Debt Rattle, September 1 2008: Once was empire

Detroit Publishing Company Luna Park at Coney Island 1903
Tonight only: "Infant incubators with living infants."

Ilargi: On this North American holiday, the main economic story, apart from Gustav making landfall in Louisiana, is the unabated decline of the British empire.

Britain falls so hard and so fast that it’s getting scary to think of where it is headed. I have warned for quite a while that it would happen, but I have to admit that even I am surprised to see the speed at which events unfold.

As the extent of the downfall and the reality of new-found desolate poverty seep through to the consciousness of the population, English society will reveal itself as an immensely volatile powder keg, with a very long array of very short fuses.

The de-facto resignation of Chancellor Alistair Darling -who publicly stated the UK economy is in far worse shape then the government lets on, knowing he will now have to go for saying so- reveals how desperate the situation is. Whether Darling comes or goes, the government can no longer keep up the pretense.

The veneer of control has become so hard to maintain that Gordon Brown resorts to a level of nonsense that seems impossible to top:

"In the next 20 years, the world economy will double in its size and wealth and we have a great opportunity to win new business, new jobs and prosperity for Britain."

On second thought, perhaps I underestimate the prime minister. It is entirely possible that that insane-looking statement serves the same purpose as Mr. Darling’s fatal interview this weekend. We may be looking at Mr. Brown’s own well-calculated de-facto resignation.


British government denies rift over economy

Gordon Brown today brushed off speculation about the future of Chancellor Alistair Darling following his warning that the economy was facing possibly the worst downturn in 60 years.

The Prime Minister, attending the EU emergency summit on Georgia in Brussels, told reporters: "We are getting on with the business of government." Mr Brown emphasised that the current economic difficulties were due to the "unique circumstances" of the trebling of world oil prices combined with the international credit crunch.

"We are showing that, unlike previous governments that could not manage a way through these difficulties successfully, that we are resilient in the way that we deal with these problems," he said.

"I think that you will find that the actions that we have taken and the actions that we are taking are actions that are designed to help the British people get through what is a difficult world economic downturn."

Mr Brown's comments came after Conservative leader David Cameron accused the Chancellor of "talking the economy down". In an interview published in The Guardian on Saturday, Mr Darling admitted voters were "p***** off" with the Labour Government and said economic conditions were "arguably the worst they've been in 60 years".

Although he later took to the airwaves to insist he was referring to international conditions and not the state of Britain's domestic economy, his startlingly negative comments sparked speculation that he would have to slash his forecast for economic growth in the upcoming Budget.

Commentators said he may have put his job on the line in any reshuffle by risking overshadowing the political fightback campaign planned by Mr Brown for the coming weeks. Mr Cameron told BBC Radio 4's Today programme: "It's an extraordinary situation that we've got a Chancellor of the Exchequer effectively talking the economy right down."

The Tory leader added: "As we stand at the moment, I think it is too difficult to say whether this is the worst situation for 60 years.

"I think it's extraordinary that the Chancellor said it - because the Chancellor of the Exchequer has got to think not only 'I must tell the truth at all times' but also 'I must use my words carefully so that I don't create a situation that's even worse'."

Downing Street rejected reports of tension between Mr Darling and Mr Brown over the comments. Mr Brown's spokesman insisted the Prime Minister has "full confidence" in his Chancellor and was working closely with him on a package of measures designed to help those hit by rising prices and the sluggish housing market.

Mr Brown will tomorrow join Communities Secretary Hazel Blears to unveil new help for first-time home-buyers and people facing the risk of repossession, and further announcements are expected shortly to ease the pressure of high fuel prices.

The Prime Minister is expected to paint a rosier picture of Britain's economic prospects when he addresses the CBI on Thursday. According to The Guardian, he will say: "In the next 20 years, the world economy will double in its size and wealth and we have a great opportunity to win new business, new jobs and prosperity for Britain."

Mr Brown has long been expected to use the early weeks of September to set out an economic recovery package designed to allay voters' concerns over the credit crunch and rising prices and shore up Labour's standing in the polls ahead of the party conference season.

Looking ahead to the expected announcements on housing and fuel, his spokesman said today: "We have already taken action in relation to housing and the mortgage market. We have already taken action in relation to helping people with their fuel bills. As the Prime Minister and other ministers have been saying in recent weeks, we want to continue to see what more we can do to help those affected."

Meanwhile, Schools Secretary Ed Balls brushed off suggestions that he was angling for Mr Darling's job. Launching a new curriculum for under-fives, Mr Balls said: "I think we've got a really good Chancellor in Alistair Darling and I can't think of any more important job I could have than making sure that the children in our country are equipped to learn."

He added that Mr Darling was "right" to "set out the challenges we face but also that we've got the strengths and experience and confidence to deal with difficult times".

Asked later by Channel 4 News whether Foreign Secretary David Miliband was after the Prime Minister's job, Mr Balls said: "I've known him (Miliband) for very many years and I know that he is a sensible, rational, sane politician, and a good guy, and I don't think that he would ever do anything so crazy, destructive and divisive, and that is why I am totally confident that's not what he was doing."

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UK mortgage approvals plunge 71% to all-time low

The malaise in the housing market worsened in July as the number of mortgages approved for house purchase fell by 71 per cent to a record low of 33,000 home loans.

The number of mortgage approvals fell from 114,000 in July last year, and today's figure is the lowest recorded by the Bank of England since records begin in 1993. The number of remortgages also dropped sharply in July to 69,000, down from 80,000 in June and the lowest figure since November 2001, according to the Bank of England.

The lack of buyers in the housing market, deterred by demands for hefty deposits and higher mortgage rates, is dragging down prices as sellers are forced to cut their prices to secure a sale.

Figures out last week from Nationwide showed that prices fell by more than 10 per cent in the 12 months to August, and some economists predict that property values could decline by 35 per cent from the market peak in August last year.

Soaring energy and fuel prices are piling more misery on homeowners, with recent figures showing that the amount of money people can afford to save plummeted to a record low earlier this year.

The savings ratio fell to 1.1 per cent between January and March, the lowest rate since 1959.

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UK rate futures rally as economic fears escalate

British gilts and interest rate futures rose on Monday as comments from finance minister Alistair Darling and bleak surveys reinforced worries about the health of the economy and raised hopes of rate cuts this year.

Darling, in a newspaper interview published on Saturday, reiterated warnings about the economy. That was enough to rattle nerves, coming just days after a Bank of England policymaker said two million could be out of work by Christmas.

'Alistair Darling endorsed the increasingly gloomy view as regards the UK economic outlook which endorses rate cut expectations,' said Richard McGuire, a strategist at RBC Capital Markets. 'It's also bad news for the supply side backdrop. He is clearly paving the way for a downward revision of the Treasury's growth projections in the autumn pre-budget report which are looking ridiculously optimistic now.'

Adding to the gloom, the Bank of England said mortgage approvals fell for a 12th straight month in July to hit their lowest since the series began in April 1993. Approvals are currently about a third of what they were last year. And the closely-watched manufacturing PMI showed the sector contracted for a fourth successive month in August, with little sign that conditions are about to improve.

By 1553 GMT, the short sterling strip was trading between 2 and 13 ticks higher. The December long gilt future settled 14 ticks higher at 112.07 and yields on two-year gilts were 7 basis points lower at 4.43 percent.

'Supply is going to be a feature of the shape of the gilt curve in the coming months, supporting our steepening theme with much of this issuance likely to be pushed back to the longer dated sectors,' said McGuire.

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U.K. Interbank Lending Plummets 68% as Banks Hoard Cash

Lending between U.K. banks slumped in July as financial institutions hoarded cash, signaling Bank of England efforts to revive money markets amid a surge in subprime-mortgage losses aren't working.

The volume of interbank lending in the British currency fell to 205 billion pounds ($370 billion), from 635 billion pounds in July last year, according to central bank data published today. The reading is down from the 269 billion-pound average since the credit crunch started last August, and the 332 million-pound average for the five years ending December 2006.

Banks have racked up losses of more than $500 billion since the collapse of the U.S. subprime-mortgage market. Interbank borrowing rates are little lower now than they were in April, when the Bank of England offered to take on damaged mortgage- backed bonds in an effort to unfreeze lending. The strains in global money markets will probably persist "for some time," the Bank for International Settlements said today.

"We're in the same position we were in last year, with banks hoarding cash to refinance their own beleaguered balance sheets," said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. "The Special Liquidity Scheme has helped individual banks by preventing them from becoming illiquid, but it hasn't helped money markets return to normal."

The July figure, which excludes central bank transactions, is down 68 percent from a year earlier. Part of the decline is due to changes in the number of institutions reporting to the central bank, according to the bank's Web site.

The central bank program allows commercial banks to swap mortgage-backed securities harmed by the credit squeeze for government bonds. The lending freeze led to the collapse of mortgage lender Northern Rock Plc in September, triggering the first run on a U.K. bank in more than 140 years.

The credit famine and the fastest inflation in at least a decade have brought the U.K. to the brink of a recession. Gross domestic product stagnated in the second quarter, ending the nation's longest stretch of economic growth in more than a century, according to government data.

Bank of England Governor Mervyn King said in June he will unveil a new money-market system this year to cope with both "normal" and "stressed" conditions. He hasn't said when or whether banks will reveal their participation in the April plan.

"It's significant that lending volumes have stopped falling, but what's worrying is the level where they've stabilized," said Lena Komileva, an economist at Tullett Prebon Plc in London. "This new order reflects weak confidence in credit quality as a result of banks struggling to refinance their loan books. It's a striking illustration of a crisis at its height."

Interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens.

The premiums banks charge each other for three-month cash relative to the overnight indexed swap rate widened to 78 basis points today from 12 basis points on July 31, 2007, before the credit crunch took hold in the U.K. It has averaged 69 basis points in the past 12 months, up from an average of 11 basis points in the preceding year.

"The term structure of Libor-OIS spreads suggests the interbank market pressures are expected to continue for some time," Ingo Fender and Jacob Gyntelberg, analysts at the BIS, wrote in the Basle-based bank's quarterly report.

The increase in short-term borrowing costs triggered questions over the accuracy of the London interbank offered rate, the benchmark interest rate administered by the British Bankers' Association and used to calculate rates on $360 trillion of financial products worldwide.

The BIS said in March some banks may have understated their borrowing costs to avoid being seen as having difficulty raising financing.

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Housing sales sink to worst for 30 years

The government is being urged to act swiftly to help drag the ailing property industry up off its knees as housing sales slow to their worst level in three decades and prices continue to decline.

According to the Royal Institution of Chartered Surveyors (Rics), sales were at their lowest level for 30 years in the three months to July, with estate agents averaging just over one property sale a week. RICS says "significant and decisive action" is needed to pull the market out of the doldrums and wants the government to help improve the supply of mortgage funds.

The Rics plea comes as the latest survey from the property intelligence group Hometrack shows that UK house prices fell for the 11th month in a row in August as banks continued to tighten lending conditions in the midst of the credit crunch.

Hometrack said the average price of a house in Britain was down by 0.9% over the month, compared with a 1.2% fall in July. Average prices were down by 5.3% in the year to August, the lowest level since the survey began in 2001.

Last week, Nationwide reported a 1.9% fall for August, taking the annual decline into double digits for the first time since the autumn of 1990. The 10.5% annual drop has shaved almost £20,000 off the cost of the average home and returned prices to their level of two years ago.

Richard Donnell, director of research at Hometrack, said: "When the market turns it can take as long as 24 to 36 months for prices to reach realistic levels and we are now well into this process. We may start to see a moderation in the rate of monthly price falls. However, with ever growing uncertainty among households over the broader economic outlook, the repricing of housing still has some way to run."

The survey found average prices down across more than half the country for the fifth month in a row. The biggest drop was in Greater London, where average prices fell 1.1% to £296,600. Rics is calling for the government to tackle mortgage liquidity and "incentivise the issuance of new mortgage-backed securities and covered bonds to give investors the confidence to return to the market".

The British Bankers' Association said last week that mortgage approvals had plummeted 65% in the past 12 months. Only 22,448 mortgages were approved in July, compared with 64,184 in July last year, as lenders continued to restrict mortgage availability and house values fell.

Rics is also asking the government to establish a tax-free savings account supported by government contributions to help first time buyers save for a deposit.

Gillian Charlesworth, spokeswoman for Rics, said: "We know there is no silver bullet that will slay this monster, but we need a joined-up, comprehensive approach to bring back confidence and give the public clarity about what is available.

While we wait for the government to act, many home owners are trapped in a market offering little or no mobility without any prospect of good cheer in the autumn."

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Mortgage hopes hit by Darling

The Treasury has snubbed calls from Britain’s lenders for direct government intervention to kick-start the mortgage market.

This week’s package of measures intended to stabilise the housing market will not meet a key demand from banks, building societies and housing-market lobby groups. The Council of Mortgage Lenders has said that without government intervention in the market for mortgage-backed securities, the lending famine that has resulted in a 65% drop in new approvals over the past year will continue.

But the Treasury, which is awaiting final recommendations from former HBOS chief executive Sir James Crosby, remains unpersuaded.

Mortgage lenders said they were left with an uphill struggle after comments by Mervyn King earlier this month, when the Bank of England governor expressed scepticism about extending the Bank’s special liquidity scheme to take in new mortgage-backed securities.

This week’s package will include measures to step up housing association purchases of unsold homes and an expanded shared-equity scheme for first-time buyers. Other options include doubling the allowance for cash Isas to £7,200 for those saving for a home. Another proposal would create a new regular saver scheme with tax benefits similar to Isas.

The Bank is preparing the ground for an informal extension of its special liquidity scheme specifically for building societies. Although some are rumoured to have borrowed more than £1 billion from the £50 billion scheme, most do not have the legal structures in place to access the cash.

Societies currently setting up covered bond vehicles to let them use the Bank facility will be permitted to access the loans even if their preparations slip past the October 20 cut-off date. The Bank’s monetary policy committee (MPC) meets this week. Analysts see little chance of a cut in rates, despite a gloomy assessment last week from David Blanchflower, one of its members.

Two members of the “shadow” MPC, which meets under the auspices of the Institute of Economic Affairs, back Blanchflower’s call for a sharp cut. Both Patrick Minford and Peter Warburton think there should be a half-point cut this week. The other seven members said it was too soon for a reduction.

The Engineering Employers’ Federation releases its quarterly trends survey tomorrow and is expected to say there has been a sharp deterioration in the economic outlook. Despite this, it is cautious about calling for a cut ahead of the expected inflation peak over the next two months.

Steve Radley, its chief economist, said: “With a tough pay round looming, business understands the need to rein in inflation. But with evidence that the economy is stagnating, the case for a cut is growing.”

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Sterling tumbles to record low against the euro

Sterling slumped to its lowest level ever against the euro and fell against the dollar as a slew of new data underlined the weakening state of Britain's economy. The pound opened sharply weaker in London after the latest survey from Hometrack showed that house prices fell for an 11th straight month in August.

Investors' willingness to hold buy sterling was also undermined after Chancellor of the Exchequer Alistair Darling said in an interview over the weekend that the economy is now in its worse state for 60 years.

"I don't think the news flow over the weekend helped," said Paul Robson, a currency strategist at Royal Bank of Scotland. "A lot of people realised that the UK economy is really slowing, when Darling indicated the UK is in for a period of slow growth."

Sterling's sell-off accelerated at 9:30am after figures from the Bank of England showed that the number of mortgages approved in July fell to the lowest level in at least nine years, as Britain's banks slammed the brakes on lending.

"Banks aren't keen to lend while there's not enough financing to go round," said Alan Clarke, an economist at BNP Paribas. "There's still likely to be downward pressure on mortgage approvals." Currency dealers have been scrambling to sell the pound as the weak flow of economic data fuels speculation that the Bank of England will have to cut interest rates this year to head off a deep recession.

Governor Mervyn King and the rest of the MPC members give their next decision on rates on Thursday. While most City experts expect the Bank to leave rates at 5pc, an increasing number now forecast that rates will be lowered in November. Sterling was down just under two cents and crashed through the $1.80 mark in mid-afternoon trading in London. Against the euro, it tumbled to 81.18p.

Mr Robson said: "I think $1.80 will be the short term base for sterling, as I think the dollar will have a more difficult time in the final months of the year."

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Bank of England to show no mercy as firms go under

The Bank of England is expected to ignore pleas for a cut in rates this week, despite warnings that the number of companies set to go under in Britain this year could reach 17,000.

The cost of borrowing should remain at 5 per cent even though figures – collated from official statistics for the first six months of 2008 – show that failures among companies could rise by a staggering third over last year's total of 12,507.

There's worse to come, insolvency experts warn. Figures for the 1990s show that company failures do not seriously escalate until the second and third year of a recession. Britain has yet to officially lurch into recession, defined as two quarters of negative economic growth.

Ian Jones, a partner in the Manchester-based insolvency practice JLD, said: "The number of failing businesses we have been asked to deal with has tripled from July last year to this. Few business owners throw in the towel straight away but companies reach a point where they simply can't carry on. Our recent three-fold increase could easily go to four- or five-fold."

InsolvencyInfo, which analyses administrations and receiverships, said that insolvent liquidations would hit 17,000 this year, should the trend of the first six months continue. Insolvency practitioners have privately accused some of Britain's biggest firms of using strong-arm tactics on their smaller suppliers and ditching long-term suppliers to gain the slenderest increase in their own profit margins.

Receiverships in the UK soared from 77 in the second quarter of 2007 to 177 in the same three months this year. But total failures are masked by the numerous companies opting for administration: the figure stands at 938 in the quarter to end June, up 62 per cent over the same three months a year ago.

Despite the growing list of business failures, economists warn that the Bank will keep rates on hold when it meets later this week. Michael Taylor, senior economist at Lombard Street Research, said: "I don't think there should be a cut in rates in the near term. Inflation is heading towards 5 per cent, far ahead of target and rising. Ultimately, the Bank of England's job is to control inflation."

Graeme Leach, chief economist at the Institute of Directors, said: "The most they could possibly do is make a quarter-point cut and that is not going to make any difference to growth."

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Money Market Strains to Continue 'for Some Time,' BIS Reports

The disruption in the global money markets that pushed relative borrowing costs higher will probably persist "for some time" as financial institutions struggle to raise cash, according to the Bank for International Settlements.

The difference between what banks charge each other for three-month dollar loans and the overnight indexed swap rate, the Libor-OIS spread that measures the availability of funds in the market, "remains elevated," the Basel, Switzerland-based BIS wrote in its quarterly report. The spread was 78 basis points on Aug. 29, compared with an average 8 basis points in the 12 months to July 31, 2007, before the credit squeeze started.

"The term structure of Libor-OIS spreads suggests the interbank market pressures are expected to continue for some time," BIS analysts Ingo Fender and Peter Hordahl wrote in the report published today. "At the same time, bids for U.S. dollar funds at auctions conducted by the European Central Bank and Swiss National Bank continued to be high."

Interest-rate derivatives imply that banks are becoming more hesitant to lend on speculation credit losses will increase as the global economic slowdown deepens. The concern is that money will become tighter through year-end because of the amount banks have to refinance in December. Stuart Thomson, a money manager in Glasgow at Resolution Investment Management Ltd., in an interview at the end of last month cited a figure of $88 billion.

Credit markets seized up a year ago after banks suddenly became wary of lending to each other because of mounting losses linked to the collapse of the U.S. subprime-mortgage market. Financial institutions have suffered over $500 billion of losses and writedowns since the start of 2007, according to data compiled by Bloomberg.

Nations accounting for half of the world's economy face a recession, Binit Patel, an economist in London at Goldman Sachs Group Inc., said in an Aug. 21 report. The premium banks charge for lending short-term cash may approach the record levels set last year, based on trading in the forward markets, where financial instruments are sold for future delivery.

Back then, concern about the health of the banking system led investors to shun all but the safest government debt, sparking the biggest end-of-year rally for Treasuries since 2000. Trust among banks remains low even after efforts by the Federal Reserve, ECB and Swiss National Bank to shore up the world's biggest banks and promote lending.

In response to the continuing turmoil, the Fed said July 30 it would give securities dealers access to its existing loan facilities. It now also offers 84-day loans to commercial banks under the Term Auction Facility, known as TAF, in addition to 28- day loans. In total, the Fed has provided almost $1 trillion of emergency loans.

An arrangement with the Fed that allowed the ECB to offer dollar-denominated funding to the region's banks was boosted to $55 billion from $50 billion. The Fed's most recent lending survey released Aug. 11 said that more banks tightened credit standards for consumers and business borrowers since April as defaults and delinquencies on home loans climbed.

The seizure in the credit markets and rise in short-term borrowing costs this year triggered questions over the validity of Libor, a benchmark administered by the London-based British Bankers' Association and used to calculate rates on $360 trillion of financial products worldwide. The BIS said in March some members of the BBA may have understated their borrowing costs to avoid being seen as having difficulty raising financing.

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Greed was not good for Dresdner Bank

The story of Dresdner Bank should become a parable for our times - a tale of greed and hubris that ended with one of the most famous names in German banking laid low.

But with the sale of the bank by insurance giant Allianz to domestic rival Commerzbank expected to herald the shake-up of the entire German banking system, the question remains as to whether anyone will heed the lessons.

Dresdner had spent much of its 125-year history as a conservative and rather staid independent domestic retail bank, although it was one of the first to open a branch in London and develop a network in emerging markets.

In investment banking, however, it fell behind its peers until it unveiled the £1.5bn acquisition of traditional London name Kleinwort Benson in 1996. It, too, had failed to keep up with its more aggressive US peers and the marriage of the two institutions was designed to herald a new era.

In a scenario that would come to be repeated, it never quite worked out like that. Four years later the turning point came with Dresdner deciding effectively to sell itself to Deutsche Bank.

The merger plans were announced in March, but less than two months later they had been torpedoed by a rebellion within the Kleinwort ranks, and then chairman Bernhard Walter was forced out. Not to be deterred, exploratory talks were held with Commerzbank but they, too, petered out into nothing.

Dresdner tried to fight back by bulking up. It overpaid at the top of the 2000 boom for renowned rainmaker Bruce Wasserstein and his boutique, Wasserstein Perella, offering $1.4bn in Dresdner stock. Yet Allianz had even bigger ideas. Just a few months later, Dresdner finally lost its independence when the German insurer paid €24bn to bring the bank into its fold.

The idea - popular at the time - was to use the bank's retail branches to cross-sell its insurance products. At the same time, it harboured hopes of using the resurgent investment bank to build a global financial powerhouse. Again, it failed fully to deliver what its architects had hoped.

The deal soured the relationship between Wasserstein and Dresdner, and the former quit for Lazard just months after the transaction was completed, taking a host of talented senior executives with him. Nor did the bancassurance concept really pay off, and recent results by Allianz have shown the drag being exerted on the group by Dresdner, which this month posted its fourth consecutive quarterly loss.

Although Lloyds TSB and China Development Bank are both thought to have looked at Dresdner, both are understood to have balked at the potential risks. The resulting deal with Commerzbank could trigger a much-needed reorganisation of Germany's entire banking sector. It would create a second national banking champion alongside market leader Deutsche Bank and put other players under pressure to follow suit.

Analysts say that, in the medium term, Dresdner and Commerzbank could join up with Postbank, a major retail bank owned by Deutsche Post. Germany's banks are dwarfs in comparison with giants such as China's ICBC with a market capitalisation of $248bn or Britain's HSBC with $190bn. In terms of its market value, Deutsche Bank ranks 32nd in the world, with Commerzbank in 84th place.

Commerzbank, aware of its vulnerability as foreign investors snap up other German banking assets, will use the deal to boost its position in retail banking and corporate banking. Its investors must hope that it has heeded the lessons its target learnt the hard way.

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Ilargi: The war mongering at the Telegraph in Britain, initiated by Ambrose Evans-Pritchard, continues at full throttle. He doesn’t care to look at why Russia acts as it does, he’s content to cite unnamed sources that claim to have proof of hostile acts in the making.

It should be no surprise that it takes a finance writer to get it so mind-boggingly wrong on the facts of energy. Electric cars in Britain and the US? In 10 years? Whence that electricity?

No, whereas the British and American dependency on Russia and its oil will surely grow much less painful over the next decade, it won’t be achieved through alternative energy sources. It will be accomplished through devastating poverty.

There is no need to fight Russia - just harness an alternative to oil

NATO is no longer part of my beat as a journalist, but let me remind those breezily pushing for an extension of the North Atlantic pact to Georgia and Ukraine what this actually means.

It exposes Britain and other Western powers to a high risk of war with Russia. It entangles us in ethnic disputes of enormous complexity deep inside the Kremlin sphere of influence, against a formidable military power, along supply lines that we cannot possibly defend.

Nato is not a golf club, or the plaything of neo-con adventurers. Article 5 obliges us to fight and die for the alliance. "The Parties agree that an armed attack against one or more of them in Europe or North America shall be considered an attack against them all."

The Bush administration wants to extend this guarantee to both Georgia and Ukraine. So does John McCain, with even greater vehemence. Britain has gone along, against the better judgment of the Foreign Office. Fortunately for all Britons of military age, this foolish demarche was stalled by Germany and France in April.

We can argue back and forth about the conduct of the Georgians. Was it wise to strip South Ossetia of its historic autonomy, or shut down the sole Abkhaz university in Sukhumi? Was it necessary to shell Russian passport holders? But to enter the debate is to see the folly of letting such an immature democracy hold us hostage to war with Russia.

Such a commitment is not credible, and is therefore dangerous. It invites Russia to call Nato's bluff. The West will not risk conflict to rescue President Saakashvili from his misadventures, if push comes to shove. The inevitable climbdown would emasculate the alliance at the moment when it was most needed.

The credible Nato line in Eastern Europe runs along the borders of the European Union, from the Baltics to Romania. This pits Russia against a unified bloc of 505m people. Any attempt by Moscow to peel off Estonia or Latvia by stirring up Sudeten-style irredentism among their Russian minorities would be deemed a mortal challenge by the EU's elites.

The "soft-power" muscles of the world's biggest economy would flex in earnest. Russia's bluff would be called.

This is not to criticise David Miliband's impassioned plea in Kiev. Russia's "unilateral attempt to redraw the map" is indeed a grave matter. The alleged parallel with Kosovo is so facile it does not deserve a response. "We need to raise the costs to Russia for disregarding its responsibility," he said.

Quite so. But Nato membership for Ukraine is playing with fire. Some 30pc of the population are native-Russian speakers. The Donetsk and Luhansk oblasts are uprisings-in-waiting along Russia's border.

Yet again, the Bush administration has misjudged events. Moscow has drawn a line in the sand over Georgia and Ukraine. To push this issue is to poke the world's biggest energy producer in the eye. Washington is lucky that China is not taking advantage of this crisis to help Russia inflict a crippling lesson.

Russia holds $580bn of foreign reserves. China holds $1,800bn. Together they own a third of the $1.5 trillion stock of Fannie Mae, Freddie Mac and other US agency bonds. They are holding a gun to the head of the US Treasury, and the US financial system.

So how should we handle the bad-tempered bear? Data from the International Energy Agency suggests that oil prices will fall back for a couple of years as the global downturn squeezes demand, and new deliveries come on-stream from Brazil, Africa, Central Asia and the US itself.

Russia's leverage as supplier of 6.5m barrels per day of crude exports will slip, but not for long. But oil may well climb to a new equilibrium price above $150 a barrel once the next global cycle starts in earnest. If so, Russia will become an even bigger headache. It is willing to use the oil weapon. It cut off 50pc of crude deliveries to the Czech Republic in July after Prague signed a deal with the US on the missile shield.

Obviously, we must cut our reliance on oil and gas even faster than we are already doing. Nuclear and clean power stations must be built with more urgency than we have seen so far. Tide and wave power technology should be given the same strategic priority as aircraft carriers.

If I were an American citizen, I would expect Washington to sponsor a Manhattan Project to harness the solar power on a mass scale. My apologies to the CIA/Pentagon if such a blitz is under way.

Jim Woolsey, the former CIA director, told me last week that the US will end its strategic dependence on oil much more quickly than people realise. "We can defeat oil as a transport fuel. Russia won't be able to push us around any more within a decade," he said.

He is counting on electric cars. His Toyota Prius can already run for two cents a mile when recharged overnight. The engine reverts to fuel after 20 miles. This will soon change. The new lithium-ion batteries are advancing by leaps and bounds.

There is no need to confront the Kremlin in the Caucasus or on the Dnieper. All we need to do is to chip away at its energy wealth. If we can drive oil back down to $70 a barrel, and keep it there, Russia will be reduced to a middling power of 141m people, with a deformed industry, in the grip of an acute demographic decline. We may even do the country a favour.

Oil is a double curse: it incubates the "Dutch Disease", and fosters autocracy. The Russian people would do better without it.

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Credit crunch brings big rise in supermarket offers on sugary foods

Supermarkets have dramatically increased cut-price promotions of cheap sugary and fatty food as the credit crunch bites, a consumer watchdog says today.

Incentives including "buy one get one free" offers could directly influence people's eating habits, according to a report by the government-funded National Consumer Council (NCC). It says money-saving opportunities are particularly important for lower-income families who are likely to be feeling the pinch more than most, and these deals are making it more attractive for consumers to choose more foods that contribute to an unhealthy diet.

The NCC conducted a spot-check on branches of the top eight English chains in Sheffield before Easter, with Easter-related promotions not counted. It found more than 4,300 promotions - a sixth more than in the last snapshot survey in 2006. Previous checks conducted by the NCC have been at branches around England.

More than half the promotions - 54% - related to foods high in fat and sugar, despite Food Standards Agency (FSA) advice that these foods should make up just 7% of diets. Only one in eight promotions featured fruit and vegetables.

Lucy Yates, author of the report, entitled "Cut-price, What Cost?", said the volume of promotions for fatty and sugary foods was "staggering". She added: "We expected to see evidence of big improvements since our last investigation, but we've been sadly disappointed.

With so many of us buying our foods at these supermarkets, their collective behaviour can heavily influence the nation's eating habits. Despite their claims, the supermarkets all still have a long way to go to help customers choose and enjoy a healthy diet."

The NCC ranks supermarkets according to four health indicators, which cover nutritional content of own-labelled processed food, labelling information and customer advice, as well as promotions. Overall, Sainsbury's came top for the second time in a row, with the Co-op second, Waitrose third, Marks & Spencer fourth, Asda and Tesco joint fifth, Somerfield seventh and Morrisons last for the fourth time in a row.

The report says at least a third of price promotions should be for fruit and vegetables, with fewer involving fatty and sugary foods. Stores should move faster to reduce salt, sugar and fat levels in their brands. It commends the Co-op, Tesco and Waitrose for not having sweets at the checkouts.

Sainsbury's, the Co-op and M&S had taken on previous recommendations, the report said. "These retailers have shown a real commitment to more responsible retailing and making their customers' health a priority, although more work needs to be done across the sector to curb unhealthy food promotion."

However, the British Retail Consortium rubbished the report, saying the "one-off snap shot ... in one English city last March" used "misleading comparisons to unfairly criticise retailers' records on encouraging healthier food choices". It said promotions were balanced across the year. "Customers will have seen for themselves the current high-profile price war centred on fruit and vegetables."

Tesco questioned the NCC's method of judging nutrition labelling, saying its bias towards one colour-coded system recommended by the FSA clouded the facts. Morrisons also rejected the findings, saying: "It's six months out of date, contains a number of inaccuracies and is a largely subjective assessment."

But a spokeswoman for the NCC discounted the seasonal argument. "We include frozen and tinned fruit and vegetables. Supermarkets could discount what is there and we did not find they were doing so. A spot-check like this is totally fair. We set out to replicate what it is like for a normal shopper."

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Rothschild hedge fund loses $5 billion on stock market volatility

Atticus became one of the biggest hedge fund casualties of the credit crunch today as it emerged that turbulent stock and bond markets had wiped more than $5 billion off the value of the activist company's portfolio.

The 25 per cent slide meant that Atticus's funds under management stood at $14 billion as at the end of July, against a high last year of $20 billion. The decline represents a setback for Atticus, which specialises in taking big bets on single stocks and covering its risks by going "short" on companies - selling borrowed shares in the expectations of being able to buy them back more cheaply at a later date.

It has a fearsome reputation as an activist investor, both in Europe and the US. Atticus is best known as one of several hedge funds that publicly opposed the proposed takeover of the London Stock Exchange by its German rival Deutsche Börse. It emerged last year with a $1 billion stake in Barclays and opposed the bank's proposed acquisition of ABN Amro, the Dutch bank that was eventually sold to a consortium led by Royal Bank of Scotland.

The fund is co-chaired by Nathaniel Rothschild, the son of Lord Jacob and part of the Rothschild banking dynasty. At least two of Atticus's funds also experienced sharp slides in performance this year. It is understood that the $7 billion European fund, run by David Slager, a former Goldman Sachs trader who is a partner at Atticus, fell 32.9 per cent during the eight months to the end of August.

Atticus Global, run by Tim Barakett, a founder of the hedge fund, is down 25 per cent over the same period. The sliding performance in recent months comes after Atticus rewarded its investors with bumper returns over previous years. It is understood that Atticus has not suffered defections from the fund, despite the recent performance falls.

The fund tends to negotiate longer lock-up periods for investors than most of its rivals, expecting its customers to stay with the fund for on average two to three years.

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