executive Bill Doyle.

Saskatchewans's offshore marketing company, Canpotex Ltd., is jointly owned by three Saskatchewan potash producers: PotashCorp, Agrium and Mosaic. As millions of Chinese join the middle class their diets are changing to include meat and dairy products. This has in turn spurred demand for grains to feed livestock. As grain production rises, so does demand for fertilizer and the potash used to make it.

The new price for potash shipped to China will rise to about $576 per tonne at the port of Vancouver, said Potash Corp. director of investor relations Denita Stann in a phone interview from Chicago. Because Chinese officials delayed negotiations over this year's potash price, Canpotex said it can only make about 1-million tonnes of potash available to China, compared with 2.5-million tonnes the year before, Ms. Stann said.

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A Storehouse of Greenhouse Gases Is Opening in Siberia

It's always been a disturbing what-if scenario for climate researchers: Gas hydrates stored in the Arctic ocean floor -- hard clumps of ice and methane, conserved by freezing temperatures and high pressure -- could grow unstable and release massive amounts of methane into the atmosphere. Since methane is a potent greenhouse gas, more worrisome than carbon dioxide, the result would be a drastic acceleration of global warming. Until now this idea was mostly academic; scientists had warned that such a thing could happen. Now it seems more likely that it will.

Russian polar scientists have strong evidence that the first stages of melting are underway. They've studied largest shelf sea in the world, off the coast of Siberia, where the Asian continental shelf stretches across an underwater area six times the size of Germany, before falling off gently into the Arctic Ocean. The scientists are presenting their data from this remote, thinly-investigated region at the annual conference of the European Geosciences Union this week in Vienna.

In the permafrost bottom of the 200-meter-deep sea, enormous stores of gas hydrates lie dormant in mighty frozen layers of sediment. The carbon content of the ice-and-methane mixture here is estimated at 540 billion tons. "This submarine hydrate was considered stable until now," says the Russian biogeochemist Natalia Shakhova, currently a guest scientist at the University of Alaska in Fairbanks who is also a member of the Pacific Institute of Geography at the Russian Academy of Sciences in Vladivostok.

The permafrost has grown porous, says Shakhova, and already the shelf sea has become "a source of methane passing into the atmosphere." The Russian scientists have estimated what might happen when this Siberian permafrost-seal thaws completely and all the stored gas escapes. They believe the methane content of the planet's atmosphere would increase twelvefold. "The result would be catastrophic global warming," say the scientists. The greenhouse-gas potential of methane is 20 times that of carbon dioxide, as measured by the effects of a single molecule.

Shakhova and her colleagues gathered evidence for the loss of rigor in the frozen sea floor in a measuring campaign during the Siberian summer. The seawater proved to be "highly oversaturated with solute methane," reports Shakhova. In the air over the sea, greenhouse-gas content was measured in some places at five times normal values. "In helicopter flights over the delta of the Lena River, higher methane concentrations have been measured at altitudes as high as 1,800 meters," she says.

The methane climate bomb is also ticking on land: A few years ago researchers noticed higher concentrations of methane in northern Siberia. The Siberian permafrost is known as one of the tipping points for the earth's climate, since the potent greenhouse gas develops wherever microorganisms decompose the huge masses of organic material from warmer eras that has been frozen here for thousands of years.

Data from offshore drilling in the region, studied by experts at the Alfred Wegener Institute for Polar and Marine Research (AWI), also suggest that the situation has grown critical. AWI's results show that permafrost in the flat shelf is perilously close to thawing. Three to 12 kilometers from the coast, the temperature of sea sediment was -1 to -1.5 degrees Celsius, just below freezing. Permafrost on land, though, was as cold as -12.4 degrees Celsius. "That's a drastic difference and the best proof of a critical thermal status of the submarine permafrost," said Shakhova.

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Ilargi: Most of what people do these days who see themselves as "aware" of one problem or another, is based on the assumption that once we recognize the issue, we can work on it, solve it, make it better.

There’s a problem with that notion: it ignores how we got where we are. What will really happen in the near future is that humankind will make its problems far worse, more so than we can or will now understand. We are the most destructive animal ever, deceitful enough to make ourselves believe we are the smartest. Drilling for highly unstable hydrates is a perfect example of this tendency.

All the claims of “unlimited energy” are just so much nonsense, which show an intensely poor understanding of the 2nd law of thermodynamics, which quite clearly says that unlimited energy (an impossibility in itself) would lead to unlimited amounts of waste. And, in turn, Daly/Townsend’s corollary of the 2nd law states that no organism can survive in a medium of its own waste.

Unlimited energy is our demise. Just look at we've accomplished with the very limited energy we've used in the past 150 years..

Canadian, Japanese team make breakthrough on vast potential energy source

A remote drilling rig high in the Mackenzie Delta has become the site of a breakthrough that could one day revolutionize the world's energy supply. For the first time, Canadian and Japanese researchers have managed to efficiently produce a constant stream of natural gas from ice-like gas hydrates that, worldwide, dwarf all known fossil fuel deposits combined.

"We were able to sustain flow," said Scott Dallimore, the Geological Survey of Canada researcher in charge of the remote Mallik drilling program. "It worked." For a decade now, Dallimore and scientists from a half-dozen other countries have been returning to a site on Richards Island on the very northwestern tip of the Northwest Territories to study methane gas hydrates.

A hydrate is created when a molecule of gas - in this case, methane or natural gas - is trapped by high pressures and low temperatures inside a cage of water molecules. The result is almost - but not quite - ice. It's more like a dry, white slush suffusing the sand and gravel 1,000 metres beneath the Mallik rig. Heat or unsqueeze the hydrate and gas is released. Hold a core sample to your ear and it hisses.

More significant is the fact that gas hydrates concentrate 164 times the energy of the same amount of natural gas.
And gas hydrate fields are found in abundance under the coastal waters of every continent. Calculations suggest there's more energy in gas hydrates than in coal, oil and conventional gas combined. Getting that energy to flow consistently and predictably, however, has been the problem. Using heat to release the gas works, but requires too much energy to be useful. Researchers have also been trying to release the methane by reducing the pressure on it.

Last month, the Mallik team became the first to use that method to get a steady, consistent flow. "That went really well," said Dallimore. "We definitely demonstrated that these hydrates are responsive enough that you can sustain flow. "We were able to take conventional technologies, modify them, and produce. That's a big step forward." Although countries including India, China, Japan and the United States have undertaken major programs to identify gas hydrate fields, it's the first step in years toward making them productive.

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World sea levels seen rising 1.5m by 2100

Melting glaciers, disappearing ice sheets and warming water could lift sea levels by as much as 1.5 metres (4.9 feet) by the end of this century, displacing tens of millions of people, new research showed on Tuesday. Presented at a European Geosciences Union conference, the research forecasts a rise in sea levels three times higher than that predicted by the Intergovernmental Panel on Climate Change (IPCC) last year. The U.N. climate panel shared the 2007 Nobel Peace Prize with former U.S. Vice President Al Gore.

Svetlana Jevrejeva of the Proudman Oceanographic Laboratory in Britain said the estimate was based on a new model allowing accurate reconstruction of sea levels over the past 2,000 years. "For the past 2,000 years, the sea level was very stable," she told journalists on the margins of the Vienna meeting. But the pace at which sea levels are rising is accelerating, and they will be 0.8-1.5 metres higher by next century, researchers including Jevrejeva said in a statement.

Sea levels rose 2 cm in the 18th century, 6 cm in the 19th century and 19 cm last century, she said, adding: "It seems that rapid rise in the 20th century is from melting ice sheets". Scientists fiercely debate how much sea levels will rise, with the IPCC predicting increases of between 18 cm and 59 cm. "The IPCC numbers are underestimates," said Simon Holgate, also of the Proudman Laboratory.

The researchers said the IPCC had not accounted for ice dynamics -- the more rapid movement of ice sheets due to melt water which could markedly speed up their disappearance and boost sea levels. But this effect is set to generate around one-third of the future rise in sea levels, according to Steve Nerem from the University of Colorado in the United States.

"There is a lot of evidence out there that we will see around one metre in 2100," said Nerem, adding the rise would not be uniform around the globe, and that more research was needed to determine the effects on single regions. Scientists might debate the levels, but they agree on who will be hardest hit -- developing nations in Africa and Asia who lack the infrastructural means to build up flood defences. They include countries like Bangladesh, almost of all of whose land surface is a within a metre of the current sea level. "If (the sea level) rises by one metre, 72 million Chinese people will be displaced, and 10 percent of the Vietnamese population," said Jevrejeva.

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