"Launch of the Western Star, Wyandotte, Michigan"
Ilargi: As another European Stoneleigh lecture tour is drawing to a close (two more dates in Ireland today and tomorrow), and I myself have already left the trail for greener pastures, life should be getting back closer to "normal" for a while. Or will it? More European dates are being set for July and August as we speak, and before that, in May and June, Stoneleigh will be touring BC and the western US without me.
The tours are great, as are all the kind people we get to meet, but they're also very time-consuming, and there's always so much to do. Still, for me at least, there should be more time in the next few months for writing and other things that need to be done for The Automatic Earth. Never a lack of plans and ideas, just of time -and money- to execute them. It can be very frustrating when things take long to develop, but for now we don't have too many options to speed up the process. Working hard on it though: it looks like we may finally move to the new format we've wanted for a long time, soon.
As you have probably noticed, TAE staff writer Ashvin Pandurangi has been fantastic in filling in the gaps the travel schedule imposed on us over the past 7 weeks. And he continues to do so today:
By now, it is is painfully obvious that the U.S. economy is not going to "recover" and that its fiscal situation will continue to deteriorate over the next few years, at least to those of us who value being truthful to ourselves. This will happen regardless of how much chatter is generated by the politicians about "fiscal responsibility" and the importance of reducing the deficit, or an imminent "government shutdown". That begs the question, however, of what will actually happen to the U.S. treasury market and the dollar as a "store of value" during this time.
Those two investments are ultimately driven by the forces of supply and demand, just like all other ones. Their supply will be plentiful, as the federal government generates new credit to fund the increasing gap between tax revenues and spending, so the question is whether there will be enough demand to meet the supply. The answer to that question is not as simple as determining whether rational investors will maintain their confidence in the U.S. Treasury market and place their limited capital at its feet.
Your average financial investors (individuals, asset managers) are, A, not rational, and B, not the only source of support for the market. The latter is clear enough from the fact that the Federal Reserve, a privately-owned institution with no actual reserves, is now the largest creditor of the federal government, as its treasury holdings surpassed those of China earlier this year. The Fed (along with a few other central banks and the IMF) is merely a front for a cartel of major financial institutions that are primarily located in the U.S., Japan and Europe, as well as other multinational corporations that work with them to maintain their operations.
These institutions, unlike the average and irrational financial consumer, will not necessarily throw their support behind the treasury market out of panic or fear of a worsening global economy. If they choose to continue "investing" in U.S. treasuries, it will be a calculated decision that is based on what they believe is the best method of preserving their wealth and power. It is obvious to even the mainstream financial world that the public bond markets of the EU (and possibly the UK) and Japan are not going to last much longer, so those investments are not really options at all.
The choice they face can be analogized to the choice faced by a middle-class entrepreneur with a relatively profitable business operation in his home country. Although the businessman may be getting anxious about the market for his products and his ability to continue generating revenues and profits, he is also very experienced at operating the company in its current environment, with his current clients and his traditional methods of conducting business.
The market for his products may indeed by on the verge of collapse, but he cannot be sure that a similar market in another artificially-created jurisdiction would be any healthier for his business. On top of that, his family and friends all live in the jurisdiction where the business currently operates, and the businessman is very familiar with his local clients and his community.
There is no guarantee that a smaller market in another community would even be able to accommodate the scale at which he is used to operating his business, or that new clients there would be able or willing to entertain his services. Ultimately, the physical, financial and psychological costs of such a dramatic switch do not appear to be worth the trouble for the businessman. He decides to simply continue running his local business and hoping or praying for the best possible outcome.
Are the major financial players, who hold trillions of their net worth in dollar-denominated debt-assets, any different from the hypothetical businessman above? Perhaps they have a degree of more flexibility in their decision-making process and significantly more resources to help them decide, but they are also slaves to tradition and the human tendency of sticking to what they know.
The debt-dollar markets (equity markets, commodity markets, real estate markets, bond markets), already systematically entrenched around the world, combined with the "full faith and credit" of the federal government and the Fed's unrestricted license to generate credit with the push of a button, tilt the scales in favor of sticking it out with the U.S. treasury market and currency. There are certainly alternative courses of action at the disposal of the wealthiest institutions in the world, but they are all a far sight short of being attractive.
One alternative plan would be to begin dumping all of these debt-assets on some clueless investors and taxpayers (via government programs such as TARP) and use the freed up capital to invest in hard assets (land, gold, oil, grains, etc.) and/or perhaps in the "emerging markets" of India, Brazil, China, etc. Personally, if I somehow ended up in the wacky world of financial elites, where priority #1 is to protect ungodly amounts of wealth and political power during a global economic depression, then I would dismiss this alternative as soon as it was presented to me.
The plan would have numerous flaws, some of which are too complex to even predict, but my general line of thinking could be summed up by comparing a few statistics and conducting a simple analysis.
- The global bond market was valued at $91 trillion as of 2009, and the U.S. treasury market accounts for almost 8% of that value. .
- The "over-the-counter" derivatives market was notionally valued at $615 trillion as of 2009, with interest rate derivatives accounting for 70% of that value, and 32% of those being directly sensitive to the value of the U.S. dollar and rates on the U.S. treasury curve. .
- The U.S. has the first and third-largest equity markets in the world, and they combine to have a market capitalization of about $15 trillion, which also equals the total capitalization of the other eight markets in the largest ten. .
- About 5.3 billion troy ounces of gold have been mined in human history as of 2009, and gold is currently selling at record prices, for about $1450/oz.
- There are less than 10 billion acres of arable land on Earth, and some of the most expensive farmland in the U.S. averaged about $2K/acre in 2006.,.
Average consumers of financial products in the developed world simply do not have enough capital to buy up a significant portion of the dollar-denominated debt-assets that the elites would like to dump, especially when those assets are "officially" marked as being much more valuable than they really are. Foreign governments, of course, can barely afford to finance their own operations, let alone pour additional funds into U.S. treasuries. The same is true of institutional asset managers (pension funds, mutual funds, etc.) who may have rebounded a bit of business activity since 2007-08, but are still teetering on the edge of destruction from quarter to quarter, not knowing whether they will record a profit or a digital suicide note when the next one comes around.
These institutions may be willing to aid the elites in transferring worthless mortgage and equity instruments to average workers and taxpayers through government directives, pension plans and mutual funds, but they simply do not have the free capital to do the same for U.S. treasuries. That is truly the limiting factor, as the U.S. treasury market and its sprawling derivatives contract extensions make the stock market look like a penny-ante game of Bingo at Uncle Sam's Fiesta Rancho Casino.
Regular old investors or fund managers with modest stock portfolios and limited capitalization cannot absorb the behemoth treasury market at full value, or anything close to it. Even if they could, where would the elites take the dollars that they received in exchange? The exact same problems described above apply to farmers, miners, manufacturers, etc. who work, invest and deal in the markets for hard assets. Besides, there is no need to pay people for their gold, land or oil when you can just take it by brute military force.
And that's really the beauty of the debt-dollar system for the financial elites. It is globally established and it comes with the implicit understanding that, if you buck the system, there will be a fiery dose of hell to pay. These elites have all the time and resources they need to abandon the current system and down-size from the Yukon Denali to the Ford Focus, but the word "sacrifice" isn't a part of their vocabulary. Instead, they will fight hard to keep the system functioning in whatever form they can manage, as long as it remains at the same scale of operation.
They are not under the illusion that the U.S. treasury or currency market are sparkly diamonds in the rough, or even shined shit in the land of fool's gold. Fundamentally, the dollar is no healthier than the euro and they know it. The choice, however, is whether to wholly abandon the treasury shell game between the federal government, the Fed and private banks or to keep a good thing going while it seems to be working. They are banking on the Fed's monetary operations, political illusions (the appearance of two parties working towards reducing the deficit), panicked "flights to safety"and a little bit of luck to preserve the debt-dollar system until global markets "reset" and economies begin to grow once again.
Perhaps they will keep other options open, as lifeboats to hop into in the last second before the Treasury Titanic is fully submerged. The problem for them is that such backup options never really end up working out as planned, especially when time is not on the same side as you are. It is also a distinct possibility that, despite what anyone wants or plans, the treasury market will blow its lid sky high next month or the month after. Possible, but not very likely, given the current situation in global bond markets and the "full court press" that is being launched by the elites. Personally, I give the treasury market and the dollar at least a few more years before their shine truly wears off, and the fan has its way with them.
A bankrupt nation wakes up
by Christopher Caldwell - Financial Times
The high point in The Gallery of Antiquities, Balzac’s great novel of debt, comes when gendarmes are arresting the young Count d’Esgrignons for a forgery committed to cover his borrowing. The loyal notary Chesnel, attached to the d’Esgrignons family by generations of service, has already spent his own modest fortune to get the young count out of such scrapes, but he is at the end of his resources. "If I don’t manage to smother this story," he tells the count matter-of-factly, "you’ll have to kill yourself before the indictment is read out."
The count realises in a flash that people have lent him money not because they have more than they know what to do with, or because he’s a nice guy, or because his privileges are the natural order of things. They have lent him money because they have made certain assumptions about his honour – misplaced assumptions, as it turns out.
Americans came face-to-face with their government debt this week and discovered that they are in the position of d’Esgrignons. There are several ways to measure how apocalyptic the situation is. The recent announcement by Pimco bond analyst Bill Gross that he was selling his long-term Treasury holdings has shaken people, and not just those who watch the business channels.
In a memo laced with words like "staggering" and "incredible", Mr Gross described himself as "confident" the US would default on its debt if did not reform its entitlement programmes (pensions and government healthcare). Mr Gross cited an estimate by Mary Meeker, a venture capitalist, that government unfunded liabilities stand at $75,000bn. To spend time with the federal budget is to suspect that the US is the sick man of the global economy.
The budget drama of the week had little to do with the frantic negotiations between congressional leaders and Barack Obama over whether to shut the government down. By week’s end, the two sides were only $7bn apart and were arguing about the finer points of abortion policy. The real drama came from the budget for next year released by House budget committee chairman Paul Ryan. It lays out what the US needs to do over the coming decades to avoid being crushed under the promises its welfare state has made.
Mr Ryan’s recommendations will not be to everyone’s liking. But he is the first politician to take the full measure of the US debt crisis, and his outlook is appropriately Balzacian. Mr Ryan views debt as an "existential threat", a great drama whose cause is self-indulgence and whose end is enslavement. Mr Ryan writes in his budget document: "We face two dangers: long-term economic decline as the number of makers diminishes and the number of takers grows and, worse, gradual moral-political decline as dependency and passivity weaken the nation’s character." Americans will have to give up their cushy retirements and a Medicare system that, according to a much quoted Urban Institute study, pays three times in benefits what it collects in revenues.
Any politician who takes such a long view must put his cards on the table, showing where he would raise money and where he would cut costs. A press consensus has formed that Republicans will pay a high political price for Mr Ryan’s forthrightness. But if the numbers are as dire as neutral observers say, then his vindication will not be long in coming.
The Ryan budget shows up the president’s inattention to the problem. In control of both branches of the legislature, his Democrats failed to – or chose not to – produce a budget last year, an unprecedented dereliction, and Congress did not pass a single appropriations bill. Mr Obama has no clear plan to reduce the deficit below several hundred billion dollars before 2020. "The government’s failure to prevent this completely preventable crisis," Mr Ryan writes, "would rank among history’s most infamous episodes of political malpractice."
A conspicuous omission from Mr Ryan’s plan is tax rises, a big part of covering any big deficit. Indeed, Mr Ryan would cut the top rate from 35 per cent to 25 per cent, in hopes of "broadening the base". Pessimists will see this faith in tax cuts as a sign that Republicans have learnt nothing from the debacle of George W. Bush’s economic policy. Optimists might see it as a bargaining ploy. Since Mr Obama has withheld specifics about which government services he would cut, Republicans must keep tax rises as a bargaining chip. Assuming they eventually happen, the lack of tax rises at this initial stage may be a sign of Republicans’ seriousness rather than their unseriousness.
One suspects, though, that tax rises are going to be necessary to make any budget politically sustainable. With the acuity that comes from anger, US voters see quite well what "broaden the base" means, and they know why supply-side theory holds that it is good for job creation. It means lowering rates for the richest and increasing the number of people who pay income tax, and it fosters growth because it reallocates capital from the classes that don’t start businesses and invent things to the classes that do. As an economic matter, the supply-siders may be right about this specific point. As a political matter, it will be a hard sell.
And it ought to be. In retrospect, the story of the past half century is that Americans found a way to extract money from future generations and leave them with the bill. What they have been enjoying is not prosperity but luxury. As Mr Ryan sees, they face the serious and open question of whether they are morally capable, over the long term, of living within their means.
March Madness: U.S. Government Spent More Than Eight Times Its Monthly Revenue
by Terence P. Jeffrey - CNSNews
The U.S. Treasury has released a final statement for the month of March that demonstrates that financial madness has gripped the federal government.
During the month, according to the Treasury, the federal government grossed $194 billion in tax revenue and paid out $65.898 billion in tax refunds (including $62.011 to individuals and $3.887 to businesses) thus netting $128.179 billion in tax revenue for March. At the same time, the Treasury paid out a total of $1.1187 trillion. When the $65.898 billion in tax refunds is deducted from that, the Treasury paid a net of $1.0528 trillion in federal expenses for March.
That $1.0528 trillion in spending for March equaled 8.2 times the $128.179 in net federal tax revenue for the month. The lion’s share of this federal spending went to redeem Treasury securities that had matured during the month—most of which were short-term Treasury bills that have terms of one year or less. In fact, during March the Treasury redeemed $705.3 billion in Treasury securities of which $623.9 billion were short-term bills with a term of one year or less.
After the disbursements made to pay off the $705.3 billion in loans that came due in March, three of the other top four federal spending items for the month were entitlements programs. The other top item was payments to defense contractors. The Treasury paid $49.8 billion in Social Security benefits in March, $47.4 billion in Medicare benefits, and $22.575 billion in Medicaid benefits. It also paid $37.9 billion to defense contractors.
To help pay off its $1.0528 trillion in monthly bills on only $128.179 in monthly tax revenue, the Treasury turned primarily to new borrowing. During the month, according to the Treasury statement, the government sold $786.5 billion in new securities. It also drew down its cash balance from $190.6 billion at the beginning of the month to $118.1 billion at the end of the month. It also reaped $18 billion from the sale of assets in the Troubled Asset Relief Program.
The federal government’s cash-flow situation was summed up pungently in Senate Budget Committee testimony by Erskine Bowles, who served as chief of staff to President Bill Clinton and is now the co-chair of President Barack Obama’s National Commission on Fiscal Responsibility.
"I'm really concerned," Bowles told the committee last month. "I think we face the most predictable economic crisis in history. A lot of us sitting in this room didn't see this last crisis as it came upon us. But this one is really easy to see. The fiscal path we are on today is simply not sustainable.
"This debt and these deficits that we are incurring on an annual basis are like a cancer and they are truly going to destroy this country from within unless we have the common sense to do something about it," said Bowles. "I used to say that I got into this thing for my grandchildren," Bowles said. "I have eight grandchildren under five years old. I'll have one more in a week. And my life is wonderful and it is wild. But this problem is going to happen long before my grandchildren grow up.
"This problem is going to happen, like the former chairman of the Fed said, or the Moody's said, this is a problem we're going to have to face up," he said. "It may be two years, you know, maybe a little less, maybe a little more. But if our bankers over there in Asia begin to believe that we're not going to be solid on our debt, that we're not going to be able to meet our obligations, just stop and think for a minute what happens if they just stop buying our debt.
"What happens to interest rates?" asked Bowles. "And what happens to the U.S. economy? The markets will absolutely devastate us if we don't step up to this problem. The problem is real, the solutions are painful, and we have to act."
Last-Minute Deal Averts US Government Shutdown
by Naftali Bendavid and Janet Hook - Wall Street Journal
Congressional leaders reached a last-gasp agreement Friday to avert a shutdown of the federal government, after days of haggling and tense hours of brinksmanship. Word of the deal came just an hour before a midnight deadline, as House Speaker John Boehner (R., Ohio), Senate Majority Leader Harry Reid (D., Nev.) and President Barack Obama made separate appearances before TV cameras to hail what they said were its historically large budget cuts.
Under the deal, the GOP won budget cuts of $39 billion for the remaining six months of the fiscal year, far more than either party had expected a few months ago. Democrats managed to hold off Republican demands to strip funding for the new health-care law and for a range of other Democratic priorities. GOP provisions to cut all federal funding to Planned Parenthood of America and National Public Radio also were dropped.
Also in the deal is a provision requiring an annual audit of the new Consumer Financial Protection Bureau, which had been created by last year's Dodd-Frank financial overhaul law. Republicans have been widely critical of the law.
The budget battle was the first big standoff in the new Washington power structure created by November's midterm election, in which Republicans seized control of the House on a surge of voter complaints about government spending. As bitter as the weekslong fight was, it served merely as a warm-up for bigger and more consequential battles to come. Some Republicans say they will vote against raising the federal debt ceiling in a few weeks unless it is accompanied by a plan to rein in deficits. In addition the GOP has laid out cuts and proposals in its budget plan for the next fiscal year that dwarf the deal struck Friday in scope and size.
One apparent winner Friday was Mr. Boehner, who negotiated budget cuts that a few months ago would have been hard to envision. Democrats' opening position was for no cuts at all. The final deal is evidence Washington has now turned its attention from new spending to cutbacks. "We fought to keep government spending down, because it really will in fact create a better environment for job creators in our country,'' Mr. Boehner said Friday night in announcing the agreement.
Mr. Obama, speaking from the White House near midnight, said the two parties had worked together to produce "the largest annual spending cut in our history," and that "both sides had to make tough decisions.'' Despite being pushed into making cuts his party initially opposed, Mr. Obama sought to turn the deal to his advantage by saying it would protect Democratic priorities, such as federal spending on education and environmental programs. Mr. Reid also hailed a "historic'' level of budget cuts.
Shortly after the leaders spoke, the Senate and House passed a short-term funding measure to keep the government operating until Friday. It was intended to give legislative leaders time to sort out final details of the broader agreement that covers the rest of the fiscal year, which ends Sept. 30.
Lawmakers were scrambling to beat a deadline of midnight, when legislation funding government operations was due to expire, leaving federal agencies without authority to spend money. While lawmakers bickered in public and aides to congressional leaders negotiated in private, federal agencies prepared to furlough an estimated 800,000 government workers, close national parks, passport offices and other operations, and suspend an array of federal services.
The deal set spending for the remainder of the year at $39 billion less than was budgeted for 2010 and $79 billion less than Mr. Obama had requested. House Republicans had called for $22 billion in additional cuts. The final package drops Republican-backed provisions that would have barred funding for Environmental Protection Agency regulation of greenhouse gases and for the Federal Communications Commission to implement "net neutrality" rules.
But it re-establishes a school voucher system for the District of Columbia, a longtime cause of House Speaker John Boehner (R., Ohio). That program provides low-income children with vouchers to attend a school of their parents' choice. Republicans had wanted to cut off funding for the new, Democratic-backed health-care law, and they wanted to turn federal aid to family planning programs into block grants to the states. The final deal includes neither provision, but it requires the Senate to take up-or-down votes on both of them.
Attention turned late Friday to how rank-and-file lawmakers would react to the details. House conservatives had warned for weeks they would oppose any agreement with cuts they believed were insufficient, but several of them indicated that they would vote for the compromise. "I think it will be fairly widely supported,'' said Rep. Tom Price (R., Ga.), a former chairman of the Republican Study Committee, a conservative caucus of House Republicans.
Some GOP lawmakers said they would oppose the deal. Rep. Jim Jordan (R., Ohio), current chairman of the Republican Study Committee, said he planned to vote against it because the measure failed to meet the group's target of $61 billion in cuts. Democratic leaders likely will have to contend with the party's sizable liberal faction, which could be furious that Messrs. Obama and Reid agreed to such spending reductions. Many Democrats are also dissatisfied with Mr. Obama's decision to keep a relatively low profile during much of the debate, only to surface at the end and try to position himself as the adult.
House Minority Leader Nancy Pelsoi (D., Calif.) stopped short of endorsing the deal. "House Democrats look forward to reviewing the components of the final funding measure,'' she said.
The immediate implications of the budget deal will be limited, since it covers only the remaining six months of fiscal 2011. Its spending cuts come from only a portion of the federal budget, leaving untouched spending on the major health-care and pension entitlement programs that are not funded by annual appropriations. But the budget fight has set the stage for other, more sweeping battles, as the divided capital takes on the 2012 budget and the nation's long-term deficits—and possibly spending on the popular Medicare and Social Security programs. Messrs. Boehner, Obama and Reid will likely be subjected to the same pressures in those debates as in this one.
Mr. Boehner has been caught between a desire to show that Republicans can use their new House majority to govern effectively and conservatives who discouraged compromise. Mr. Obama has sought to stay above the fray, a strategy that risked making him appear disconnected from his party and the biggest issue of the day. And Democrats have given significant ground on spending while trying to tie the GOP to a tea party movement that Democrats continually describe as "extremist.''
Throughout Friday, Messrs. Reid and Boehner were simultaneously jockeying with each other to deflect blame for the budget impasse while reaching out to their partisan bases. Mr. Reid said a final obstacle to the deal was Mr. Boehner's insistence on changing the Title X program, which provides family-planning services to low-income women. Democrats said the GOP was pushing to turn Title X into a block grant to states, allowing conservative governors to gut the program because it would give them more discretion in how to use those funds. "We are not bending on women's health," Mr. Reid said.
Mr. Boehner, by contrast, said differences over social provisions had largely been resolved and the final dispute was over spending levels. "There is only one reason that we do not have an agreement yet, and that reason is spending," Mr. Boehner said early on Friday.
Democrats argued that block-granting Title X, which has an annual budget of $317 million, would cripple it and damage Planned Parenthood Federation of America, which receives about one-fourth of Title X money. Planned Parenthood provides abortions but by law can't use federal money for that procedure. Instead, Democrats said it uses Title X funds to provide such services as mammograms and cervical cancer screening to low-income women.
Still, many Republicans were upset at the notion of an abortion provider getting any federal money. The Center for Responsive Politics reports that the Planned Parenthood political action committee donated $286,986 to federal candidates in the 2010 election cycle, 99% of it to Democrats.
Budget deal still leaves largest deficit in history
by Mark Knoller - CBS News
If you believe the spin from the White House and the offices of congressional leaders, there were only winners in the struggle to reach a budget agreement last night and avert a government shutdown.
Both House Speaker John Boehner and Senate Majority Leader Harry Reid called the agreement "historic" and President Obama praised "their leadership" while a team of his top aides did the same for him. A shutdown was avoided and some officials may have racked up a few points on the public perception scoreboard, but it all stems from a failure by the 111th Congress to enact the appropriations bills it was supposed to for the 2011 fiscal year that began October 1st.
With Democrats in charge of both chambers last year, the leadership didn't see to it that Congress do its budget job. On the contrary, Democrats Nancy Pelosi and Harry Reid decided their party's members would fare better in the Nov. 2nd elections if Congress didn't pass the appropriations bills which called for the largest federal deficit in history of over $1.6 trillion.
So does anyone in government deserve applause or acclaim for passing a budget bill more than six months into the fiscal year it covers? Depending on whose numbers you accept, the budget agreement calls for either $87.5 billion in cuts or $38.5 billion. Either way, it's a drop in the budget bucket. The federal budget for 2011 calls for spending of $3.819 trillion and a deficit of $1.645 trillion. Both numbers are the largest in U.S. history.
The hard-fought budget cuts contained in the agreement will reduce amount of federal deficit spending, but not by much. Even using the $87.5 billion figure repeatedly trumpeted last night by Sen. Reid, it amounts to a 5.3 percent reduction in the government's runaway spending blueprint. "There is not much of a difference between a $1.5 trillion deficit and a $1.6 trillion deficit," says Sen. Rand Paul, R-Ky., who voted against the short-term funding bill last night. He said the deficit is still way too big and "will lead us to a debt crisis that we may not recover from."
It's possible the battle over the 2011 budget will quickly fade from memory in a few weeks when Congress must address the issue of raising the federal debt limit. Treasury Secretary Tim Geithner warned Congress this week that the U.S. government will hit the $14.3 trillion ceiling on borrowing "no later than May 16." He said unless the limit is raised, the Treasury risks default on its obligations by July 8.
"Default by the United States is unthinkable," said Geithner in his letter to Congress Monday. Unthinkable, though some Treasury officials can think of nothing else. They fear it would - as Geithner wrote - "cause a financial crisis potentially more severe than the crisis from which we are only now starting to recover." And the congressional battle over raising the national debt could make budget fight just-ended seem more like a minor skirmish.
All concede default by the government would be a calamity and damage the U.S. financial and political standing in the world. But some in Congress insist that any increase in the debt limit be accompanied by provisions to much more rapidly reduce deficit spending than called for in Mr. Obama's budget projections. And after the debt limit fight, comes the budget and appropriations bills for the 2012 fiscal year. The president's budget calls for $3.7 trillion in spending and another trillion dollar deficit.
Next on the Agenda for Washington: Fight Over Debt Ceiling
by Jackie Calmes - New York Times
The down-to-the-wire partisan struggle over cuts to this year’s federal budget has intensified concern in Washington, on Wall Street and among economists about the more consequential clash coming over increasing the government’s borrowing limit.
Congressional Republicans are vowing that before they will agree to raise the current $14.25 trillion federal debt ceiling — a step that will become necessary in as little as five weeks — President Obama and Senate Democrats will have to agree to far deeper spending cuts for next year and beyond than those contained in the six-month budget deal agreed to late Friday night that cut $38 billion and averted a government shutdown. Republicans have also signaled that they will again demand fundamental changes in policy on health care, the environment, abortion rights and more, as the price of their support for raising the debt ceiling.
In a letter last week, Treasury Secretary Timothy F. Geithner told Congressional leaders the government would hit the limit no later than May 16. He outlined "extraordinary measures" — essentially moving money among federal accounts — that could buy time until July 8. Once the limit is reached, the Treasury Department would not be able to borrow as it does routinely to finance federal operations and roll over existing debt; ultimately it would be unable to pay off maturing debt, putting the United States government — the global standard-setter for creditworthiness — into default.
The repercussions in that event would be as much economic as political, rippling from the bond market into the lives of ordinary citizens through higher interest rates and financial uncertainty of the sort that the economy is only now overcoming, more than three years after the onset of the last recession.
Given the short time frame for action and the prospect of an intractable political clash, leaders in both government and business are already moving to avert a crisis that most likely would be "a recovery-ending event," as Ben S. Bernanke, the Federal Reserve chairman, testified recently in the Senate. He described a sequence of events that "would cascade through the financial markets," provoking another credit crisis like that in 2008 and causing interest rates to jump.
Mr. Geithner has been meeting privately with senior lawmakers of both parties to underscore the economic stakes. At the White House, Mr. Obama’s chief economic adviser, Gene Sperling, peeled away from the spending fight in recent weeks to turn nearly full time to developing the administration’s strategy for the debt-limit debate. Central to that, administration officials say, is whether Mr. Obama initiates bipartisan talks on a long-term debt-reduction plan that tackles taxes, military spending and fast-growing entitlement programs like Medicare and Medicaid.
Executives of the nation’s largest financial institutions in recent days met with Mr. Geithner, House Speaker John A. Boehner, Republican of Ohio, and other lawmakers, arguing for the importance of raising the debt ceiling. Jamie Dimon, the chief executive of JPMorgan Chase, told them that his bank had devised contingency plans to protect its global business in the event of a default. "If anyone wants to push that button, which I think would be catastrophic and unpredictable, I think they’re crazy," Mr. Dimon said recently at the United States Chamber of Commerce.
The United States is one of the few nations that limits its debt by law, and votes in Congress to raise the ceiling, something that happens every few years, are perhaps the least popular that lawmakers face.
Financial and government leaders alike have grown accustomed to some political brinkmanship over raising the cap, confident that Congress ultimately would do so, usually with the party holding the White House supplying most votes. (So it was that Mr. Obama, as a Democratic senator in 2006, voted against a Bush administration request to raise the debt limit; it passed with mostly Republican votes.)
What makes this year different, people in both parties say, is the large number of Congressional Republicans, including the many newcomers who gave the party a House majority, who are strenuously opposed to government spending, and egged on by the activist Tea Party movement to use the leverage of the debt-limit vote to make their stand.
"We want to see real structural, cultural-type changes tied to this debt ceiling. We’re not interested in a one-off kind of savings, or anything small," said Representative Mick Mulvaney, a first-term Republican from South Carolina. "There has got to be game-changing kinds of changes to get us to vote for it." He dismissed warnings about default as "just posturing," and said Democrats should bear the responsibility for passing any measure to increase the borrowing limit. "It’s their debt," he said. "Make them do it. That’s my attitude."
In fact, the debt was created by both parties and past presidents as well as Mr. Obama. Of the nearly $14.2 trillion in debt, roughly $5 trillion is money the government has borrowed from other accounts, mostly from Social Security revenues, according to federal figures. Several major policies from the past decade when Republicans controlled the White House and Congress — tax cuts, a Medicare prescription-drug benefit and wars in Iraq and Afghanistan — account for more than $3.2 trillion.
The recession cost more than $800 billion in lost revenues from businesses and individuals and in automatic spending for safety-net programs like unemployment compensation. Mr. Obama’s stimulus spending and tax cuts added about $600 billion through the fiscal year that ended Sept. 30.
Though the recent standoff that consumed Washington over spending for the 2011 fiscal year ended without a government shutdown, the messy process and 11th-hour settlement have stoked trepidation about the debt-limit fight to come. If Republicans and Democrats found it so hard to compromise over a few billion dollars, the thinking goes, how can they ever come together on a multi-year, multitrillion-dollar plan to cut the debt within weeks or months?
"If I were still Treasury secretary, it would worry the hell out of me," said James A. Baker III, who served in that office for President Ronald Reagan, during a time when the total federal debt nearly tripled over his two terms. "But it doesn’t worry me as a good Republican, and one who wants to finally see some fiscal responsibility in this country." Mr. Baker, long known as a deal-maker, said Republicans were right to say, "O.K., we’ll increase the debt limit, Democrats, if you will enact enforceable spending restraint."
Neither the White House nor Congressional leaders are certain how they will get enough votes to raise the limit. The White House and Democrats in Congress will urge passage of a "clean" debt limit increase, without amendments, though they acknowledge that cannot pass in the Republican-controlled House. While the House is the focus of most concern, passage in the Democratic-controlled Senate will be a challenge as well. Republican conservatives there, reinforced by Tea Party adherents elected last November, vow to filibuster any increase in the debt limit, which would require a 60-vote supermajority to overcome.
The Republican leader, Senator Mitch McConnell of Kentucky, has privately urged the conservatives not to filibuster, without success, say three people familiar with the talks. He argued that if Republicans did not filibuster and just 50 votes were needed for passage, the Republicans could try to force all the votes to come from the 51 Democrats — including 17 who are up for re-election. But if 60 votes are required because of a filibuster, ultimately some Republicans would have to vote for the increase lest the party be blamed for a debt crisis.
In the House, Mr. Boehner said after the November elections that his new members would have to deal with the debt limit "as adults." But with many Tea Party-backed Republicans feeling that they already compromised more than they wanted on the current year’s budget, it is not clear how receptive the freshman Republicans will be to a deal this time.
The just-concluded budget fight has spawned talk that the White House and Congress will perhaps resort to a series of short-term extensions of the debt limit while they bargain over a debt-reduction plan or some other mandatory budget restraints. The question is, how might global financial markets react? "We’ve never seen that before," said Robert E. Rubin, the Treasury secretary under President Bill Clinton and a longtime Wall Street executive. "But I know this: It’s not a risk I’d take."
After this week, Congress recesses until early May, returning just two weeks before Treasury hits the debt ceiling. Even stretching the deadline for action to July, there would be little time to agree on a debt-reduction accord as Republicans demand — or even on the basis for negotiations.
So attention is turning to a bipartisan "Gang of Six" in the Senate. The senators, three from each party, have met for 10 months to negotiate a comprehensive plan on taxes, entitlement programs and military spending based on recommendations in December of Mr. Obama’s bipartisan fiscal commission. "It would be nice to have it in a package form by the debt-limit" debate, said Senator Saxby Chambliss, a Republican of Georgia. But even if the six agree, he added, "hitting everyone else with something this major, it’s going to take some time to be digested. Plus you’ve got to go through the various committees."
House Republicans in effect outlined their starting position last week, when, amid the fight over 2011 spending, they unveiled their budget for the 2012 fiscal year and beyond. It would cut $6 trillion over 10 years, mostly from projected spending for Medicare and Medicaid. But those savings would be offset by about $4 trillion in tax cuts. The result, according to the Congressional Budget Office, would be continued annual deficits until 2040 — necessitating more votes to raise the debt limit, even under House Republicans’ plan, for decades to come.
IMF urges U.S. budget include Fannie, Freddie costs
by Emily Kaiser - Reuters
The United States should include in its budget the cost of mortgage loan guarantees and other housing supports, the International Monetary Fund said on Wednesday in a rare criticism of its biggest shareholder.
The IMF's findings may land it squarely in the middle of a hot political debate over what to do about Fannie Mae and Freddie Mac, the mortgage finance giants that back most new housing loans. The IMF also faulted the Obama administration for failing to address the tax deduction for mortgage interest, which it called "both expensive and regressive." The tax break is hugely popular, and eliminating it would no doubt cause political pain at a time when the Obama administration is already preparing for the 2012 presidential election campaign.
The IMF did say that the weak U.S. housing market still needs government guarantees for securitized mortgages, and abruptly removing those support could be damaging. "However, government guarantees should be explicit and fully accounted for on the government's balance sheet," it said. "There is a need for better-defined and more transparent government participation in the housing market, with all such policies, including strict affordable housing goals, transparently shown in the government's budget," it added.
The Obama administration has kept Fannie and Freddie off the budget, as did the Bush administration before it. Including them would make an already ugly fiscal picture look even worse. The United States put those companies, which buy loans from banks and repackage them as securities for investors, into conservatorship in 2008 as the housing market bust led to massive losses on loans they guaranteed. The government has propped them up with more than $134 billion in taxpayer funds.
The U.S. Congressional Budget Office said in 2010 that Fannie and Freddie should be treated as government entities and counted in the budget, and many Republicans in Congress have pushed for that as well. The IMF has generally tiptoed around direct confrontation on policy issues with the United States, which is its largest member and has effective veto power over any IMF decisions.
Overall, the Obama administration's housing reform proposals were "headed in the right direction, although some concerns and challenges remain," the IMF said. The Fund said the reform efforts rightly focused on winding down Fannie and Freddie, adding the firms should be closed over the medium term to allow private-market securitization to return. The private sector all but vanished from the mortgage-backed securities markets after the housing bust and financial crisis spawned hundreds of billions of dollars in losses. The government -- through Fannie Mae, Freddie Mac and the Federal Housing Administration -- now backs close to nine of 10 new residential mortgages.
The IMF's recommendations were included in its Global Financial Stability report, released ahead of its spring meeting scheduled for mid-April. "While an overhaul of the housing finance system will take years to complete, U.S. authorities need to step up their efforts now to develop and implement an appropriate action plan," the IMF said.
Farm Subsidies: Sacred Cows No More
by Bill Tomson and Siobhan Hughes - Wall Street Journal
The hunt for cuts has come to this: Even agriculture subsidies—billions in spending both parties have embraced for years—are on the table. With the farm economy booming and Washington on a diet, a program set up in the 1990s that cuts checks to farmers could be trimmed or eliminated next year when Congress writes a new five-year farm bill.
A group of conservative lawmakers has set its sights on these direct payments, and even farm-state Democrats who like the program say high crop prices make the outlays of about $5 billion a year harder to justify. Recently, the National Corn Growers Association, an industry lobby group, urged Congress to revamp the program, fearing it would be eliminated altogether. Washington is looking everywhere for savings, even to programs once viewed as sacrosanct, including farm programs and defense spending.
Republican House Budget Committee Chairman Paul Ryan's blueprint for the fiscal 2012 budget puts agriculture subsidies in the cross hairs, seeking to cut $30 billion over a decade—starting when the next farm bill is passed in 2012—out of a total of some $150 billion in total expected spending on farm subsidies. "We are very focused on getting a grip on spending—that means a lot of things even I like," said House Agriculture Committee Chairman Frank Lucas (R., Okla.) The direct payments have "a target on them," said Sen. Mike Johanns (R., Neb.), a former supporter of the program.
The farm payments at risk were supposed to be temporary. Lawmakers designed the program in the 1996 farm bill to wean farmers of rice, feed grains, cotton and later soybeans off years of subsidies tied to keeping portions of land fallow. The direct payments have endured and are now a cornerstone of American farm subsidies. The $5 billion in direct payments to farmers accounts for a third of the roughly $15 billion in total farm subsidies last year, according to government data.
Benefiting are about one million farmers on 260 million acres of land spread around 364 of 435 congressional districts, according to the Agriculture Department and the Environmental Working Group, a organization that wants to eliminate some farm subsidies and use the money to protect natural habitats. With the farm sector booming—the USDA estimates net farm income this year will be the second-highest in 35 years—direct payments have become an easy target. Iowa State University economist Chad Hart notes that the payments go to farmers regardless of crop price or quality—a way to provide assistance without violating international trade rules.
Farm subsidies have survived previous attempts to cut them back, and defenders will likely cite the continuing support for farmers in Japan and the European Union. This time, the U.S. industry has pared its defense of the status quo. "Our members of Congress are telling us that they just can't support this program anymore," said Anthony Bush, a policy expert with the National Corn Growers Association. "In times of record-high prices [the government is] still handing out money like this, it's just politically not possible, feasible or popular these days," he said.
Mr. Bush said corn farmers have the most to lose if direct payments are eliminated altogether. He said $2.1 billion of the roughly $5 billion in direct payments go to such farmers. Corn futures Wednesday settled at $7.63 a bushel, down slightly after reaching an all-time high above $7.70 Tuesday. Prices have more than doubled since last summer on strong export demand, record ethanol output and steady buying by domestic livestock producers.
The National Corn Growers Association voted earlier this month to "investigate transitioning direct payments" into a more politically acceptable form of subsidy. Roger Johnson, president of the National Farmers Union, said the direct subsidies have become indefensible because they don't go to farmers who need them to survive tough times.
Most of the payments go to the largest farmers in the U.S., given the amount of land they own. From 2002, when the program was expanded, through 2010, the top 10% of recipients received 67% of the funds, according to David DeGennaro, an Environmental Working Group legislative analyst. Mr. Lucas of Oklahoma, the Republican chairman of the House Agriculture Committee, said in an interview that direct payments were fair game for lawmakers looking to cut spending next year. He still wants to resist some cuts, a point of view he outlined in a March 15 letter to the House Budget Committee written with Rep. Collin Peterson (D., Minn.). He didn't specify what might be protected.
Senate Majority Leader Harry Reid (D., Nev.), however, suggested earlier this month that farm subsidies were a likely budget-cutting target. He didn't specify which programs, but said, "Commodity price for farms, farm products have never been—never been higher than they are today. There's money there."
Enriching a Few at the Expense of Many
by Gretchen Morgenson - New York Times
Some people say it doesn’t really matter how much companies pay their executives, at least as far as the shareholders are concerned. Whether investors prosper depends on the executives’ management skill, not on penny-ante items like pay, this argument goes. To this, Albert Meyer, a money manager at Bastiat Capital in Plano, Tex., responds with a resounding "phooey."
Executive pay is not only a sign of how a company views its duties to shareholders, Mr. Meyer says, but it is also a crucial tire to kick when making investment decisions. "When compensation is excessive, that should be a red flag," Mr. Meyer says. "Does the company exist for the benefit of shareholders or insiders?"
As investors scan corporate proxy statements this spring and prepare to vote in annual elections for company directors, executive pay is again moving to center stage. After a few years in the wilderness, top executives are getting hefty raises, according to Equilar, a compensation analysis firm in Redwood City, Calif. But while outrage over executive pay has been eclipsed in recent years by anger over the causes and consequences of the financial crisis, compensation issues still resonate among many investors.
Of course, pay is just one item that Mr. Meyer takes into account when analyzing companies. In his search for shares he can own "forever," he also hunts for companies with high-quality earnings — that is, those that don’t depend on accounting tricks — as well as generous cash flows and management integrity. Companies he avoids include those that award oodles of stock or options to their executives. Such grants vastly dilute the earnings left over for a company’s owners: its shareholders. "Stock-based compensation plans are often nothing more than legalized front-running, insider trading and stock-watering all wrapped up in one package," Mr. Meyer says.
A former professor of accounting, he earned recognition when he identified a Ponzi scheme in Philadelphia that had scammed nonprofits out of hundreds of millions of dollars. It was called the Foundation for New Era Philanthropy, and it went bankrupt in 1995. As an equity analyst, he has identified aggressive accounting at Tyco, Enron and other companies over the years.
At Bastiat Capital, a money management firm he founded in 2006, Mr. Meyer oversees $25 million in private clients’ capital. About $8 million of that is invested in the Mirzam Capital Appreciation mutual fund, which he manages. It is up an annualized 4.5 percent, after expenses, since its inception in August 2007. It is up 4.57 percent this year.
His interest in executive pay has led Mr. Meyer to a raft of international companies whose pay and other corporate governance practices are, in his view, more respectful of shareholders than those of similar companies in the United States. He cites as good stewards Statoil, the Norwegian energy company; Telefónica, the Spanish telecommunications concern; CPFL Energia, a Brazilian electricity distributor; and Southern Copper of Phoenix, a mining company with operations in Peru and Mexico. These and other companies he favors have performed well, while paying relatively modest amounts to executives, he says.
Mr. Meyer’s favorite pay-and-performance comparison pits Statoil against ExxonMobil. Statoil, which is two-thirds owned by the Norwegian government, pays its top executives a small fraction of what ExxonMobil pays its leaders. But Statoil’s share price has outperformed Exxon’s since the Norwegian company went public in October 2001. Through March, its stock climbed 22.3 percent a year, on average, Mr. Meyer notes. During the same period, Exxon’s shares rose an average of 11.4 percent annually, while the Standard & Poor’s 500-stock index returned 1.67 percent, annualized.
According to regulatory filings, Statoil paid Helge Lund, its chief executive, 11.5 million Norwegian krone in 2010 (roughly $1.8 million at the exchange rate last year). There were no stock options in the mix, but Mr. Lund was required to use part of his cash pay to buy shares in the company and to hold onto them for at least three years. By comparison, Rex W. Tillerson, the chief executive of ExxonMobil, received $21.7 million in salary, bonus and stock awards in 2009, the most recent pay figures available from the company. Mr. Tillerson’s pay is more than double the combined $8.3 million that Statoil paid its nine top executives in 2010.
Other aspects of Statoil’s governance also appeal to Mr. Meyer. Its 10-member board includes three people who represent the company’s workers; management is not represented on the board. In addition, Statoil has an oversight group known as a corporate assembly, something that is required under Norwegian law for companies employing more than 200 workers.
This 18-person group oversees the company’s directors and the chief executive’s management and makes decisions about Statoil’s operations that affect its work force. The assembly members are elected for two-year terms; shareholders elect 12 and workers elect 6. "That second layer of corporate governance protects the shareholders and the employees," Mr. Meyer says. "They are really doing it as a civic duty to oversee the actions of the directors."
Another company whose approach to pay is commendable, Mr. Meyer says, is Telefónica. Based in Madrid, it dispenses stock options to employees but eliminates the dilution to existing shareholders by buying a call option in the amount of shares given out as compensation.
At CPFL Energia in Brazil, financial statements routinely compare the highest level of executive pay with that of the lowest-paid workers. In 2010, that ratio was 79 to 1. (Comparable multiples for United States companies range from 100 to 300, depending on the size of the company.) CPFL Energia also discloses the number of "complaints and criticisms" it receives each year — whether from customers, employees or others — and how many are resolved. "This is an ideal for disclosure," Mr. Meyer says.
He also rejects the argument that sky-high pay is necessary to attract talented managers. "Look at some of the pay at the companies my fund owns," he says. "They prove that you don’t have to pay nosebleed compensation to attract good people."
Few money managers seem to share Mr. Meyer’s view that pay should be factored into investment decisions. His background as a forensic accountant made him train his eye on corporate proxy statements, where pay practices are outlined. Indeed, he says he first became interested in how executive pay affects shareholder returns during the early 1990s, when companies began issuing boatloads of stock options that they did not have to deduct as compensation costs.
The fiction that options should not be counted as a business expense finally changed in 2005, when the Financial Accounting Standards Board required that companies recognize the costs of options in their financial statements. But options had become the drug of choice for those addicted to excessive compensation, whether on the receiving end or delivering it as directors on a corporate board’s compensation committee.
"Middle-class America experienced a lost decade in their retirement accounts, whereas executives enjoyed record compensation packages through the subterfuge of stock option programs," Mr. Meyer says. "There has been a massive wealth transfer from middle-class America’s retirement accounts to the bank accounts of the privileged few. The social consequences of this wealth transfer bear scrutiny."
We must call the bluff of the big, bad banks
by Jeff Randall - Telegraph
When asked by a judge why he persisted in robbing banks, the serial offender replied: "Because that’s where the money is."
For us taxpayers, this observation is now doubly true. The banks have captured our money twice over: as cash in their vaults and investments in their shares. We own all of Northern Rock, most of Royal Bank of Scotland and nearly half of Lloyds Banking Group. We rescued them – and in so doing became their prisoners.
The scale of our discomfort will be set out on Monday when the Independent Commission on Banking, chaired by Sir John Vickers, delivers an interim report. It will be embroidered with arcane references to "functional subsidiarisation" and "macro-prudential regulation". But cut through the gobbledegook and there is a simple question: can our banking system be reformed to make customers’ deposits more secure, without destroying the value of the state’s enormous shareholdings?
Would new rules to separate the racier aspects of banking – so-called casino operations – from traditional savings-and-loans business result in a diminution of banks’ profitability and, as a result, prompt a flight of institutions from these shores? Top bankers want us to believe the answer is yes. The global economy cannot function without big banks, they say: gigantism provides synergies, efficiencies and benefits of scale. What a hoot. Tell that to the shareholders of Citigroup, a banking behemoth, which all but disappeared up its own balance sheet in 2008, having had a wild (losing) punt on sub-prime mortgages.
Big banks’ claims of indispensability are "preposterous", says Nouriel Roubini, professor of economics at New York University. The financial hypermarket is doomed to fail because "the complexity of these firms, never mind the exotic financial instruments they handle, makes it mission impossible for CEOs – much less shareholders or boards of directors – to keep tabs on what’s going on across every division at every trader’s desk".
Even if financial conglomerates could provide services a bit more efficiently than smaller banks – which they can’t – are the marginal advantages worth holding the whole system hostage to a few super-sized players whose failures would be catastrophic? Go down this road and you end up in a toxic dump with the capacity to wipe out entire economies – as Ireland has discovered. Irish banks weren’t too big to fail, they were too costly to save.
Applying the logic that bigger is always more beautiful, says Roubini, "one might build a gigantic nuclear power plant that’s a hundred times the size of Chernobyl, simply to gain some minor economies of scale. That’s nice – until there’s meltdown."
The real reason big banks want to take in small depositors’ money has nothing to do with the effectiveness of a one-stop shop. It’s simply that Mr Littlechap’s account is a cheap source of funding, backed, as it is, with a guarantee from government that is obliged to protect small savers.
Terry Smith, a former top-rated banking analyst, who now runs his own fund management company, explains: "I’d never invest in big banks as they are. Their managements have demonstrated they’re completely incapable of running businesses that combine high-risk trading with conventional high-street operations. There is not a shred of evidence to demonstrate that attempting to do both improves customer service."
Insanity is repeating one’s mistakes but expecting different results. We’ve tried madness and it doesn’t work. We need a new settlement with our banks. But in what form? There is a general perception that we don’t want banks to fail, not even bad ones. This is a mistake. We should be perfectly happy to see poorly run businesses disappear – as long as they don’t take customers’ deposits and the wider financial system with them. The obvious conclusion is that we need to split up the banks, or at least make sure that their gung-ho trading departments are hermetically sealed from ordinary people’s savings.
It is widely perceived that Mervyn King, the Bank of England’s governor, shares such a view. He invited us to infer this in an address to Scottish business organisations in 2009: "Anyone who proposed giving government guarantees to retail depositors and other creditors, and then suggested that such funding could be used to finance highly risky and speculative activities, would be thought rather unworldly."
I have re-read the governor’s Edinburgh speech. He did not declare unambiguously that the banks should be split up, but neither Dr King nor his press team chose to correct the ubiquitous impression that this is what he had meant. The headlines went unchallenged.
In recent days, however, with the Vickers report looming, I’m picking up a markedly different scent wafting through the corridors of Threadneedle Street. The governor, it seems, will not go toe-to-toe with Vickers if the commission’s conclusion, as many think likely, is that the big banks should remain largely intact. Having strayed perilously close to interfering in fiscal policy, perhaps the governor does not want to embarrass the Chancellor by being openly at odds with a government-commissioned study.
If this is the case, then I fear that the upshot of much hand-wringing, head-banging and horse-trading will be a ghastly fudge, a limp compromise. The big banks are threatening to remove their bat and ball if they cannot set the game’s rules. They point out that the playing fields are more attractive elsewhere. Let’s find out. We should call their bluff.
European Bank Stress Tests to Hit German Banks Hard
by Jack Ewing - New York Times
European banks that fail a planned checkup by regulators in June will be required to present a recovery plan that could force some weaker institutions, particularly in Germany, to raise more capital or even wind down their operations, according to documents released Friday.
The European Banking Authority released more details of how it will conduct the so-called stress tests of 90 of Europe’s largest banks. The parameters include more rigorous scrutiny of the capital that banks hold in reserve in case of unexpected losses. That is in response to criticism that a stress test last year was too easy and failed to restore confidence in European banks. Analysts welcomed what they said is shaping up as a more-thorough examination of the banking system. "The quality of capital has improved dramatically," said Silvio Peruzzo, euro area economist at Royal Bank of Scotland. "That’s a very welcome step."
However, the rules appear to create a problem for some German landesbanks by disqualifying a portion of the funds they now use to meet regulations on shock-absorbing reserves. The stress tests have become a heated political issue in Germany because they threaten to impose unpleasant choices on the state governments and local savings banks that typically share ownership in the landesbanks. The economics minister of the state of Hessen, Dieter Posch, said this week that the state’s landesbank, Helaba, should boycott the stress test, which it is likely to fail.
It is not up to banks, however, whether to participate, officials said. While banks can opt not to disclose the results of their tests to the general public, they must give information to regulators as part of the stress tests and would be required to take action if they failed. The E.B.A. said in a statement Friday that it expected any bank "showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time."
While political leaders and representatives of the landesbanks have complained about the stress tests, many economists have said that pressure is needed to force the banks to rebuild their capital reserves and avoid the risk of another financial crisis. The European Banking Authority, created this year to replace the relatively toothless Committee of European Banking Supervisors, seems determined to conduct a more severe test of banking health, said Nicolas Véron, an economist at Bruegel, a research organization in Brussels. "It’s really all about the implementation," Mr. Véron said. "But at this stage they are ticking the right boxes."
The E.B.A. said that, to pass the stress tests, banks must have a capital cushion equal to 5 percent of assets. The E.B.A. will also narrow its definition of so-called core Tier 1 equity, considered the most durable form of reserves. Only funds that would be immediately available to cover losses will qualify, the E.B.A. said. The banking authority said that emergency government aid would still qualify as core capital. That is good news for WestLB, one of the most troubled landesbanks. Its capital buffer includes €3 billion, or $4.3 billion, it received from the federal government in a bailout.
Commerzbank, a commercial lender in Frankfurt, is another bank that received billions in capital from the German government. But the bank already said this week that it would issue new shares and take other measures to repay the aid and bolster its capital. But the stricter definition of capital appears to be bad news for other landesbanks.
The E.B.A. would exclude so-called silent participations by other shareholders, such as the savings banks that provide a significant amount of the funds that many landesbanks use to meet capital requirements. The definition would also exclude silent participations by state governments that were not part of an emergency bailout. The rules would mean that NordLB, a landesbank in Hanover, would have to exclude about a third of its core capital. The funds are in the form of silent participations by the state of Lower Saxony and local savings banks. The state money predates the financial crisis and so does not qualify as emergency government aid.
"Naturally silent participations are important to banks that do not have access to the market," said Dominik Lamminger, a spokesman for the Association of German Public Sector Banks, which represents the landesbanks. The association has maintained that German landesbanks would pass the stress tests, but it argued that it was unfair to hold the banks to a standard not yet required by law.
A spokesman for NordLB, who could not be named because he was not authorized to speak publicly about the matter, declined to comment on the stress test. But the bank’s main owner is already taking action to strengthen NordLB’s capital, in a sign that pressure from the stress tests as well as looming regulations are in fact prompting change.
The state of Lower Saxony will convert silent participations worth €1.2 billion, or $1.68 billion, in NordLB into ordinary shares, the bank spokesman confirmed. Ordinary shares would count toward core capital for purposes of the stress test as well as for new regulations. WestLB, based in Düsseldorf, still has other problems even before it undergoes the stress test. Joaquín Almunia, European Union competition commissioner, has said that the bank must present a detailed plan to restructure by April 15, or be forced to repay the state aid it has received.
Banks that fail the stress tests would have to raise more capital or sell some assets to reduce their level of risk. In extreme cases they might have to wind down their operations.
Spain's tough stance makes it different from the rest
by Emma Rowley - Telegraph
Once Portugal admitted the inevitable, the spotlight was always going to turn to Spain. Since Ireland sought aid in November, the Mediterranean neighbours have been talked of in the same breath as the euro economies next at risk of collapse.
Yet, as Portugal goes cap in hand to the international authorities, the tone has changed. "We think the contagion stops here," said Erik Nielsen, chief European economist at Goldman Sachs – and many agreed. Neither Ireland nor Portugal enjoyed such votes of confidence when they found themselves the focus of investors' crisis of faith in public finances across the eurozone.
On the face of it, Spain shares many of the same problems as the other bailed-out nations – a large hole in its budget, shaky-looking banks and weak growth. Plus, Spain has the highest unemployment rate in Europe pushing up its dole bill. Portugal's total debt burden was greater, at 92.6pc of GDP last year compared to Spain's 60pc, but the Spanish deficit – the annual shortfall – was worse, at 9.2pc to its neighbour's (recently upped) 8.6pc.
However Madrid, fully conscious of how market prophecies can become self-fulfilling, has done its utmost to differentiate itself from other risky-looking PIGS (Portugal, Ireland, Greece and itself). The Spanish government has not balked from aggressive moves to bring down its deficit, raising its pension age from 65 to 67, increasing taxes and cutting public sector wages. It has also injected small amounts of capital into the weakest banks, but did not repeat Ireland's mistake of guaranteeing bank creditors.
Madrid now expects to cut its deficit down to 6pc as a share of GDP for this year. In contrast, in the run-up to its bail-out, Portugal saw its latest bout of austerity measures rejected by parliament. Needless to say, investors prefer the Spanish way. Spain's 10-year debt is trading with a yield, or return, of about 5pc, compared to the record 9pc yield on its Portuguese counterpart earlier this week.
The likelihood that Spain will default on its debt over the next five years is viewed by markets at around one in seven, according to a Capital Economics analysis of credit default swaps – insurance instruments – on its government debt. Traders think Greece is more likely than not to default and put the risk for Ireland and Portugal at more than one in three, they said.
Spain may also have benefited from fears that as the eurozone's fourth largest economy it is simply "too big to bail", as it would put the area's rescue system under too much strain - a politically-fraught scenario which could even threaten the euro.
One theory is that while Ireland was pressed to take a bail-out, Portugal was allowed to delay the inevitable – thus keeping the bond vigilantes' attention – while Spain took steps to bolster its finances. That meant when Portugal's well-flagged bail-out materialised, Elena Salgado, Spain's economy minister, could plausibly say "it has been some time since the markets have known that our economy is much more competitive". But safety is not guaranteed.
The European Central Bank's decision on Thursday to raise interest rates across the eurozone will keep the pressure on Spain, where many mortgage holders are on variable-rate deals. Madrid cut its growth forecasts on Wednesday due to the likely impact of higher rates coupled with rising oil prices. As with Ireland, even with the government apparently on the fiscally cautious path, the state of the banking sector is a major worry. Spain's central bank chief warned this week that the worst could still be yet to come for the country's banks.
Above all, Spain faces a liquidity risk – running out of funds – as it tries to cut its deficit against the backdrop of high unemployment, its property crash and shaky banking system, the Economist Intelligence Unit said. Nonetheless, its researchers concluded: "Provided Spain can thread the needle on stabilising its still low [total] public debt, while maintaining social stability and saving its banking system, it can avoid a bail-out and return to reasonable economic growth." No siestas for Ms Salgado for a while, it would seem.
Portugal is Next Nation in European Union 'Debt Trap'
by Steven Erlanger - New York Times
For the third time in a year the European Union is going through the same ritual, bailing out another insolvent country. Portugal now follows Greece and Ireland to the European welfare office to ask for new loans on the condition of ever more drastic spending cuts.
So far the markets have taken Europe’s third successive sovereign financial crisis in stride. But many economists are a good deal more alarmed, most notably because the bailout formula European leaders keep applying to their most indebted member nations shows no signs of working.
Greece, Ireland and now almost certainly Portugal have access to hundreds of billions of dollars in emergency European aid to help them avoid defaulting on their debt. But the aid is really just more loans, and the interest rates the countries are paying, if a little lower than what the private market would charge, are still crushingly high. Their pile of debt gets bigger with every passing day.
Moreover, the price of these loans has been a commitment to slash government spending far more drastically than domestic leaders would have the desire or the political power to accomplish on their own. And for countries that depend a good deal on government spending to generate growth, rapid decreases in spending have meant sustained economic stagnation or outright recession, making every dollar of debt that much harder to pay back.
Economists call this "the debt trap." Escape from the trap generally requires devaluation of the currency, which cannot happen among countries that use the euro as their common currency, or strong economic growth, which none of the three have, or some kind of bankruptcy process, which all three forswear. Add to that the likelihood that all three countries will continue to have unstable governments until they figure a way out, and Europe’s financial crisis has no end in sight.
"What has been missing, in the debate about how countries can restore their finances to some kind of sustainability, is the limit of how much they can cut in a period of austerity," said Simon Tilford, chief economist for the Center for European Reform in London. "There is a limit of how much any government can cut back spending and survive politically unless there is a light at the end of the tunnel, a route back to economic growth."
The problems of the weaker countries are not just sovereign debt, but also lack of competitiveness, both in Europe and the larger world. Without the nations’ restoring competitiveness and selling more goods abroad, which can come only through a longer-term process of reducing wages and taxes to spur private sector investment, economists are not optimistic about prospects for new growth soon.
The crisis in Portugal also raises new questions about whether the European Union will come to grips with the other side of its crisis: the banks. Banks in well-off countries like Germany, France and the Netherlands, as well as Britain, hold a lot of Greek, Portuguese and Irish debt. And if these countries cannot pay their debts, they would have to reschedule them, reduce them or default, causing a major banking crisis in the rest of Europe.
That reckoning would require governments to ask their taxpayers to recapitalize the banks, which is exactly what political leaders are afraid to do. "We have a banking crisis interwoven with a sovereign debt crisis," Mr. Tilford said. "Europe needs to address both, and it needs to acknowledge that the banking sectors of creditor countries — especially Germany — are not now in a position to handle restructuring and default, and that governments will have to pump money into the banks to recapitalize them."
In essence, Mr. Tilford said, it is the taxpayers of Greece, Ireland and Portugal who are bailing out German, French and British taxpayers and depositors — not the other way around. The indebted countries are not really getting bailouts, he said, "but loans at high interest rates." For there to be a real bailout, he said, there would have to be a default.
António Nogueira Leite, a former Portuguese secretary of the treasury and an adviser to the center-right opposition, said that the bailout packages "don’t really take into account the arithmetic of the debt." The experiences of Greece and Ireland show, he said, "that once austerity sets in, the country doesn’t generate the means to be able to pay for the already incurred debt."
The Economist this week, in an article about Greece’s problems, said, "The international plan to rescue Greece is instead starting to paralyze it."
Of course the indebted countries have responsibility for their own dire straits. Greece lied about its statistics, Ireland decided to guarantee the enormous debts of its reckless banking sector and Portugal borrowed cheap money but did not restructure its economy. Still, Mr. Nogueira Leite said, "If you can’t devalue, and you say no restructuring of the debt, and say that the taxpayers of Germany must receive a risk premium in interest to loan to the peripheral countries, then it’s impossible to avoid the debt trap."
Portugal is not in a great position to bargain, he said, but "we must fight to get as low an interest rate as possible, so we don’t end up like Greece and Ireland." Portugal’s decision to seek a bailout from the European Union was hardly unexpected, and funds had already been set aside to cover its needs. But the decision is also a marker about the political costs of austerity.
Portugal went to the European Union after the opposition refused to support the minority government’s fourth austerity package, and the government of José Sócrates, the Socialist prime minister, finally fell. Portuguese bankers also made it clear that they would no longer keep buying up Portuguese government debt, which was approaching junk status, even if they could offload it to the European Central Bank.
"The government had a cash problem, but was just kicking the can down the road," said Ricardo Costa, deputy editor of the weekly newspaper Expresso. He said that when the European Union failed to agree on more flexible measures to aid countries like Portugal — blocked in February by Germany and Finland — Mr. Sócrates "was alone against the markets." Elections in June are likely to bring the center-right Social Democrats to power in a coalition. They accept the need for cuts, but how they react to the bailout deal Mr. Sócrates will have to negotiate before then is complicated, Mr. Costa said.
Portuguese efforts to get a small "bridging loan" to get the country through the elections failed because the European Union has no such practice and no country would give a bilateral loan. So on Friday, in Hungary, European finance ministers said they would begin negotiations, together with the International Monetary Fund, for a roughly 80-billion-euro rescue package for Portugal with all political parties.
"If the opposition signs the package before elections, voters will say, ‘You’re the same, raising taxes, closing schools,"‘ Mr. Costa said. "But our main problem is that we’re not growing enough; actually we’re not growing at all," he said. "And if we don’t grow, we won’t get out of this problem in a decade."
There are also fears about Spain, one of the largest economies in the euro zone, which has problems with bank debt, unemployment and bad mortgages that are still on the books after the construction bubble burst. If Spain needs a bailout, the euro will be in deep trouble because the rescue fund, the European Financial Stability Facility, is not big enough.
On Friday, European officials insisted that the Portuguese bailout would reduce the risk to Spain. The Spanish government has worked hard to pacify the markets by cutting spending, but its economy must also grow to convince markets that it can handle its debt. The austerity program already in place has made the Socialist prime minister, José Luis Rodríguez Zapatero, and his party so unpopular that he announced this week that he would not run again.
Portugal rescue marks eurozone formal commitment to 'two-speed economy'
by Philip Aldrick and Bruno Waterfield - Telegraph
The eurozone formally committed itself to a two-speed economy on Thursday after the central bank raised interest rates on the same day Portugal joined Ireland and Greece in officially requesting a bail-out.
The European Central Bank lifted rates for the first time in almost three years, from 1pc to 1.25pc, as negotiations began over the scale of Portugal's rescue package, which is now expected to hit about €75bn (£66bn). European Commission sources said the package would be negotiated "swiftly" despite Lisbon's caretaker government lacking a political mandate ahead of country's June 5 elections. "It will be done quickly, very quickly. Portugal really needs the money soon to service debt. There is no question of waiting until after elections," said one source.
Jean-Claude Trichet, the ECB president, admitted on Thursday that he had "encouraged" the Portuguese authorities to seek financial aid before the election. "We have encouraged the Portuguese authorities to ask for support," he said. The deal is expected to provoke a political storm because Portugal is without an elected government following the collapse of the Socialist administration two weeks ago, after Portugal's parliament rejected an austerity programme agreed with the European Union to bring its public finances under control.
By raising rates to tackle incipient inflation, however, the ECB will make life more difficult for Portugal. Marchel Alexandrovich, European economist at Jefferies, said higher interest rates will hurt the eurozone periphery far harder than its core.
Debt interest for households and non-financial corporations "would rise by around 0.3pc of GDP if ECB rates are one percentage point higher", he said. "But Germany and France would see a rise of just around 0.1pc of GDP, while Portugal, Spain and Ireland would see increases equivalent to 0.8pc of GDP." ING economist Carsten Brzeski added that higher rates "will increase, not diminish, divergence within the eurozone". However, Mr Trichet dampened speculation that Thursday's move would be the start of a series of rate rises, saying he would only "monitor very closely" the risks of more price increases.
Fears that Spain would come under attack as the "bond vigilantes" switched their sights from Portugal proved unfounded. Yields on Spanish 10-year bonds trod water, rising from 5.226pc to 5.230pc, as Madrid comfortably got a €4.1bn bond auction away. Erik Nielsen, chief European economist at Goldman Sachs, said: "We think the contagion stops here."
Portuguese 10-year bond yields, which soared to record levels following the government's resignation, edged up from 8.426pc to 8.487pc. Portugal is now expected to be forced into a series of structural reforms, such as improving labour market flexibility and recapitalising its banks, alongside fresh austerity measures as a condition of the bail-out. German finance minister Wolfgang Schaeuble said it will take two to three weeks to assess Portugal's request and that conditions would be applied to any bail-out.
European ministers will begin negotiations at Friday's Ecofin gathering in Hungary. George Osborne confirmed he will be attending as any rescue will be backed by the UK taxpayer. Britain may be on the hook for about €4.4bn as early indications were the estimated €75bn package would be equally split between the European Financial Stability Mechanism (EFSM) and the International Monetary Fund (IMF), which are backed by the UK, as well as the eurozone's European Financial Stability Facility (EFSF). Britain has a 13.6pc exposure to the EFSM contribution and 4.5pc to the IMF.
The Chancellor may push for the eurozone portion of the bail-out to be increased and could win support from Sweden, which is in a similar position. Anders Borg, the Swedish finance minister, said the EU was in "a very tricky situation". The UK will earn interest on the loan and only lose out if Portugal defaults. Economists estimated it would be offered a better rate than the 5.8pc Ireland is paying.
Portugal has been forced to seek aid on fears it would not be able to refinance government debt as it comes due. An estimated €14bn needs to be raised before the end of June. With public debt at 93pc of GDP, a budget deficit of 8.6pc and household and corporate borrowings equivalent to two-and-a-half times national output, economists fear Portugal will be unable to escape its debts. Making matters worse, the country is forecast to slip back into recession this year.
The bail-out, which has been expected for some time, helped restore confidence to European banks and markets. Shares in Portugal's banks rose as the uncertainty lifted, as did those of Spainish banks, which are heavily exposed. UK banks have exposure of €33.7bn to Portugal, according to CreditSights. Separately, Barclays shifted €1.3bn of capital to its Spanish subsidiary on Thursday to meet the Bank of Spain's new minimum solvency requirements. Despite the ECB interest rate rise on the same day as the Bank of England held rates at 0.5pc, the euro fell against the pound from €1.1416 to €1.1374.
Portugal asks for bail-out which could cost Britain £4.4 billion
by James Hall - Telegraph
Portugal last night became the third European Union country after Greece and Ireland to formally request an emergency bail–out which could cost Britain £4.4 billion. The country's caretaker prime minister José Sócrates said the measure had been taken after the stricken nation had run out of options.
Economists last night put the UK's involvement in a Portuguese bail–out at up to a potential £4.4billion. After months of resisting having to apply for a bail–out from the EU and the International Monetary Fund, Portugal's cost of borrowing has reached unsustainable levels. Addressing the nation last night Mr Sócrates, said: "I have always said that asking for aid would be the final way to go, but we have reached the moment." It is understood that the rescue fund could be as high as £70 billion, or €80 billion.
Sources close to the Treasury said last night that Britain would take part in any Portugal–related discussions involving the EU's 27 member states. However, the type of bail–out is yet to be discussed and therefore the extent of the UK's exposure was impossible to gauge, the sources said.
It is understood that a bilateral loan from the UK to Portugal has not been requested and that the Treasury does not foresee any circumstances under which such a request would arise. José Manuel Barroso, the European Commission president, said last night that Portugal's request for help would be dealt with as quickly as possible. He assured Mr Sócrates that Portugal's request would be "processed in the swiftest possible manner, according to the rules applicable". He also said he had "confidence in Portugal's capacity to overcome the present difficulties".
The Portuguese government had previously said that the country did not need outside help and was able to finance its own debt. Observers were last night wondering whether contagion from Portugal would spread to other eurozone countries such as Spain, whose economy is significantly larger than that of Portugal, Ireland and Greece combined. Portugal had earlier promised to pay investors high rates of return to take up government bonds due to be repaid in six and 12 months, its second bond auction in less than a week.
The new economic crisis confronting Europe comes weeks after an EU summit to confirm a new permanent 700 billion euro bail-out facility for eurozone countries in trouble. The UK will not be liable for any contributions from that fund, but is included in the current temporary 440 billion euro bail-out fund which was set up to help Greece and which runs until mid-2013. The temporary fund has already been used to bail out Ireland, and now Portugal is expected to come calling to prop up its economy and shore up the shaky credibility of the euro.
That would oblige the UK to contribute under the terms of the temporary rescue scheme signed up to by then Chancellor Alastair Darling, and which was fiercely opposed at the time by George Osborne, who took his job after the election. Now Mr Osborne may have to preside over the extension to Portugal of the UK commitment, albeit in the form of financial guarantees rather than actual cash.
UK Independence Party leader Nigel Farage said the UK should refuse to contribute to any bail-out. Mr Farage said: ''The full tragic reality of the euro is now being seen. Bailing out Portugal is utterly pointless, it only traps them into a system into which they are totally unsuited. Britain should not contribute a single penny to their bail-out.''
Greek Loan Relief May Be Insufficient, German Finance Minister Says
by Jonathan Stearns and Rainer Buergin - Bloomberg
Loan relief granted to Greece last month may be inadequate to restore the country’s financial health, German Finance Minister Wolfgang Schaeuble said after European officials again ruled out debt restructuring.
Euro-area leaders decided on March 11 to reduce interest rates on loans for Greece under its 110 billion-euro ($159 billion) rescue package and to extend their maturities. Greece also gained the right to sell bonds directly to the region’s rescue fund. "Whether that is enough and how this continues will have to be monitored closely," Schaeuble told reporters today after a meeting of European Union finance ministers and central bank chiefs in Godollo, Hungary.
The doubts about Greece’s finances emerged as EU officials said a planned aid package for Portugal would draw a line under the region’s debt crisis, which was triggered by Greece and engulfed Ireland four months ago, when that nation received an 85 billion-euro rescue. The funds for Portugal are projected by the EU to total around 80 billion euros.
In return for aid, the government of Prime Minister George Papandreou has pledged to bring Greece’s budget shortfall to within the EU’s 3 percent limit in 2014. The deficit soared to 15.4 percent of gross domestic product in 2009. Greece intends to return to the markets for financing next year at the latest.
Greece’s economic contraction is projected at 3 percent in 2011 as austerity measures bite. The economy shrank 4.5 percent last year, more than forecast. The nation’s overall debt will peak at 159.4 percent of GDP in 2012, according to EU projections made Feb. 24. "We do exclude restructuring," EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Hungary today. "We have a solid plan and we are working on the basis of that plan. And it is based on very careful analysis of debt sustainability."
Appearing with Rehn, European Central Bank President Jean- Claude Trichet stressed the importance of the Greek austerity plan. In February, Trichet said "that program does not comprehend" the concept of losses for bondholders. At the meeting in Hungary, euro-area finance ministers ratified last month’s decisions to cut the average rate on loans to Greece by 1 percentage point, to around 3.5 percent, and to lengthen the maturities to 7 1/2 years from three.
"It’s known that Greece has a strong refinancing requirement in coming years," Schaeuble said. "That’s one of the reasons why we agreed in principle to extend the maturities for aid to Greece. We can’t say for good today whether that’s enough."
Lawmakers from Chancellor Angela Merkel’s coalition on April 7 didn’t rule out a restructuring of Greece’s debt, breaking with the official stance in Germany and in the EU.
As part of their March 11 accord, euro-area leaders also decided to let the European Financial Stability Facility, whose current role is to sell bonds to finance rescue loans, buy bonds directly from euro-area nations that are in an aid program.
Four days later, Greek Finance Minister George Papaconstantinou said this would offer an "exceptionally important" backstop in 2012 as Greece seeks to tap the markets for financing.
Portugal Told to Make Deeper Deficit Cuts to Gain $116 Billion EU Bailout
by James G. Neuger and Mark Deen - Bloomberg
Europe’s wealthy countries looked to Portugal to resolve the year-old euro debt crisis by coming up with "sustainable" deficit cuts to pave the way to an 80 billion-euro ($116 billion) bailout.
Confident that Portugal will be the last aid seeker, German Finance Minister Wolfgang Schaeuble pushed the feuding political parties in Lisbon to unite behind an austerity package in the thick of an election campaign. "It’s up to Portugal to decide," Schaeuble told reporters today at a meeting of European finance officials in Godollo, Hungary. Portugal "has to deliver sustainable measures for reducing the deficit."
Bond markets reflected optimism that Spain will escape the turmoil, while speculation mounted that Greece might need further help to deal with the billowing debt that triggered the crisis last year. Finance ministers agreed yesterday to send European Commission, European Central Bank and International Monetary Fund officials to Lisbon next week to start negotiations over the package, with the goal of wrapping it up on May 16, three weeks before Portugal’s June 5 election.
Portugal’s bond yields surged to euro-era highs after the opposition party balked on March 23 at a program of additional savings of 4.5 percent of gross domestic product over three years, leading Prime Minister Jose Socrates to step down and prompting downgrades in the country’s credit rating.
Yesterday’s European pledge failed to buoy the Portuguese market. Ten-year yields rose 5 basis points to 8.66 percent, leaving the extra yield over German bonds at 518 basis points. Europe’s effort to return to fiscal health is also dogged by the threat of higher borrowing costs after the ECB this week lifted its main interest rate for the first time in almost three years.
In a sign of how Portugal has surrendered control of its fate, the European Union will intrude on the political campaign by trying to broker a cross-party budget-cutting deal between Socrates and the opposition party led by Pedro Passos Coelho. Anibal Cavaco Silva, the largely ceremonial Portuguese president, said he will play a role in forging an initial accord on an economic overhaul that will be followed up by the future government.
"What we need now is an interim program so the next government can participate in the final negotiations because it is the next government that is going to implement the program," Cavaco Silva told reporters at a separate event in Budapest today. Both parties "are sticking to the general budgetary objectives" of shaving the deficit to 4.6 percent of GDP this year, 3 percent in 2012 and 2 percent in 2013, Luxembourg Prime Minister Jean-Claude Juncker said.
"Discussing deeply unpopular measures ahead of elections will not be easy," Gilles Moec, a London-based economist at Deutsche Bank AG, said in a research note. "Some volatile newsflow is likely to emerge in the next few days from Lisbon."
In addition to budget cuts and the sale of state assets, Portugal will be pressed to lessen regulations that have helped keep its annual economic growth rate below 1 percent for the past decade, one of Europe’s worst records. The 80-billion-euro aid estimate is "very, very preliminary," EU Economic and Monetary Commissioner Olli Rehn said in Godollo. He said Portugal’s loans would be "most likely" for three years, shorter than the 7 1/2-year maturities on joint EU-IMF packages of 110 billion euros for Greece and 67.5 billion euros for Ireland.
As with the first two bailouts, two-thirds of the loans would come from the EU and one-third from the IMF. The Washington-based global lender is "prepared to move expeditiously," Managing Director Dominique Strauss-Kahn said in a statement yesterday. "I never write a check before I see the bill," French Finance Minister Christine Lagarde said. "Work has to be done quickly."
Politics in the bill-paying countries will also play a role, with German Chancellor Angela Merkel’s popularity suffering and polls showing a surge in support for a euro-skeptic party in Finland’s April 17 elections.
Finnish Finance Minister Jyrki Katainen, a candidate for prime minister, said Portugal must enact deficit cuts that go beyond the measures rejected last month in parliament. "The package must be really strict because otherwise it doesn’t make any sense," Katainen said yesterday. "The package must be harder and more comprehensive than the one the parliament voted against."
Finance ministers also took steps to loosen the economic noose around Greece, the country that triggered the debt crisis when it veered toward default a year ago. Plans to lengthen Greece’s maturities to 7 1/2 years from 3 years were confirmed at the meeting, along with a cut in the average lending rate by 1 percentage point to around 3.5 percent. Ireland has made less progress in winning a cut in its 5.8 percent aid rate, facing pressure from Germany and France to first lift its 12.5 percent business tax rate, about half the EU average.
Investors are charging Greece 938 basis points more than Germany to borrow for 10 years and Ireland 577 basis points. Spain’s spread has been compressed to 178 basis points from 283 basis points on Nov. 30, a sign of growing confidence in Spain’s financial management. "I do not see any risk of contagion -- we are totally out of this," Spanish Finance Minister Elena Salgado said.
100,000 UK home owners with £30,000 credit card debts face 'losing their homes'
by Myra Butterworth - Telegraph
More than one hundred thousand home owners face losing their homes because of £30,000 worth of credit card and other debts excluding their mortgage, charities warned today.
Industry figures suggest the number of repossessions this year will be 40,000, but charities predict that numbers will reach more than double that amount once interest rates begin to kick in. Debt charity Consumer Credit Counselling Service said it was contacted by 90,000 struggling home owners last year, each with an average debt of £30,160 on credit cards and personal loans. It said this figure would break through the 100,000 mark this year as their repayments increase on the back of interest rate rises.
Middle income households are particularly vulnerable, according to separate research released earlier this week, as they would be unable to survive for six months if they lost their main source of income. Delroy Corinaldi, a director at the CCCS, said: “So many households are just managing to make ends meet, that even a small increase in the cost of their mortgage may push them over the edge. As far as possible, families need to think how they could pay such increases and seek help at the earliest opportunity if they feel that they cannot cope.”
It places extra pressure on households after Halifax, Britain, biggest mortgage lender, revealed the typical value of a home dropped more than £6,000 during the past year. It said average house prices rose marginally by 0.1 per cent in March compared with the pervious month but was down 2.9 per cent on the same period a year ago. Martin Ellis, housing economist at Halifax, said: “Uncertainty over the general economic outlook and individual financial circumstances are likely to constrain housing demand, resulting in some modest downward pressure on prices.”
Economists said prices would end up falling 10 per cent since the first half of 2010 to the end of this year. Howard Archer, an economist at Global Insight, said: “Although there are signs that housing market activity has stabilized recently, it is still at a very low level that historically has been associated with falling house prices. Indeed, current very low consumer confidence will make many people reluctant to risk buying a house.”
Gerald Celente loses it
Lack of Data Heightens Japan’s Nuclear Crisis
by Hiroko Tabuchi and Keith Bradsher - New York Times
Nearly one month after Japan’s devastating nuclear accident, atomic energy experts, regulators and politicians around the world are still puzzling over a basic question: How much danger is still posed by the Fukushima Daiichi nuclear power plant?
That depends to a considerable extent on how hot the uranium fuel rods at the power plant remain, and whether fuel has escaped its containment, or might still do so. Yet remarkably little is known for sure about what is really happening inside the reactors because some areas remain far too radioactive for workers to approach, and some instruments have malfunctioned.
The paucity of data and the conflicting estimates of what the available information really means have prompted a series of confusing analyses and a rift between officials in Japan and those overseas — and even between one member of Congress and the United States Nuclear Regulatory Commission.
The commission speculated this week that the nuclear fuel in the core of one of the stricken reactors had probably leaked from its thick steel pressure vessel, its most important protective barrier. If that proved to be accurate, it would raise the prospect of continuing fuel leaks and high levels of radioactive releases that would vastly complicate containment and the cleanup.
But Japanese officials said there was no evidence of a compromised pressure vessel, and they wondered why they were reading about it in the newspapers. "If they have a concern, they should inform us," said Kentaro Morita of Japan’s nuclear regulatory body, the Nuclear and Industrial Safety Agency, after its American counterpart sounded the alarm over a possible nuclear fuel leak at the plant’s Reactor No. 2, clearly contradicting Japanese accounts. "They didn’t say such concerns to us directly," Mr. Morita said.
A senior Foreign Ministry official, meanwhile, accused the foreign media of exaggerating the threat posed by the power plant and the radiation spreading from it. Radiation fears are hurting sales of Japanese products abroad.
Who is proved right in the scientific debate has great repercussions for how and when the nuclear crisis might be brought under control, and the potential implications if assumptions prove wrong. From the start there have been differences, with the American authorities expressing a more pessimistic view than the Japanese.
The United States has advised Americans to stay at least 50 miles away from the Fukushima Daiichi plant. Japanese officials evacuated residents within a 12-mile radius, and have since said they are considering expanding the evacuation zone.
An assessment in late March by the Nuclear Regulatory Commission said that hydrogen explosions at the plant might have blown particles of nuclear fuel from the reactors’ spent-fuel pools up to a mile away. The Tokyo Electric Power Company, the operator of the Fukushima Daiichi plant, says that while the pools remain exposed at the most-damaged reactors, the fuel remains safely inside.
American officials are also concerned that mounting stresses on the reactors’ containment structures as they fill up with radioactive water used in emergency cooling make them vulnerable to rupture in an aftershock from the March 11 earthquake. Japanese officials have played down that concern, and on Friday they said a sizable aftershock that struck overnight had caused no further damage at the plant.
The rift also highlights the difficulty of a debate in which both sides are forced to extrapolate possible situations with little access to crucial readings from inside the reactors. Much of the automated measurement equipment in the reactors has been damaged, either by explosions in the early days of the crisis or by intense radiation since then. Damage to the reactors, as well as high radiation, has prevented technicians from making detailed assessments.
The Pentagon has provided airborne surveillance drones that can help monitor ground-level radiation at the plant. It is possible that American officials are basing their analysis on data they have collected independently, though Obama administration officials say they have shared their information with the Japanese.
Even so, it is not easy to explain why such different theories are being offered on fundamental questions like whether radioactive fuel from the steel reactor pressure vessel at Unit No. 2 is leaking into the bottom of the containment structure.
The Nuclear Regulatory Commission cited high levels of radiation at one spot inside the containment structure at Reactor No. 2 as evidence for its analysis. In addition, extremely high levels of radiation were detected in the water from a recently stanched leak that ran from the reactor building into a drainage ditch and into the ocean.
The Japanese flatly deny that possibility. "At this moment we do not have any data that shows there has been leakage to the containment vessels," said Hidehiko Nishiyama, deputy director general at the Japanese regulatory agency. He also said that the Japanese and American regulators, who talk every day, were no longer so far apart on this question.
Japanese officials believe that water pumped into the reactor to cool it — as opposed to the nuclear fuel itself — might have somehow leaked out. In addition, there is evidence that an explosion may have breached the primary containment structure, which may have allowed highly radioactive water into other parts of the plant and into the ocean.
Domestic political priorities appear to be driving at least some of the reactions in both countries. In the aftermath of the 1979 accident at Three Mile Island in Pennsylvania, nuclear regulators in the United States have often planned for and talked about the worst possibilities to avoid accusations that they are lax about safety.
The pressure on American officials to give well-rounded explanations about the potential threat remains high. In fact, some members of Congress who are critics of the nuclear power industry are skeptical that the regulatory commission has been as forthcoming as it should be about the risks posed by Japan’s nuclear crisis or the potential impact on American nuclear power plants that use similar technology.
This week, Representative Edward J. Markey, Democrat of Massachusetts, an outspoken critic, engaged in a running debate with members of the commission’s staff over the conditions at Reactor No. 2 in Japan. Mr. Markey said the regulators had told his staff that fuel was leaking from the reactor, but then the commission issued a more ambiguous public statement.
"I find it rather curious that some within the Nuclear Regulatory Commission are attempting to deny the findings their own technical staff conveyed to my office as soon as it became clear that this information showed a meltdown that is more severe than some people apparently wish to acknowledge," Mr. Markey said in a statement.
On the Japanese side, officials have an obvious desire to avoid causing panic in public statements. "We have a very conservative culture in the nuclear industry" in the United States, said Murray E. Jennex, a professor at San Diego State University and a specialist in nuclear containment structures. "There’s nothing to gain by the N.R.C. saying things are good. At the same time, there’s nothing to gain by Tokyo Electric not downplaying stuff."
The Americans also appear to rely more heavily on complex computer programs like Melcor that use available data to extrapolate conditions in reactors after accidents. But the regulatory commission appears to have partly relied on data provided by Tokyo Electric, something that engineers skeptical of the power company say compromises the validity of the findings.
"When the input numbers are no good, the output numbers are no good," said Satoshi Sato, a former engineer at General Electric, which designed the reactors at Fukushima Daiichi. He argues that the conditions in the reactors are probably worse than the Japanese have reported.
The Japanese also seem to prefer presenting raw data without explaining what they think it means, said Takashi Inoue, a professor of public relations at Waseda University. Every day, Tokyo Electric, the nuclear agency, the chief cabinet secretary and others hold news conferences at which they present a blizzard of facts and numbers but rarely make broader declarations about the conditions at Fukushima Daiichi.
Industry experts are split. Yoichi Kikuchi, a Japanese nuclear engineer who helped design the containment vessel at one of the Fukushima Daiichi reactors, agreed with the Americans that a fuel leak was possible. He said that the pressure vessel at Reactor No. 2 was especially vulnerable because of openings at the bottom where control rods are inserted. If the fuel were melting, the metal welding around those openings would easily give way, allowing the fuel to travel into the drywell, he said. The fuel could then react with the water in the suppression chamber, setting off a vapor explosion and a huge release of radiation into the air, he said.
Shuichi Iwata, a nuclear fuel expert at Tokyo University, said that he thought a leak of fuel was probably occurring, but that the consequences might not be great. "The worst case is not happening, I think," he said.
But Toshihiro Yamamoto, an associate professor in nuclear engineering at the Kyoto University Research Reactor Institute, said the nuclear agency’s explanation was more likely. He said that it was water, not fuel, escaping from the same openings, or perhaps from a damaged circulation pump higher in the vessel. Masashi Goto, a former Toshiba nuclear power plant designer, said that Japanese officials appeared to have decided that they gained nothing but panic from predicting outcomes. "They will never speak about the worst-case scenario," he said. "They will never predict."
Fukushima: A 'nuclear sacrifice zone'
by Dahr Jamail - AlJazeera
Japan's Fukushima Daiichi nuclear power plant that was heavily damaged by the tsunami from the massive March 11 magnitude 9.0 earthquake continues to spread extremely high levels of radiation into the ocean, ground, and air.
Tokyo Electric Power (Tepco), the company that operates the plant, said on April 5 that radioactive iodine-131 readings taken from seawater near the water intake of the No. 2 reactor reached 7.5 million times the legal limit. The sample that yielded this reading was taken just before Tepco began releasing more than 11,000 tonnes of radioactive water into the sea.
The radioactive water discharged into the Pacific has prompted experts to sound the alarm, as cesium, which has a much longer half-life than iodine, is expected to concentrate in the upper food chain. "The situation is very concerning," Dr MV Ramana, a physicist specialising in issues of nuclear safety with the Programme on Science and Global Security at Princeton University told Al Jazeera, "They are finding it very difficult to stabilize the situation."
Operators of the plant are no closer to regaining control of damaged reactors, as fuel rods remain overheated and high levels of radiation are being released. Until the plant's internal cooling system is reconnected, radiation will flow from the plant. Nuclear safety agency spokesman Hidehiko Nishiyama on April 3 offered the first sense of how long it might take to bring an end to the nuclear crisis.
"It would take a few months until we finally get things under control and have a better idea about the future," said Nishiyama, "We'll face a crucial turning point within the next few months, but that is not the end." Ramana explained to Al Jazeera that he sees the current situation as being the "best case scenario," because "the wind has been largely over the ocean, there haven’t been any more major explosions, and none of the spent fuel areas have had a major fire."
Worst case scenario
"There could be a core that gets molten, and we could have an explosion," Ramana said of what he believes would be a worst-case scenario, "This isn't likely, but it is possible." Mary Olson is the director of the Southeast Office of the Nuclear Information and Resource Service (NIRS), a group that describes itself as the information and networking center for citizens and environmental organisations concerned about nuclear power, radioactive waste, and radiation.
Olson shares Ramana's concerns about the worst-case scenario. "The worst-case scenario is still out there, it could happen," Olson told Al Jazeera, "And that would be some kind of explosive force that mobilizes the fissile material on the site into a wider sphere."
Olson, who is also an evolutionary biologist with a double major in Biology and History of Science, including studies of chemistry and biochemistry at Purdue University, expressed concern over the fact that in the aftermath of the Three Mile Island nuclear disaster in the United States, "All the contaminated material generated from that was released to our environment in a planned and 'regulated' way. It was dumped in rivers or boiled off into the atmosphere."
Olson sees the same thing already happening now with the Fukushima disaster, and thinks the situation could eventually be worse than even the Chernobyl nuclear disaster that left some 200,000 people dead, according to a study from the environmental group Greenpeace. "All of those [Fukushima] reactors have been in a catastrophic level of radioactive release that exceeds Chernobyl," she said,."Two of these have exploded, No. 2 is in meltdown, and we believe it has gone back into criticality and that there is a nuclear chain reaction coming and going."
She also pointed out that the fuel core in reactor No. 4 was offloaded for refueling at the time of the earthquake and tsunami, "So none of the fuel was in containment and was all in the pool and that's why it's gotten hotter faster and there has been very little attention to this. All of these are catastrophic in themselves. Having them in one place in one month is truly catastrophic."
Dr Ramana warned that it would likely take several months without any more setbacks before the crisis can be declared stable. "What we're seeing is a lot of the systems were taken out during the tsunami and explosions," he added, "The lack of power to circulate the water is a problem, so there aren’t going to be any quick fixes for these things."
Olson also fears that if the core meltdowns get to the groundwater under the plant, "You have an explosive force that is like putting dynamite under the site. The problem is if you get this molten fuel into that water it could cause a steam explosion." "Since unit two is showing signs of fission happening, the chances of something more catastrophic happening at that site are increasing," Olson added, "People are acting like the worst is over, and that is just not understanding the real issues here as far as the radiological impacts." She also pointed out that the fuel pool in reactor No. 3 "is gone, according to recent photos. There is no fuel there. The reactor fuel pool in No. 3 is gone. Where did it go?"
On Thursday, Japan's chief cabinet secretary Yukio Edano said the current 20-kilometer evacuation zone around the plant may need to be enlarged due to the original parameters having been established in relation to short-term exposure. "Current evacuation orders apply to areas where people are in danger of having received 50 millisieverts [of cumulative exposure]. We are now looking into what to do with other areas where, with prolonged exposure, people may receive that amount," Edano said. A 50-millisievert amount is the exposure limit for a nuclear-plant worker for a full year.
"The regions the Japanese government has evacuated have been declared to be long-term, and these are regions of several hundred square kilometers and they are finding local hotspots that are further out," Ramana told Al Jazeera, "There is going to be an area around Fukushima that is going to be off-limits for human habitation for decades. The same thing happened with Chernobyl."
Olson agrees, and believes the mandatory evacuation area needs to be increased. "Two hundred thousand people are now out of their homes," she said, "But the government needs to enlarge the evacuation area. Much of that area, to the north and west will become permanent interdiction, meaning nobody will be going home. There will be a fairly large area where nobody will be going home."
Taking 'safety' with a grain of salt
Recently disclosed documents show US regulators doubt that some of the nation's nuclear power plants can withstand a disaster akin to Fukushima's. Nuclear Regulatory Commission (NRC) members have questioned back-up plans to maintain cooling systems in case main power sources fail, and a July 2010 memo assessing Exelon Corporation's Peach Bottom nuclear plant in Delta, Pennsylvania, concludes that contingency plans, "have really not been reviewed to ensure that they will work to mitigate severe accidents".
A Union of Concerned Scientists statement by nuclear expert Edwin Lyman said, "While [regulators] and the nuclear industry have been reassuring Americans that there is nothing to worry about … it turns out that privately NRC senior analysts are not so sure."
Possibly answering Olson's question about the missing fuel pool in Fukushima reactor No. 3, the document suggests that fragments of nuclear fuel from spent fuel pools above the reactors were blown "up to one mile from the units" during one of the plants earlier hydrogen explosions. This ejection of radioactive material could indicate far more extensive damage to the radioactive pools than has been previously disclosed.
Ramana, the Princeton University physicist, is clear in what he believes needs to happen within the nuclear industry to correct these myriad and potentially catastrophic problems. "At the minimum you probably want to stop all nuclear construction until we get a much better understanding of what happened at Fukushima and what problems occurred," he said. "Even though the reactors shut down as they are designed to do, the problem was cooling water. In Chernobyl, it took years to really get a better understanding of what happened. Until that happens, all construction should be put on hold."
Ramana points to another problem - that of building several reactors on the same site. "There are six reactors on the same site at Fukushima, and what happened was that all of them were affected by one common cause, the tsunami. We also saw that when there were hydrogen explosions in one reactor, that affected the spent fuel at another reactor, so we have cross-effecting problems. Then when one started getting out of control, it impeded emergency steps that needed to be taken at other reactors. So building multiple reactors at one site is a bad idea, and should be stopped."
He said that previous accidents like Chernobyl and Three Mile Island have been dismissed by the nuclear industry. "Chernobyl was explained away due to Soviet operator errors and operators who had bad training, etc." he said, "So the argument for many years is that as long as we are using western built light water reactors we are perfectly safe." "Now, however," he added, "Fukushima blows that idea out of the water. We are going to be told that new reactors are safer and that has to be taken with a grain of salt."
A nuclear Obama
The Obama administration has proposed $36bn in federal loan guarantees to jump-start the construction of nuclear power plants in the US Nuclear operator Exelon Corporation has been among Barack Obama's biggest campaign donors, and is one of the largest employers in Illinois where Obama was Senator. The company has donated over $269,000 to his political campaigns. Obama also appointed Exelon CEO John Rowe to his Blue Ribbon Commission on America's Energy Future.
Illinois, where Obama began his political career, gets approximately half of its electricity from nuclear power, more than any other state. It currently has 10 operable reactors at six sites. The Quad-cities Nuclear Power Plant, located on the banks of the Mississippi River, is a GE Mark One plant, with the identical design and nearly the same age as the Fukushima reactors.
Olson said that even with Japanese and US government so-called acceptable limits of radiation exposure, "we’re still getting excess cancer". She says it's too soon to say if the fallout from Fukushima will compare to cancers borne of the Chernobyl disaster, where two thirds of the excess cancers occurred outside of the Belorussia area.
"We are creating radioactive sacrifice zones on our planet," she said, "And these zones will persists for hundreds of thousands of years, and our genetics will be effected. Ionising radiation, especially when it is internalised in our bodies, randomizes DNA…so when cells are damaged, that is when cancer starts. And every single time radiation exposure occurs, there will be additional cancers." Olson also pointed out that there is likely little Tepco can do to prevent the Fukushima plant's radiation from being released into the environment.
"All of that radioactive water they are holding will be diluted and released or evaporated into the air. The water is going off as radioactive steam or runoff, and all of that will end up in our environment because there is no place to put it. They treat it like dilution is the solution, but the more you spread it out the more human and animal tissue is exposed and the more cancer there is."
Cars, whole houses and even severed feet in shoes: The vast field of debris from Japan earthquake and tsunami that's floating towards U.S. West Coast
by Daily Mail
A vast field of debris, swept out to sea following the Japan earthquake and tsunami, is floating towards the U.S. West Coast, it has emerged.
More than 200,000 buildings were washed out by the enormous waves that followed the 9.0 quake on March 11.
There have been reports of cars, tractor-trailers, capsized ships and even whole houses bobbing around in open water.
Adrift: A whole house bobs in the Pacific Ocean off the coast of Japan. An enormous field of debris was swept out to sea following the earthquake and tsunami
But even more grisly are the predictions of U.S. oceanographer Curtis Ebbesmeyer, who is expecting human feet, still in their shoes, to wash up on the West Coast within three years.
'I'm expecting parts of houses, whole boats and feet in sneakers to wash up,' Mr Ebbesmeyer, a Seattle oceanographer who has spent decades tracking flotsam, told MailOnline.
Several thousand bodies were washed out to sea following the disaster and while most of the limbs will come apart and break down in the water, feet encased in shoes will float, Mr Ebbesmeyer said.
'I'm expecting the unexpected,' he added.
Journey: This graphic depicts the predicted location of the Japan debris field as it swirls towards the U.S. West Coast. Scientists predict the first bits of rubbish will wash up in a year's time
In three years' time the debris field will have reached the U.S. West Coast and will then turn toward Hawaii and back again toward Asia, circulating in what is known as the North Pacific gyre
Members of the U.S. Navy's 7th fleet, who spotted the extraordinary floating rubbish, say they have never seen anything like it and are warning the debris now poses a threat to shipping traffic.
'It's very challenging to move through these to consider these boats run on propellers and that these fishing nets or other debris can be dangerous to the vessels that are actually trying to do the work,' Ensign Vernon Dennis told ABC News.
'So getting through some of these obstacles doesn't make much sense if you are going to actually cause more debris by having your own vessel become stuck in one of these waterways.'
Debris soup: There have been reports of cars, tractor-trailers and capsized ships bobbing around in open water off the coast of Japan Vast: An aerial view of the debris shows massive amounts of timber, tyres and parts of houses. The U.S. Navy said they had never seen anything like it and warn it now poses a threat to shipping traffic
Scientists say the first bits of debris from Japan are due to reach the West Coast in a year's time after being carried by currents toward Washington, Oregon and California.
They will then turn toward Hawaii and back again toward Asia, circulating in what is known as the North Pacific Gyre, said Mr Ebbesmeyer,
Mr Ebbesmeyer, who has traced Nike sneakers, plastic bath toys and hockey gloves accidentally spilled from Asia cargo ships, is now tracking the massive debris field moving across the Pacific Ocean from Japan.
He relies heavily on a network of thousands of beachcombers to report the location and details of their finds.
'If you put a major city through a trash grinder and sprinkle it on the water, that's what you're dealing with,' he said.
Some of the debris to hit the West Coast may be radioactive following the devastation at Japanese nuclear power plants, according to James Hevezi, chair of the American College of Radiology Commission on Medical Physics.
'But it would be very low risk,' Hevezi said. 'The amount that would be on the stuff by the time it reached the West Coast would be minimal.'
Only a small portion of that debris will wash ashore, and how fast it gets there and where it lands depends on buoyancy, material and other factors.
Fishing vessels or items that poke out of the water and are more likely influenced by wind may show up in a year, while items like lumber pieces, survey stakes and household items may take two to three years, he said.
Strong force: The graphic shows the currents in the Pacific Ocean that will push the debris around from Japan to the U.S. West Coast and then back again
If the items aren't blown ashore by winds or get caught up in another oceanic gyre, they'll continue to drift in the North Pacific loop and complete the circle in about six years, Ebbesmeyer said.
'The material that is actually blown in will be a fraction' of the tsunami debris, said Curt Peterson, a coastal oceanographer and professor of in the geology department at Portland State University in Oregon.
'Some will break up in transit. A lot of it will miss our coast. Some will split up and head up to Gulf of Alaska and (British Columbia).'
'All this debris will find a way to reach the West Coast or stop in the Great Pacific Garbage Patch,' a swirling mass of concentrated marine litter in the Pacific Ocean, said Luca Centurioni, a researcher at Scripps Institution of Oceanography, UC San Diego.
Much of the debris will be plastic, which doesn't completely break down. That raises concerns about marine pollution and the potential harm to marine life.
But the amount of tsunami debris, while massive, still pales in comparison to the litter that is dumped into oceans on a regular basis, Mr Ebbesmeyer said.
He is also concerned for the welfare of some hundred thousand juvenile sea turtles, which are born in Japan and must make the journey across the Pacific to California.
They usually follow the path of North Pacific Gyre but swim around the north side of the garbage patch, Mr Ebbesmeyer said.
But now the turtles face a sea of debris from Japan on their journey.
Meanwhile Japan's meteorological agency says it has now lifted a tsunami warning for the north-eastern coast after a 7.4-magnitude earthquake struck offshore.
The quake hit about 11.30 pm local time. It has rattled nerves nearly a month after the devastating earthquake and tsunami that flattened the same area of coastline.