Friday, March 5, 2010

March 5 2010: The Long Hot Summer

The Long Hot Summer 1958

Ilargi: If you’d never before heard of Herbert Allison, you certainly wouldn’t be alone. Turns out Mr. Allison is a deputy of sorts at the US Treasury, for which he oversees its $700 billion financial rescue plan. Herb was having a discussion with Elizabeth Warren, chair of the Congressional Oversight Panel created to investigate the $700 billion TARP plan (she oversees how Allison oversees, so to speak), and said the most remarkable thing: "There is no too-big-to-fail guarantee on the part of the U.S. government [..]".

Warren wouldn’t have any part of that one. And why should she? The Treasury Department may claim that there is no such guarantee, true, since it was never put on paper. But how important is that after they’ve already bailed out every too big to fail institution? NO, that’s not our policy. We just do it every single time. Ms. Warren asked her question(s) because she (rightly) thinks that the bailed out banks have advantages over competitors when it comes to raising funds; investors will feel safe when buying Citi stock, relying on the fact that Washington will bail it out when push comes to shove. There is little risk attached to Citi bonds.

In that same vein, Barney Frank yesterday made a comment that falls in the same category as Herb Allison's. Frank implied that Fannie Mae and Freddie Mac might be allowed to deliver haircuts to their bondholders. This apparently is part of the doomed to failure attempts to reorganize Fannie and Freddie, which are loaded up with trillions of -potential- losses for the US taxpayer. It should have dawned on Frank and the rest of the Capitol Hill crew by now that Fannie and Freddie are in such a deep dark hole that reorganizing them is simply not possible in any meaningful way, not unless, that is, entirely new heights are achieved in creative accounting methods.

As for the haircuts for bondholders, the Chinese seem to have lots of that stuff. They should be ever so thrilled when they're told they just lost a few dozen billion dollars and counting. I’ve often said it before: Fannie and Freddie are the epitome of the perversion in the financial system. Wait till they are forced onto the US federal budget. You’re going to love the spectacle. Americans will become like Icelanders, who, to satisfy the governments of Britain and Holland, face a bill of $135 per person every single month for the next eight years. Think America is going to like that?

Iceland certainly doesn't, and it looks almost certain that tomorrow's referendum on the matter will result in a NO vote. Which will lead to a whole new set of conundrums. The question will emerge again if a country's citizens are responsible for the losses of its banks. So far, Iceland is the one place where the losses would be implicit; in the US, Britain, France, Holland etc., the people still focus on the carrot of having their investments in their banks returned to them one day, and with interest or even profit to boot. Yeah, right. What will they do when they find out that is not ever going to happen? That they will need to pay up like the Icelanders, while the bankers keep getting their bonuses?

Think they may go the way Greece is going, where people tried to storm the parliament building today? That we may perhaps see a long hot summer? I know what I’m thinking. The crisis hasn't even started yet. Governments everywhere and at all levels will cut jobs and services. And the people will not continue to let that happen without raising their voices, and their pitchforks. It's inevitable. And that will signal the start of a whole new phase in the crisis, where increasing volatility and violence will make events much more unpredictable. Still, these people, all over the world, will find that they're too late. The losses were incurred in the past, and they will have to be paid. Oh well, at least Greece is off the hook for now. Right?

Where Greece and the US and everyone in between may well meet is perhaps best phrased by the Irish opposition. "Fine Gael leader Enda Kenny warned of a revolution if there was more money put into Anglo Irish Bank, which he described as a "dead bank, which will not lend any more money". "I put it to you, Taoiseach, there will be revolution on the streets if you do that." Or, if you will, In San Francisco or Toledo, where mayors quite simply say they'll fire all their civil servants. And rehire (some of) them at lower salaries and perks.

Yup. Long and hot. And steamy too.

Global banks warn on interest rates and house prices
Mortgage rates will rise, home prices will fall and the supply of credit will diminish when the US Federal Reserve and other central banks wind down emergency programmes, a group of global banks warned yesterday. In a stark prediction for the fallout of the end to the Fed's programme of purchasing mortgage-backed securities (MBS), the Institute of International Fin-ance's Market Monitoring Group cautioned that there would be "considerable repercussions for mortgage rates and home prices". The IIF represents the world's biggest financial institutions and its monitoring group, co-chaired by Jacques de Larosière, former governor of the Banque de France, and David Dodge, former governor of the Bank of Canada, contains representatives from HSBC, Deutsche Bank and Citigroup.

Ben Bernanke, chairman of the Fed, said in testimony to Congress last week that "last year, in part because of our programme of buying MBS and bringing mortgage rates down there were millions and millions of refinances, which got people into better shape". But the Fed is due to stop buying MBS this month and will eventually begin selling the securities to return its balance sheet to a more normal level as part of an end to the unconventional tools used to supplement a policy of near-zero interest rates and get credit flowing.

Last month Mervyn King, governor of the Bank of England, said he would not extend a UK scheme that allows banks to swap MBS for government bonds in spite of pressure from the industry. Economists are divided on the impact of the phase-out from the UK and US programmes, with many expecting some tightening in interest rates but not necessarily as dramatic as the IIF. The IIF's monitoring group said there would be "a significant impact on banks' capacity to lend" from the end of support programmes and warned that fiscal consolidation and regulatory uncertainty were also adding to concern over the future supply of credit.

Charles Dallara, managing director of the IIF, said individual countries' regulatory proposals such as the "Volcker rule" that would ban US banks from trading for their own benefit and the proposed $90bn US bank tax were clashing with the co-ordinated international approach outlined by the Group of 20 countries. "In an environment where banks are still working off some of the legacy problems . . . it's difficult enough for the market to see its way through this period of uncertainty . . . without the framework of the G20 being fractured by proposals that are pretty clearly outside the framework," he said. "Either the G20 leaders believe that the G20 framework is the way to go or they don't."

While some wildcard regulatory proposals have come from Europe - such as recent moves to limit or ban credit default swaps linked to sovereign debt - the world is watching the US regulatory upheaval with particular attention. Yesterday the Senate banking committee continued to try to find agreement between Republicans and Democrats on a regulatory reform package designed to introduce better oversight of systemic risk, bring transparency to over-the-counter derivatives trading and improve protection of consumers. The last area is proving the stickiest for Congress to deal with and it is overshadowing other parts of the package, which many banks and international observers believe are more important.

US payrolls fall by 36,000; jobless rate steady at 9.7%,
U.S. nonfarm payrolls declined for the 25th time in the past 26 months, falling by 36,000 in February to a seasonally adjusted 129.5 million, the Labor Department estimated Friday. Job losses were concentrated in construction, schools, transportation, insurance and publishing. Manufacturing job rolls rose by 1,000, the second increase in a row, according to a survey of businesses. The nation's jobless rate was steady at 9.7% as the number of those employed in the household survey rose by 308,000.

Severe snowstorms during the survey week may have depressed the payroll count, but the Bureau of Labor Statistics said it could not quantify the impact. Ahead of the report, economists cautioned against reading too much into the data, in light of the likely impact of the storms. It'll take until April before a clean count can be given. "The trend is still for smaller job losses leading to job gains by the second quarter," said John Silvia, chief economist for Wells Fargo. The number of people with jobs who said they couldn't work because of bad weather was a not-seasonally adjusted 1.03 million, the highest since the Blizzard of 1996. The number of people who usually work full-time but were forced to work less than 35 hours because of bad weather rose to 5.3 million, also not seasonally adjusted.

Total hours worked fell by a seasonally adjusted 0.6%, likely due to weather-related shutdowns. The February employment report was better than expected, as economists surveyed by MarketWatch had forecast a drop of 90,000. They expected the unemployment rate to rise to 9.8%. Payrolls data for December and January were revised higher by 35,000. Temporary hiring to conduct the U.S. Census added 15,000 jobs. The U6 alternative gauge of the unemployment rate, which includes discouraged workers and those forced to work part-time, rose to 16.8% from 16.5%.

Some details of the Labor Department's report were encouraging. According to a survey of 400,000 business establishments, private-service producing industries added 42,000 jobs, concentrated in two areas: Temp help and health care. Temporary-help jobs, a sign of future hiring, rose by 48,000 in February, pushing the total increase in this category to 284,000 since September. Health care added 20,000 jobs. The government hired 15,000 temporary Census workers, but laid off 9,000 postal workers. Total government employment fell by 18,000, with education employment falling by 17,000.

Construction employment fell by 64,000, close to the average loss for this segment over the past six months. Average hourly earnings rose 0.1%. Over the past 12 months, average hourly earnings are up 1.9%, compared with a 2.7% rise in the consumer price index -- the gauge for measuring inflation at the retail level. "What should not go overlooked are the lackluster gains seen in the income components of the report," wrote Dan Greenhaus, economic strategist for Miller Tabak & Co. With the hours worked falling, average weekly earnings dropped 0.4%.

According to the survey of 60,000 households, employment rose by 308,000 to 138.6 million, nearly matching the 342,000 increase in the labor force. The participation rate rose a tenth to 64.8%. Unemployment rose by 34,000 to stand at 14.9 million. Long-term employment eased slightly, with the number of people out of work longer than six months falling to 6.1 million, down 180,000. The number of people working on a part-time basis because of the slack economy rose by 312,000 to 6.2 million.

Broader U-6 Unemployment Rate Increases to 16.8% in February
The U.S. jobless rate was unchanged at 9.7% in February, following a decline the previous month, but the government’s broader measure of unemployment ticked up 0.3 percentage point to 16.8%. The comprehensive gauge of labor underutilization, known as the "U-6" for its data classification by the Labor Department, accounts for people who have stopped looking for work or who can’t find full-time jobs. Though the rate is still 0.6 percentage point below its high of 17.4% in October, its continuing divergence from the official number (the "U-3? unemployment measure) indicates the job market has a long way to go before growth in the economy translates into relief for workers.

The 9.7% unemployment rate is calculated based on people who are without jobs, who are available to work and who have actively sought work in the prior four weeks. The "actively looking for work" definition is fairly broad, including people who contacted an employer, employment agency, job center or friends; sent out resumes or filled out applications; or answered or placed ads, among other things. The U-6 figure includes everyone in the official rate plus "marginally attached workers" — those who are neither working nor looking for work, but say they want a job and have looked for work recently; and people who are employed part-time for economic reasons, meaning they want full-time work but took a part-time schedule instead because that’s all they could find.

A U-6 figure that converges toward the official rate could indicate improving confidence in the labor market and the overall economy. This month pushes convergence even further away.

College students across the nation protest tuition hikes

A day of action. That's what organizers of Thursday's nationwide protests are calling efforts to combat the rising cost of higher education. With states across the country slashing funding for public universities, schools are forced to make up the difference with tuition increases. In some cases those increases are more than 30 percent. It's a scene playing out on more than 100 college campuses across the country: Student protests over budget cuts, layoffs and tuition increases. "The fact that we have to pay thousands of dollars in higher education is ridiculous," said one Denver student protester.

Colleges and universities in at least 32 states took part in Thursday's so-called "day of action". It was a grass-roots effort triggered by last year's massive demonstrations in California over plans for a 32-percent tuition hike. And California is not alone: A purposed 35 percent increase at the University of Georgia and 20 percent at the University of Illinois are other examples. School officials say they have no other choice.

What's driving these increases? State lawmakers across the country, already reeling with budget deficits, are slashing university funding in an effort to make up the difference. It's leaving administrators no choice but to raise tuition, end programs and lay-off staff. "We get our money from two places, state and student fees. As the state contributions go down, our hands are tied," says University of California spokesman Peter King. Something today's demonstrators say they will fight.

While most of today's rallies were peaceful, other recent demonstrations were not. Last week students at Berkeley turned violent, overturning cars and setting fires in the street. Organizers of Thursday's nationwide protest called for calm, but urged students, faculty and staff to stand-up against the rising costs of public education. "It's a strong way of discrimination on a fiscal level... just economic discrimination which pushes out the marginalized," said UC Berkeley protester Michael Anthony Hopkins. And while these protesters voices are being heard now, it's unclear whether these demonstrations will have any long term impact on the rising costs of higher education.

California job losses grow
California's ailing job market is much more feeble than analysts thought was the case a few weeks ago, according to a new report that provides an early glimpse into statewide employment trends. "The economy was a lot worse than everybody thought," said Howard Roth, chief economist with the state's Department of Finance. "The job market is weaker than we figured." It appears California lost 871,000 jobs in 2009, suggests an estimate provided by the state Employment Development Department. "This is the worst recession for California since the Great Depression," said Brad Kemp, director of regional research with Beacon Economics.

If those estimates hold up when final revisions are released this month, the actual job losses in the state would be far more grim than first believed. In the initial EDD estimate, released Jan. 22, the EDD reported California employers chopped 579,000 jobs from payrolls in 2009. "We will have a really big downward revision," Roth said. That would translate into an 292,000 more jobs that were lost, on top of the prior losses. "If it comes to that number, it would be one of the biggest revisions ever," said Paul Wessen, an economist with the state EDD. Wessen prepares an interim revision with regular snapshots about the California job market. "I can't remember a revision this big since the early 1990s, when we lost a lot of aerospace jobs," Roth said. The state EDD is due to officially release its annual revised figures for California payroll employment this month. Those numbers could differ from the unofficial estimate.

Bleak economic conditions come as no surprise for Bay Area job seekers. "The job market is pretty tough," said Nyla Burt-Heeder, a Martinez resident who is seeking work as an administrative assistant in the medical industry. "It's fairly difficult to get the type of income that you want." Burt-Heeder has yet to get an interview. She's been looking since mid-January since she was laid off from her job at Contra Costa Regional Medical Center. Ryan McMillan, an Albany resident who has been seeking a job for three months, hasn't been able to find work as a cook despite plenty of experience in the kitchen. "I've been unemployed for about three months," McMillan said. "It's very difficult. You get a little worried when you can't find anything."

McMillan hopes he is closing in on a job in the culinary industry. It won't be as a cook, though. McMillan has an interview this week for a job to sell food products to high-end grocery stores. Why are job losses so much worse than first thought? It's due to the savage nature of a recession that has shredded jobs in California. "When you have a recession this severe, you can have a variation like this," said Wessen, the EDD economist. "The monthly payroll survey predicts the direction the economy is heading. But it often doesn't get the magnitude of the change."

The EDD's monthly estimates depend in part on the number of employers it believes exist in California at a given time. The recession has erased numerous companies. "Businesses went away and no longer existed that we originally thought were there," said Dennis Meyers, an economist with the state finance department. If the job erosion intensifies, that could force state officials to revamp estimates for economic growth — and the amount of cash expected to enrich state coffers. "It means the revenue stream is going to be that much lower," Roth, the finance chief economist, said. "The job base on which revenues depend is lower."

Some hopeful signs have emerged lately. A new report by IHS Global Insight predicts jobs in the state may grow 0.9 percent in 2010. "We are getting to the bottom of the job losses," Kemp, the Beacon economist, said. That doesn't mean things will be noticeably better any time soon. Employers may need to see six to 12 months of profit improvements before they resume hiring. "Being at the bottom doesn't necessarily feel good," Kemp said. "Things aren't getting better. They just aren't getting exponentially worse."

 15,000 San Francisco workers face layoffs, shorter weeks
More than 15,000 San Francisco city workers across all departments will receive layoff notices Friday, and most of them will have the option of being rehired to work a shorter week, Mayor Gavin Newsom said Tuesday. Newsom's controversial plan to help reduce the city's $522 million budget deficit for the 2010-11 fiscal year would shift the majority of the city's 26,000 workers from a 40-hour week to 37 1/2 hours, cutting their paychecks by 6.25 percent. The plan is expected to save $100 million - half in the city's general operating fund and half in money-generating departments including the port and airport - but is being decried by unions and some supervisors as a slap at the rank and file.

They also pointed to the mayor's inability to promise that the move would spare future layoffs. Newsom said not all workers who receive layoff notices Friday will be rehired but refused to specify how many that may be. The mayor insisted, though, that it's a smart way to spare several thousand layoffs and ensure that workers retain jobs as the city faces its biggest budget deficit. The move to a shortened workweek would not affect employees' health benefits, vacation or sick time.

"This is a pro-job alternative," Newsom said. "We can keep people employed and keep their health benefits." He announced the idea last month and said he was open to cost-saving alternatives from unions. But Tuesday, he said he didn't receive any and needed to move forward because his budget proposal is due to the board on June 1. "I have not gotten any better ideas, and so it is my intent to go forward this Friday," Newsom said.

Tim Paulson, executive director of the San Francisco Labor Council, said many city unions have joined to form a "public employees committee" to craft alternative cost-saving proposals, but declined to say what they were likely to include or when they'd be unveiled. "We're going to do the right thing because we care about the city," he said. "The mayor's cookie-cutter method is not going to work." The mayor's proposal would affect most job classifications including librarians, gardeners, secretaries, clerks, street cleaners, janitors and more. The vast majority would be rehired at the reduced schedule within 60 days and would continue working as normal in the meantime.

The plan wouldn't affect police officers, firefighters, deputy sheriffs, Muni operators or attorneys for a variety of reasons, including that some of those groups have mandatory staffing levels or work hours inscribed in their deals with the city. Newsom stressed those groups would be asked to take 6.25 percent wage cuts, though that would require agreements from those unions. Carlos Rivera, a spokesman for Service Employees International Union Local 1021, said union members are unlikely to see their actual workloads reduced - just their paychecks. "Cutting down the time doesn't eliminate the work," he said.

Newsom said he didn't have sympathy for workers who complained about their workloads. "Well, they have a job," he said. "Let's be adults. Let's deal with reality." He added that he won't accept city-run operations opening their doors to the public a half-hour later or closing a half-hour earlier and that he'll rely on managers to stagger workers' schedules instead. Newsom's plan doesn't need approval from the Board of Supervisors, but some members haven't shied away from publicly opposing the plan. Supervisor John Avalos, chairman of the board's budget committee, said the plan hits the city's lowest-paid workers.

"It is not something that is equitable," he said. "The people who are making more could give up more." Avalos suggested that the city look into declaring a fiscal emergency, which would allow city officials to make across-the-board wage reductions to preserve services and jobs.

Toledo mayor: I'll start laying off everybody
Toledo Mayor Mike Bell revealed last night at a citizens' forum his "backup plan" for closing the city's $48 million budget hole, should City Council fail to get onboard his current proposal: He'll start laying off everybody. "Depending on how large [the deficit] gets, the only thing left for us to do, after this, are major cuts in our staffing," Mr. Bell told an audience of more than 60 in the cafeteria at Waite High School. "And whatever number we don't have is how far we'll cut." The mayor added: "And everybody - everybody - is inclusive in those cuts."

Mayor Bell made the remarks near the start of what was the first of six planned public forums on his budget proposal, which contains a number of controversial ways to cut costs or generate revenue, including an 8 percent sports-and-event tax, a hike of the monthly trash fee to $15, forced concessions from city unions, and a plan to eliminate the income tax credit for Toledoans who work outside the city. In recent days, several councilmen and union leaders have expressed opposition to some of the revenue proposals in the mayor's plan. Yet a city budget must be approved by March 31, and Mr. Bell yesterday initially alluded but didn't describe his "backup plan" for putting one in place. He finally shared details of it when asked directly by a citizen in the audience.

"Nobody has heard it," the mayor had said. "There is a backup plan, but it's not as good as what we have in front of you. It's a little bit more painful in the way our city moves forward." But for several people at last night's meeting, the revenue generators in the current proposal looked plenty painful.

For Kathy Wiegand, 57, who lives on Nevada Street in East Toledo but works at an automotive supplier in Oregon, the most egregious of the bunch was the mayor's idea to eliminate the income tax credit that shields Toledoans who work outside the city from paying twice. Toledoans working in other places that withhold income taxes receive a 100 percent credit for taxes paid to those respective cities. That means they pay Toledo the difference, if any. But without that credit, those residents would pay Toledo's 2.25 percent tax in addition to the taxes withheld by the communities where they work. Ending the tax credit would affect about 19,200 Toledoans. "Do you want to know why I'm frustrated? Taxes, taxes, and more taxes is why I'm frustrated," Miss Wiegand said. "I'm ready to put my house up for sale and move the heck out."

The budget meeting's format was different from that of years past. Participants yesterday were divided into seven groups and asked to list their top ideas, complaints, or issues related to the budget. Members of each group then shared those ideas aloud with the councilmen and city administration officials in the room. The ideas are to be compiled and issued in a formal report to city leaders once the budget meeting series concludes. John Truby, 70, a retired shipping and receiving clerk who lives on 4th Street, said he was enraged that Mr. Bell would seek tax and fee hikes after he granted double-digit-percentage-point raises to some of his own top staff. The mayor's administration has defended those raises, saying the employees were entitled to them from promotions and because they are performing work once handled by several people.

"They give them those big raises right after the new mayor comes in … and the next week, they're talking about raising taxes," said Mr. Truby, who suggested firing the handful of people who got the big raises and hiring new staffers at half the salary levels. Mayor Bell, who had two prior engagements, left shortly after his opening remarks. Before departing, Mr. Bell suggested some of his budget-balancing measures would only be temporary. "A large portion of what we're talking about now is actually just a bridge for about 18 months or, say, maybe 24, because the city is going to turn itself around," Mr. Bell said, adding that he sees "some large job potential" for Toledo soon.

New York State's Budget Gap Grows 18% to as Much as $9.65 Billion
New York state’s spending gap has grown 18 percent to as much as $9.65 billion as tax collections fall short of projections made last month, state officials said. The $850 million reduction in tax revenue between now and the end of March 2011 comes as lawmakers grapple with an $8.2 billion deficit projection that the governor and comptroller said was too low because of unrealistic assumptions about other revenue sources. New York, the third-largest U.S. state by population, faces a cash shortage as taxes fell amid the worst economic slump since the 1930s.

"What you are looking at is a deficit in the range of $8.5 billion to $9.65 billion," said E.J. McMahon, director of the Albany-based Empire Center for New York State Policy, which assesses the state economy and finances. "The revenue consensus would bring Division of Budget’s deficit forecast up to $9 billion," said Matt Anderson, a budget spokesman. The forecast includes a $485 million "reserve for fiscal uncertainty," according to the amended budget. The state also has about $1.2 billion of other reserves. Governor David Paterson proposed a $135.2 billion budget for the year beginning April 1, or $79.3 billion excluding federal aid and capital spending.

The lower end of the range set by McMahon assumes the state collects money from sources that Paterson said yesterday were doubtful, agreeing with earlier statements by Comptroller Thomas DiNapoli. In addition to overestimated tax revenue, DiNapoli said the state might not collect a $300 million payment expected from developers of a gambling parlor at Aqueduct Racetrack, $200 million from the Battery Park City Authority and $250 million from a tax amnesty plan. Other doubtful aspects of Paterson’s budget plan include $250 million of still-to-be-negotiated savings in contracts with unionized state workers, McMahon said.

Clash Over 'Too Big to Fail'
There is no U.S. government guarantee to protect the largest financial firms, a Treasury Department official said, as a congressional watchdog criticized the $45 billion in government aid provided to Citigroup Inc. Herbert Allison, who oversees the Treasury's $700 billion financial-rescue plan, disagreed with members of a congressional oversight panel that some financial firms benefit from the assumption that the government would step in to prevent their failure. "There is no too-big-to-fail guarantee on the part of the U.S. government," Mr. Allison said.

Elizabeth Warren, who chairs the five-member Congressional Oversight Panel, said it was clear that financial markets do assume the guarantee exists, pointing to a recent ratings-company report that specifically noted the government's role in backing Citigroup. "The market clearly perceives that there is a too-big-to-fail guarantee," Ms. Warren said. "That gives Citi an advantage in raising capital. ... That is very valuable to Citi." Panel members locked horns with Mr. Allison over his reluctance to answer some questions, primarily regarding the health of Citigroup when the government injected capital into the bank in late 2008. Panel member Damon Silvers, pressing Mr. Allison on whether the bank was at risk of failure at the height of the financial crisis, said it was "extraordinary that it is not possible to have a straightforward conversation."

"I do not understand why it is that the United States government cannot admit what everyone in the world knows, which is that in that week that Citigroup was a failing institution," Mr. Silvers said. Mr. Allison did acknowledge that many banks, including Citigroup, "were on the brink of failure had the system had not been underpinned" by government actions. The U.S. government currently holds a $25 billion stake in Citigroup after the bank partially repaid the taxpayer assistance last year. Mr. Allison said the Treasury intends to dispose of its current investment in the bank "as rapidly" as possible over the next year. Pressed by the panel, he also said the U.S. government has no plans to invest any more money in the bank.

Citigroup Chief Executive Vikram Pandit, also appearing before the panel, said the bank owes a "large debt of gratitude" to taxpayers for aiding the firm. "Taxpayers still hold 27% of our common stock, and we look forward to helping them make money on that investment," Mr. Pandit said. Mr. Pandit echoed Mr. Allison, saying the bank has no plans to request more government funds. When asked whether the bank or any of its businesses are currently insolvent, he said "no." He said the company is currently "well capitalized" and would pass the government-ordered stress tests if they were run again today.

In response to panel questions, he also said that Citigroup's transaction-processing and trust business wasn't a factor in the government's rescue of the firm. The global transactions-services business helps move money around the world for big companies and governments, including the transfer of aid to foreign countries. Asked whether the unit came up during discussions when the Treasury was deciding about providing aid to the bank, Mr. Pandit said he didn't recall making such a statement to government officials. He also embraced some of the Obama administration's top regulatory overhaul proposals, including new protections for consumers and limits on banks' ability to engage in proprietary trading.

"Banks should not be speculating with banks' capital," Mr. Pandit said, reiterating that such trading is not a big part of Citigroup's business. On consumer protection, both Mr. Pandit and Ms. Warren separately acknowledged that many on Capitol Hill are moving away from the idea of a stand-alone agency. Mr. Pandit said the design of a new consumer protection entity "could be looked at in various ways," while Ms. Warren said the key is that a new consumer regulator can't have its decisions vetoed by other agencies. "The question is less about geography and more about whether it is genuinely independent," said Ms. Warren. "There is no point in building a battleship that was designed to sink."

Yen Lending Rate Indicates Stronger Dollar
The yen this week regained its status as the cheapest of the world's heavily traded currencies to borrow, a shift that could indicate a stronger U.S. dollar is down the road. A closely watched rate for borrowing Japanese yen—the yen's three-month benchmark London interbank offered rate, or Libor—fell below its U.S. dollar counterpart Thursday for the first time in six months. Libor is a key gauge of liquidity in short-term funding markets and a benchmark rate for short-term borrowing by companies and consumers. The yen had been cheaper to borrow than the dollar from May 1993 until 2009. The fall in dollar Libor rates late last year resulted in a prolonged greenback slump, as the dollar increasingly was used to fund trades into higher-yielding currencies.

That bout of dollar weakness ended in December as market players began betting that the U.S. Federal Reserve Board will raise interest rates later this year or in early 2011 as the U.S. economy recovers and fears rise that easy credit could lead to bubbles down the road. That contrasts with expectations that the Bank of Japan will keep its policy rate at ultra-low levels as it fights deflation in the world's second-largest economy. David Forrester, a forex strategist with Barclays Capital, said he expects the gap between dollar and yen rates to grow in coming months on differing rate-hike expectations. Also driving the gap wider is the close later this month of the Fed's asset purchase program, which has been an additional source of dollar liquidity since last year.

Mr. Forrester said those trends may boost the dollar against the yen, lifting it from current levels that are close to four-month lows. Barclays forecasts that the dollar will hit 95 yen at the end of June and 100 yen at the end of December. Midday Friday, the dollar was fetching 89.27 yen. "The dollar-yen is the most sensitive cross to interest rate movements at the moment," Mr. Forrester said. "We think the market hasn't yet priced in this situation." Yen Libor on Thursday dropped in London fixing to 0.25063%, its lowest level since mid-2006. At the same time, three-month dollar Libor rose to 0.25219%, moving above Yen Libor for the first time since Aug. 21.

Prices of Fed-funds futures also fell Thursday, indicating rising expectations among market participants that the U.S. central bank will hike its benchmark rate late in the year. The November fed-funds contract priced in a 70% chance that the Fed will lift the fed-funds rate to 0.5% from the current range of 0.0%-0.25% at its early November policy meeting. These expectations likely pushed dollar Libors higher Thursday, but the three-month rate remains close to the all-time low hit it in December at 0.24875%, and far from the 4.8% level it reached in October 2008, when interbank lending came to a standstill at the height of the global financial crisis.

Still, analysts say yen rates are bound to remain even lower, as investors fret over the possibility that the BOJ will pump more yen liquidity into the market to combat deflation. Earlier Friday, Japanese Finance Minister Naoto Kan said that both the Bank of Japan and the government must step up measures against deflation.

Why The Situation In Japan Is About To Get A Lot Worse
I'm hearing from my buddies in Japan that while things are already quite bad in that enchanting country, they are about to get a whole lot worse, and that it is time to start scaling into a major short in the yen. Australia and China have already raised interest rates, to be followed by the US, and eventually Europe. With its economy enfeebled, the prospects of Japan raising rates substantially is close to nil, meaning the yield spread between the yen and other currencies is about to widen big time.

That will generate hundreds of billions of dollars worth of yen selling as hedge funds rush to pile on a giant carry trade. Until now, the government has been able to finance ballooning budget deficits caused by two lost decades, but those days are coming to an end. Japan is quite literally running out of savers. The savings rate has dropped from 20% during my time there, to a spendthrift 3%, because real falling standards of living leave a lot less money for the piggy bank. The national debt has rocketed to 190% of GDP, and 100% when you net out government agencies buying each other's securities.

Japan has the world's worst demographic outlook. Unfunded pension liabilities are exploding. Other than once great cars and video games, what does Japan really have to offer the world these days, but a carry currency? Until now, the government has been able to cover up these problems with tatami mats, because almost all of the debt it issued has been sold to domestic institutions. Now that this pool is drying up, there is nowhere else to go but foreign investors.

With Greece and the rest of the PIIGS at the forefront, and awareness of sovereign risks heightening, this is going to be a much more discerning lot to deal with. You could dip your toe in the water here around ¥88.40. In a perfect world you could sell it as it double tops at the 85 level. My initial downside target is ¥105, and after that ¥120. If you're not set up to trade in the futures or the interbank market like the big hedge funds, then take a look at the leveraged short yen ETF, the (YCS). This is a home run if you can get in at the right price.

Fannie, Freddie Ask Banks to Eat Soured Mortgages
Fannie Mae and Freddie Mac may force lenders including Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. to buy back $21 billion of home loans this year as part of a crackdown on faulty mortgages. That’s the estimate of Oppenheimer & Co. analyst Chris Kotowski, who says U.S. banks could suffer losses of $7 billion this year when those loans are returned and get marked down to their true value. Fannie Mae and Freddie Mac, both controlled by the U.S. government, stuck the four biggest U.S. banks with losses of about $5 billion on buybacks in 2009, according to company filings made in the past two weeks.

The surge shows lenders are still paying the price for lax standards three years after mortgage markets collapsed under record defaults. Fannie Mae and Freddie Mac are looking for more faulty loans to return after suffering $202 billion of losses since 2007, and banks may have to go along, since the two U.S.- owned firms now buy at least 70 percent of new mortgages. "If you want to originate mortgages and keep that pipeline running, you have to deal with the push-backs," said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia, and former examiner for the Federal Reserve. "It doesn’t matter how much you hate Fannie and Freddie."

Freddie Mac forced lenders to buy back $4.1 billion of mortgages last year, almost triple the amount in 2008, according to a Feb. 26 filing. As of Dec. 31, Freddie Mac had another $4 billion outstanding loan-purchase demands that lenders had not met, according to the filing. Fannie Mae didn’t disclose the amount of its loan-repurchase demands. Both firms were seized by the government in 2008 to stave off their collapse. "We are trying to be good stewards of taxpayer dollars and as part of that, it’s important that those dollars not go to loans that should not have been sold to us in the first place," said Sharon McHale, a spokeswoman for McLean, Virginia-based Freddie Mac.

Terry Edwards, Fannie Mae’s executive vice president for credit portfolio management, said in an e-mailed statement that failure to send back the faulty loans "would undermine important tenets of the housing-finance system." The government’s efforts might be counterproductive, since the Treasury and Federal Reserve are trying to help banks heal, FBR’s Miller said. The banks have to buy back the loans at par, and then take an impairment, because borrowers usually have stopped paying and the price of the underlying home has plunged. JPMorgan said in a presentation last month that it loses about 50 cents on the dollar for every loan it has to buy back.

"It’s a fine line you’re walking, because the government’s trying to recapitalize the banks, not put them in bankruptcy, and then here’s Fannie and Freddie putting more pressure on the banks through these buybacks," FBR’s Miller said. "If it becomes too big of an issue, the banks are going to complain to Congress, and they’re going to stop it." Bank of America recorded a $1.9 billion "warranties expense" for past and future buybacks of loans that weren’t properly written, seven times the 2008 amount, the bank said in a Feb. 26 filing. A spokesman for Charlotte, North Carolina- based Bank of America, Scott Silvestri, declined to comment.

JPMorgan, based in New York, recorded $1.6 billion of costs in 2009 from repurchases, including $500 million of losses on repurchased loans and $1 billion to increase reserves for future losses, according to a Feb. 24 filing. "It’s become a very meaningful issue, and it will continue to be a meaningful issue for the next couple of years," Charlie Scharf, JPMorgan’s head of retail banking, said at a Feb. 26 investor conference. He declined to say when the repurchase demands might peak.

Barbara Desoer, head of Bank of America’s mortgage division, said at a Feb. 10 investor conference that the bank added staff to handle increased claims from Fannie Mae and Freddie Mac. "I can’t forecast the rates at which they’re going to continue," she said. Her division lost $3.84 billion last year, as the bank overall posted a $6.28 billion profit. "The volume is increasing." Wells Fargo, ranked No. 1 among U.S. home lenders last year, bought back $1.3 billion of loans in 2009, triple the year-earlier amount, according to a Feb. 26 filing. The San Francisco-based bank recorded $927 million of costs last year associated with repurchases and estimated future losses.

Citigroup increased its repurchase reserve sixfold to $482 million, because of increased "trends in requests by investors for loan-documentation packages to be reviewed," according to a Feb. 26 filing. "The request for loan documentation packages is an early indicator of a potential claim," New York-based Citigroup said. Banks that sell mortgages to Fannie Mae and Freddie Mac have to provide "representations and warranties" assuring that the loans conformed to the agencies’ standards. With more loans going bad, the agencies are demanding that banks turn over loan files, so they can scour the records for missing documentation, inaccurate data and fraud.

The most common include inflated appraisals or falsely stated incomes in the loan applications, said Larry Platt, a Washington-based partner at law firm K&L Gates LLP who specializes in mortgage-purchase agreements. The government agencies hire their own reviewers who go back and compare the appraisals with prices from historical home sales, he said. "They may do a drive-by for a visual inspection," he said. Wells Fargo said three-fourths of its repurchase requests came from Freddie Mac and Fannie Mae. While investors may demand repurchase at any time, most demands occur within three years of the loan date, Wells Fargo said.

The mortgage firms are looking at every loan more than 90 days past due and "asking us basically to give them all the documentation to show that it was properly underwritten," JPMorgan’s Scharf said. "We then go through a process with them that takes a period of time, and literally it’s every loan, loan-by-loan, and have the discussion on whether or not we actually should buy the loan back." So far, JPMorgan has succeeded in getting about half of its repurchase demands rescinded, Scharf said. Mortgage repurchases may crimp bank earnings through 2011, Oppenheimer’s Kotowski said. That’s because the worst mortgages -- those underwritten in 2007 -- are just now coming under the heaviest scrutiny, he said.

Freddie Mac’s McHale said 2009 mortgages were proving to be of better quality. "The worst of the stress is the 2007 vintages, though 2006 and 2005 weren’t a whole lot better and 2008 wasn’t much better," Kotowski said. Separately, House Financial Services Committee Chairman Barney Frank said Fannie Mae and Freddie Mac bondholders shouldn’t assume the government will make them whole on their investments as Congress retools the companies. "Please don’t think this is federally guaranteed, I don’t think it is, I don’t think it should be," Frank told reporters in Washington today. Congress will "certainly not" extend any new protections to bond and mortgage-security investors beyond what exists, Frank said.

Rep. Barney Frank questions safety of Fannie Mae, Freddie Mac investments
An influential voice on Capitol Hill has unexpectedly called into question the safety of investing in Fannie Mae and Freddie Mac, raising the specter that investors who have lent money to the two firms or bought their mortgage-backed securities could one day suffer losses. The comments by Rep. Barney Frank (D-Mass.), chairman of the House Financial Services Committee, come despite the assumption of many investors that investments in the two mortgage finance giants are risk-free. Until now, federal officials -- who took over Fannie and Freddie two years ago to save them from collapse -- have signaled to the market that lending the companies money is just about as safe as lending to the U.S. government itself.

"People who own Fannie and Freddie debt are not in the same legal position as [those who own] Treasury bonds, and I don't want them to be," Frank said in an interview Thursday. If investors believe that Fannie and Freddie carry some risk, they could demand a higher interest rate to lend them money or buy their mortgage-backed securities. This in turn could ripple across the entire U.S. housing market, prompting an increase in the mortgage rates that borrowers must pay. Frank's remarks came in the context of a discussion about possible ways the federal government could overhaul Fannie Mae and Freddie Mac, which have together received more than $100 billion in emergency federal aid to cover their losses. He said he "absolutely" would consider requiring investors in the two companies to take some losses themselves.

In restructuring the companies, Frank said he wants "to preserve the right to give people haircuts." He added, "I don't want to preclude that." Frank repeated his comments about potential investor losses on Friday morning while speaking with reporters at a conference in Washington. Fannie Mae and Freddie Mac use the proceeds of money raised from investors around the world to funnel cash to the housing market, providing a fresh supply of funds to make more home loans. Despite Fannie Mae and Freddie Mac's staggering financial losses, investors have been willing to loan the firms hundreds of billions of dollars -- and buy their mortgage securities -- because they believe the U.S. government will make them whole on any losses. That, in turn, has meant record-low interest rates on home loans, providing a buffer to a sagging housing market.

While the companies are not officially part of the U.S. government, they are controlled by federal overseers. And the Obama administration has gone to extraordinary lengths to assure investors around the world they will always be paid back, offering to provide unlimited financial assistance to Fannie Mae and Freddie Mac. Frank's comments come after some on Capitol Hill have called for Fannie Mae and Freddie Mac's books to be incorporated onto the federal budget. The companies have more than $5 trillion in outstanding liabilities, not much less than the U.S. government. But the Obama administration has rejected incorporating that debt into the federal books.

Frank said it's a fair debate but he opposes putting Fannie Mae and Freddie Mac debt on the federal books because he doesn't want to treat their debt as official U.S. government debt. "I don't think we should tell [investors] it's legally safe," he said. Frank said, however, the government might decide to pay back investors 100 cents on the dollar even if it has the legal right to make them suffer losses. "The fact is they have to do some of this to avoid loss of foreign investment," Frank said. "We may now decide to bail you out. . . . But that's different from being legally obligated."

Doubts about the safety of Fannie Mae and Freddie Mac led to a steep sell-off of the firms' stock in summer 2008, eventually leading to their seizure. The Treasury Department, which is largely responsible for ensuring that Fannie and Freddie can meet their financial obligations, released a statement Friday morning repeating a vow late last year to back the companies. "As we said in December, there should be no uncertainty about Treasury's commitment to support Fannie Mae and Freddie Mac as they continue to play a vital role in the housing market during this current crisis," the statement said.

2009 Sends Ominously Obvious Signals of Massive Risk in Real Estate Ownership
by Michael David White

We have just in the last year had the largest annual fall in real estate prices, hit the highest number of delinquent mortgages measured, witnessed a record 918,000 homes taken in foreclosure, and 11.3 million home owners now own negative-equity. Case Shiller prices fell a record 19.1 percent versus the previous year in Q1 2009. Mortgage delinquencies are at a record high 15.02 percent (Q4 2009) according to the Mortgage Bankers Association — meaning an estimated 8.4 million families do not pay their most important bill. RealtyTrac reported a record of over 900,000 foreclosure repossessions in 2009, and estimates a record 3 million homes will experience a foreclosure event this year.

First American counts 11.3 million homes with negative equity, and sees an additional 2.3 million homeowners on the edge of going overboard and under water. Every element — falling prices, mortgage delinquencies, repossessed homes, negative equity — they all hit records in 2009. Now look at the other side of the story and the radical opposite reaction in our real estate war-of-the-worlds.

Mortgage rates hit a record low in 2009 on Freddie’s index for a 30-year fixed rate and the average 4.9% in Q4 2009 is outstanding for affordability (please see the chart above). The Fed won with low rates what Robert Shiller called in the Wall Street Journal "the most dramatic turnaround" he has seen in home-prices since starting to watch them in 1987. The year-over-year loss in values shrank last year from a monster 19% in Q1 to a mousy 2.5% in Q4.
Fannie and Freddie now own the mother-of-all helocs. They can write themselves checks without consideration of their losses – an important fact given they will lose more money than anybody in the aftermath of the financial crisis.
Can the Fed and Fred and Fannie and Ben and Tim be beaten in their mission? Will they have the power to support current real estate prices even if only half of the bubble blow-up value has disappeared?

Only a fool fights the Fed. Yet the decline in unit sales in December 2009 of 16.2 percent was the largest ever and the decline in unit sales in January 2010 of 7.2 percent was the second largest ever and new home sales in January 2010 of 25,750 was the lowest on record. These record sales failures are not substantial except as a glimpse into a world without both free money for first time homebuyers and world-war-level government intervention to save a dying patient – the price of homes.

Distressed sales for January 2010 are 38% of the total. One of four purchases are paid for in cash. Truly radical in a country where to buy is to borrow. I look at the charts of unit sales above and see a market which cannot even stand in place. A twin train wreck of negative equity and mortgage delinquencies will collide with real estate prices. They deflate values. No one can predict the consequences. Strategic default will be a smart choice for many. Some will discover a home can be returned to the bank. Will the madness of equity-free crowds take arms against a sea of manic bubble prices?

If you want to refinance and the appraised value could be an issue, get your mortgage done now. This is especially true in the jumbo market. If you want to buy real estate, beware and be warned. Your financial massacre may follow your purchase. You cannot reasonably buy in this environment except with aggressive price negotiations, a close study of national and local price trends, intelligent courage, and your eye lids burned off by what you read here. Fools rush in where wise men fear to buy.

Marc Faber: Economic problems will worsen, spread, Greek bailout to fail

French debt coming under investor scrutiny
French debt looks set to come under pressure in the near future with investors battered by the Greek crisis arguing it is pricey and does not reflect France's growing indebtedness. As a result, other euro zone paper, including Germany's and -- perhaps surprisingly -- Italy's, could be in for a filip. The gist is not that France's economy is under any immediate Greece-like default stress, but the cost of its bonds -- and the cost of insuring them -- does not properly reflect what stress is actually there.

The French deficit is set to climb to 8.2 percent of gross domestic product this year, the highest for at least half a century. Its debt is projected to jump to 83.2 percent of GDP -- up 20 percentage points in just two years. "France has been lumped as a core euro zone economy. To our mind the budgetary situation is not as good as the pricing suggests," said Richard Batty, an investment director at Britain's Standard Life Investments. "It is being priced as though there isn't a budget problem," he said.

In it latest note, Batty's firm said it was being put off French debt because its fiscal problems and the true cost to euro zone economies of any bailout of peripheral economies are not fully priced in to its debt. This echoes the view of a number of other fund managers and bank analysts. Royal Bank of Canada, for example, has produced a "heat map" of sovereign risk, designed to gauge which of 21 developed global economies are under the most duress and why.

Despite being widely treated as a core euro zone economy, France ranked 6th out of the 21, coming in as less risky than only Ireland, Greece, Portugal, Britain and Italy. Its 10-year bond yield, however, offers a relatively tight spread of only around 30 basis points over benchmark German Bunds. The cost of insuring French debt through credit default swaps, meanwhile, is around 43,400 euros per 10 million euros of exposure, less than 10,000 euros more than for German debt and cheaper than The Netherlands, according to CMA DataVision.

All this is not just beginning to put off investors. It also has them looking to play what they expect will be a mispricing shift. Fortis Investments, for example, is considering trades to cash in on what it expects will be a widening of French bond yield spreads over German ones. Investment specialist Joost van Leenders says if the firm did make a move it would likely be through credit default swaps. French CDS costs would rise if investors began to treat France's economy as its numbers might suggest. In the meantime, other euro zone countries might end up the beneficiary of any French sell off.

One of those would probably be Germany, which, as core of the core, would attract investors averse to much risk. German yields have come in about 25 basis points year-to-date, already widening spreads with others. But investors have also begun to look at Italy for reasons that mirror their growing wariness about France -- to some, Italian bonds look cheap in relation to its economy. Italy's bond spread over Bunds is more than 80 basis points and its CDS cost 101,500 euros per 10 million euros of exposure, nearly 2-1/2 times that of France.

Some investors, however, are making the case that the market is being over-gloomy about Italy. In the same note that it criticized France, for example, Standard Life Investments, cited Italy for its potential attractiveness. The world's largest bond fund has also taken note. Andrew Bosomworth, executive vice president of PIMCO Europe, told Reuters that while there was a risk the French/German yield differential could increase, Italy appeared in better shape. "Italian spreads are a lot wider. But the Italian government has been a lot more vigilant in keeping their deficit down than France," he said. "You get a higher spread and a reasonably strict discipline being exercised." Not something you hear very often in relation to Italian economics.

Europe's Original Sin
Europeans are blaming financial transactions arranged by Wall Street for bringing Greece to the brink of needing a bailout. But a close look at the country's finances over the nearly 10 years since it adopted the euro shows not only that Greece was the principal author of its debt problems, but also that fellow European governments repeatedly turned a blind eye to its flouting of rules. Though the European Commission and the U.S. Federal Reserve are examining a controversial 2001 swap arranged with Goldman Sachs Group Inc., Greece's own budget moves, in clear breach of European Union rules, dwarfed the effect of such deals.

Predicaments of the sort Greece is facing—years of overspending, leaving bond investors worried the country can't pay back its debts—weren't supposed to happen in the euro zone. Early on, countries made a pact aimed at preventing a free-spending state from undermining the common currency. The pact required countries adopting the euro to limit annual budget deficits to 3% of gross domestic product, and total government debt to 60% of GDP. But an examination of budget reports to the EU shows Greece hasn't met the deficit rule in any year except 2006. It has never been within 30 percentage points of the debt ceiling.

Greece has revised its deficit figures, always upward, every year since 1997—often considerably. Several times, the final figure was quadruple what was first reported. Late last year, the Greek government set in motion its current crisis by increasing its 2009 budget-deficit estimate, initially 3.7% of GDP, to nearly 13% of GDP. Those revisions far exceed the impact of controversial derivative transactions Greece used to help mask the size of its debt and deficit numbers. The 2001 currency-swap deal arranged by Goldman trimmed Greece's deficit by about a 10th of a percentage point of GDP for that year. By comparison, Greece failed to book €1.6 billion ($2.2 billion) of military expenses in 2001—10 times what was saved with the swap, according to Eurostat, the EU's statistics authority.

The Greek problem has shown that EU financial institutions don't have enough teeth or expertise to rein in renegade member states, said Jean-Pierre Jouyet, chairman of France's stock-market watchdog and former chief of staff to a president of the European Commission, Jacques Delors. "We need new tools to manage these disequilibriums, because a pact without sanctions is not enough," said Mr. Jouyet. Constantine Papadopoulos, secretary-general for international economic affairs at the Greek foreign ministry, said Greece entered the euro zone legitimately. "The notion that Greece 'cheated' to get into the euro zone is one of those notions that has stuck in people's minds in Europe and, being the well-crafted piece of propaganda that it is, is extremely difficult to reverse," he said.

Mr. Papadopoulos, a member of the now-ruling Socialist party, said most of the revisions took place because an incoming New Democracy government in 2004 retrospectively revised the way it dealt with military spending. That, he said, had an impact on the recorded budget deficit for the past years of the Socialist government. But Eurostat deemed those revisions necessary, since Greece had "widely underestimated" its military spending. The Aegean country wasn't alone in breaking the euro zone's rules: A majority of other euro-zone members also failed to meet the debt and deficit requirements at least once over several years, the reports show.

The euro's launch, with 11 founding members in 1999 and Greece joining 18 months later, amounted to a deliberate political gesture by European leaders: Membership in the fledgling currency should be as broad as possible. Italy and Belgium were allowed in with the first group despite well exceeding the debt threshold—a decision that spurred some controversy. Bringing in Greece, the ancient "cradle of democracy," was symbolically important. In any case, by the late 1990s Greece was being billed as a great economic turnaround story and few eyebrows were raised.

Greece's current crisis—which has weakened the euro and sown concerns about the debt levels of some other European countries—shows Europe's political ambitions for a broad euro are clashing with economic realities. It also suggests Greece's economic success was partly a mirage created by misreported economic statistics. This is a consequence of a weakness that economists and historians say was built into the common currency at birth: the lack of a coordinated fiscal policy to go with monetary union. From the beginning, the euro has been replete with unresolved tensions, says David Marsh, author of "The Euro," a 2009 book chronicling the birth of the currency. The currency union was seen by some politicians as a way to pull the EU toward political union; others, mainly in Germany, emphasized the need for fiscal and monetary rectitude.

Once a country is in the currency, little can be done to a wayward member because the euro's architects built in no real means of enforcement. That's in part because of a compromise made in a 1996 European summit in Dublin that placed the decision whether to levy fines on errant governments with other EU governments. That was a victory for Jacques Chirac, then French president, over German Chancellor Helmut Kohl, who wanted the fines to be automatic. Since then no country has been fined.

Willem Buiter, chief economist at Citigroup and a former member of the Monetary Policy Committee of the Bank of England, described the 1996 agreement aimed at enforcing the debt and deficit rules as "a paper tiger." "It is ineffective, because for a while it created the illusion that there were sticks and carrots capable of changing the fiscal behavior of the member states, when in reality there were neither," he wrote in a new research report. The lax attitude to fiscal rules began early. Eager to get the euro in place in the late 1990s, EU leaders decided 1997 would be the key year. If everyone could meet the targets for that year, the currency could be launched.

The 60% debt goal was simply out of reach—Belgium, for instance, had debt equaling 131% of GDP in 1995. The countries agreed excess debt was acceptable, so long as it appeared to be shrinking. (The euro zone as a whole has never met the 60% debt limit.) Instead, Europe tried to stand firm on the annual deficits. That triggered a busy year of one-off boosts to government coffers. Countries sold mobile-phone spectrum licenses. France got a payment of more than €5 billion for assuming future pension obligations from the soon-to-be-privatized France Télécom. Germany tried, but failed, to revalue its gold reserves.

Buoyed by these maneuvers—and helped by the tech boom—11 of the 12 countries made the 3% goal for 1997. With much fanfare, the euro was born as the clock ticked from 1998 to 1999, though notes and coins didn't begin circulating for another three years. With much less fanfare, countries later revised their numbers: Of the original 11 entrants that qualified on the basis of their 1997 data, three—Spain, France and Portugal—later revised their 1997 deficit figures to above 3%. France's budget revision, to 3.3%, wasn't made until 2007.

Greece didn't make the first wave. Its 4.0% deficit in 1997 missed by too much. Even then, technocrats doubted Greek statistics. But in late 1999, eager to keep the euro zone on track, the EU overlooked those concerns. The figures for 1998 appeared better, and European governments agreed that Greece had met the fiscal goals. They cited a cut in its deficit to 2.5% of GDP in 1998 and a projection of 1.9% for 1999, and saluted Greece for reducing its debt. "The deficit was below the Treaty reference value in 1998 and is expected to remain so in 1999 and decline further in the medium term," the governments proclaimed in December 1999.

None of that turned out to be true. In March 2000, Eurostat said a new accounting standard pushed Greece's 1998 deficit up to 3.2%. Later, in a 2004 report, Eurostat added nearly €2 billion to the original 1998 deficit—largely because Greece had wrongly deemed subsidies to state entities as equity purchases, a device Portugal would later use. In the end, the 1998 figure stood at 4.3%, well above the euro-zone entry criterion. It got worse. Eurostat found that Greece barely recorded any expenditure on military equipment for years, routinely overestimated tax collections, didn't record hospital costs in the state health system and counted EU subsidies to private entities in Greece as government revenue.

In the face of an economic downturn, others joined the Greeks. France and Germany breached the deficit limit in 2002, 2003 and 2004, setting the example that even the bloc's economic powerhouses didn't have to play by the rules. In 2003, the Netherlands and Italy did too. "When Germany and France got into difficulty, there was not a strong reaction from the European Union," says Jean-Luc Dehaene, a former Belgian prime minister. Finance ministers decided on the response, and "they tend to make a political decision," he says.

Of the 12 early members of the euro, all but Belgium, Luxembourg and Finland have overrun the budget rule at least once. Finally, under political pressure, the norms were softened in 2005 to allow the deficit limit to be breached in an economic downturn. That was after the tragicomic tale of Greece's 2003 deficit. In March 2004, Greece reported that its 2003 deficit had been €2.6 billion, or 1.7% of GDP. Eurostat put in a footnote calling the figure "provisional," but it was still well below the euro-zone average of 2.7%.

Any Greek celebration was short-lived. Two months later, under pressure from Eurostat, Greece put out new figures. The 2003 deficit was now 3.2%, thanks in part to overestimated tax receipts and EU subsidies. Four months after that, it was up to 4.6%: Greece had failed to include some military expenses, overestimated a social-security surplus, and low-balled its interest expenses. Another revision in March 2005 kicked it up to 5.2%. Later that year, it became 5.7%. What had been reported 18 months earlier as an €2.6 billion deficit was now €8.8 billion. In short, says Vassilis Monastiriotis of the London School of Economics, Greece "failed to internalize the logic of the euro zone—which is fiscal discipline."

Fear and loathing as the hedge funds take on the euro
Gigantic bets against the euro have fuelled rumours of a hedge fund plot to cash in on the Greek crisis. Fears of a hedge fund "conspiracy" to destroy the euro gathered pace yesterday when the American authorities ordered some funds not to destroy records of their trading in the single currency. The move comes after the US Federal Reserve promised to probe claims that the use of credit derivatives by Goldman Sachs had, ironically, helped Greece enter the eurozone a decade ago. Although the latest Greek austerity plan helped to calm markets and nudged the euro higher against the dollar, traders warned that the euro's traumas were far from over. Indeed, it seems that the EU and the hedge funds are about to intensify their economic warfare, with the opening of a new front in America.

The US Department of Justice has asked a number of the hedge funds whose executives attended a dinner hosted by New York-based research and brokerage firm Monness, Crespi, Hardt & Co on 8 February, to preserve their trading histories. According to an agenda obtained by Bloomberg, those present discussed a number of "themes", including the chances of the euro falling against the dollar. Aaron Cowen, an executive at SAC Capital Advisors, David Einhorn, head of Greenlight Capital, and Don Morgan, who runs Brigade Capital Management LLC went to the dinner, as did a representative from Soros Fund Management. The presence of a Soros employee has set alarm bells ringing, as George Soros' formidable reputation as an investor – as well as a maker and breaker of currencies – goes before him. So far-reaching is his influence that any hint from him of negative sentiment towards an asset or currency can turn into a self- fulfilling prophecy.

While the meeting may have been no more than an exchange of ideas, with no commitments on any side, the presence of so many powerful American financial interests in one room discussing the euro will no doubt fuel the conspiracy theories currently swirling around the foreign exchange markets and in political circles. The Greek prime minister, George Papandreou, has condemned speculators with "ulterior motives" for making his country's difficulties worse and destabilising the euro. If the dinner meeting in New York was part of a concerted effort to move markets it might well break US anti-trust laws. Conversely, other hedge funds have said they have avoided euro denominated sovereign debt for fear of regulatory retaliation. The forces are massing. The value of the "bets" made by hedge funds and others against the European currency has reached more than $12bn – almost double the amount of a few weeks ago, suggesting that the pressure will persist. The number of credit default swap (CDS) contracts made to the same effect has also soared.

Many CDSs – in effect a means of insuring against the risk of default – have been taken out by those with no ownership of the underlying asset, such as Greek government bonds, in so called "naked" CDS trading. Very low interest rates provided by central banks have also made such bold currency plays more viable, as they reduce the cost of funding or "covering" them. For the moment though, the euro seems set to survive its Greek calamity. A swingeing programme of VAT rises and public sector wage cuts were widely rumoured to be the price Greece will have to pay for the long-mooted EU bailout of around €25bn. It should also clear the way for a successful €5bn bond issue at the end of the week. As was widely anticipated, Athens yesterday announced a further €4.8bn in fiscal consolidation, about 2 per cent of GDP, in the third package in three months. There will be a rise in VAT, further tax hikes on fuel, alcohol and tobacco, and more reductions in the public-sector wage bill.

This is in line with the demands European finance ministers have been making on their Greek counterpart. Yesterday's plan also had a positive effect on the cost of insuring Greek government debt, which fell back again. However, a further €20bn will need to be raised by Greece over April and May, and more explicit assurances that the other eurozone states will stand by Greece financially may be needed. The anticipation of a deal between Athens, Brussels and the two nations liable for much of the bill – France and Germany – was also heightened by the announcement that Mr Papandreou will meet Chancellor Merkel this Friday before seeing President Sarkozy on Sunday. By the time Mr Papandreou faces all his fellow EU leaders in Brussels on 16 March he should be able to demonstrate concrete progress towards his stated ambition of getting Greece's near 13 per cent of GDP budget deficit down to 9 per cent next year and back below the Lisbon Treaty limit of 3 per cent by 2012.

However, mutual suspicion and name-calling between the hedge funds and regulators on both sides of the Atlantic still threatens to escalate into something more serious. The EU's new Internal Market Commissioner, Michel Barnier, said this week that he would investigate short sales of the euro and the abuse of the credit default swaps market. He is currently supervising the Commission's latest directive to regulate the hedge fund industry, the alternative investment fund managers (AIFM) directive. This measure has the potential to kill the EU hedge fund business, which is 80 per cent concentrated in London. Clauses in the draft AIFM directive that require regulatory equivalence in territories where hedge funds usually domicile their money, such as the Cayman Islands or Jersey, would effectively end many hedge funds' life in the EU. And it is a substantial business. European hedge funds, predominantly in the UK, grew by 9.1 per cent in the second half of last year to reach $382bn, according to Hedge Fund Intelligence, part of a global wave of almost $2trillion, more than enough to move certain assets or currencies, especially if leveraged with cheap central bank money.

Lord Turner, the chairman of the Financial Services Authority said on Tuesday he backed an investigation into short speculative positions. He said: "It may be that even if you banned it, it wouldn't make a big difference, but there are questions as to whether you should be allowed to take out an insurance contract where you don't have an insurable interest." The French Finance Minister, Christine Lagarde, has said she wants the EU to take a united approach against "speculators" betting on CDSs, and the German Finance Ministry has also called for review of "over-the-counter" products such as CDSs, which are not traded on any central exchange and, arguably, lack transparency. Such sabre rattling is yielding results. Some hedge funds, including Brevan Howard and Moore Capital, have avoided euro-denominated sovereign debt because of the threat of a "regulatory squeeze", though they may continue to take a position against the euro itself.

Brevan Howard, Europe's largest hedge fund, with $27bn of assets under management, has said the short trade in eurozone government bonds was "extended, crowded, fully pricing the fundamentals", and indeed the CDS spreads for Greek paper have been narrowing markedly in recent weeks. The firm added that the hedge funds were facing the same sort of pressure over short-selling activity that they did at the peak of the crisis on 2008, when they were banned temporarily in some places from going short on bank shares, something that had little long-term effect on the fate of the banks. In the war between the hedgies and the authorities, many observers believe that Spain, rather than Greece, will prove the decisive battle ground. As Spain's economy is so much larger than that of Greece, a bailout would be far more difficult to fund even for the zones largest economy Germany, where political resistance to further rescues may be insurmountable.

In the long term, the resolution of this struggle may be political rather than economic. Mr Papandreou has suggested speculation against individual nations would be rendered impossible if sovereign debt was issued by a European Treasury on behalf of all states, just as the US Treasury does. President Sarkozy has also spoken enthusiastically and often about the need for "European economic governance". But a pooling of budget and Treasury functions across the zone would remove the last defences of German fiscal prudence: the others have gone. The Maastricht criteria, transferred to the Lisbon Treaty, limited budget deficits, national debt levels and outlawed cross-border bailouts; All have been, or may shortly be, swept away by the financial storm. The hedge funds are, in part, betting that the German government, or its people, will prefer to preserve their treasured economic security rather than the cherished political project of European unity. As so often during momentous episodes in European history, it all depends on Berlin.

The involvement of George Soros in the euro crisis has revived uncomfortable memories of the success – and profits – he enjoyed by betting against the pound during the ERM crisis of 1992. "The man who broke the Bank of England", he was soon dubbed, and he reputedly made $1bn from his activities then; the concern is that he will now break the euro. The influence of the Hungarian-American currency speculator, stock investor and philanthropist is such that he attracts many followers, and his bets can thus become self-fulfilling through "momentum trading". Even if he does not actually destroy the eurozone, he will leave it badly mauled.

The auguries are not good. At the Davos World Economic Forum in January, Mr Soros declared that he thought the euro "may not survive". And if there is one theme in his long career it is that he enjoys making one way bets on economic inevitabilities; often the certainty that a fundamentally weak currency will have to leave a fixed exchange rate system (as with the pound in 1992). By the spring of 1992, it was becoming clear that Britain was a part of the European Exchange Rate Mechanism at the wrong rate. It was overvalued compared to the German currency, and we were increasingly uncompetitive. The only way it could be sustained was for British interest rates to be kept far too high for UK domestic conditions (though that did hammer inflation out of the system). The pain the ERM was causing, unnecessarily, to the British economy, was becoming unbearable. Soros spotted his chance.

In retrospect, he followed what was an obvious strategy. In this case, he borrowed around £6bn and converted it to German marks at the fixed rate, shorting his sterling position. It was almost a one way bet. If sterling collapsed he would hit the jackpot. He hit the jackpot. A £350m side bet on equities rising after the devaluation was a bonus. The Tory government led by John Major was humiliated for its economic incompetence, and was left out of contention for two decades. The political advisor to the then chancellor, Norman Lamont, was a certain David Cameron. One can guess the lessons he learned from the experience. Almost 80 now, Mr Soros has been a pantomime villain ever since, but he perhaps did the UK a favour. "Black Wednesday", 16 September 1992, heralded a savage depreciation of sterling followed by a long period of sustained low inflation and export-led growth. The Greeks could do a lot worse.

Britain Grapples With Debt of Greek Proportions
As Greece’s debt troubles batter the euro, Britain has done its utmost to stay above the fray. Until now, that is. Suddenly, investors are asking if Britain may soon face its own sovereign debt crisis if the government fails to slash its growing budget deficits quickly enough to escape the contagious fears of financial markets. The pound fell to $1.4954 on Tuesday, its lowest level against the dollar in nearly 10 months. The yield on 10-year government bonds, known as gilts, slid as investors fretted that Parliament would be too fragmented after a crucial election in May to whip Britain’s messy finances back into shape.

The slide in the pound followed a sharper decline on Monday after polls released over the weekend indicated that the opposition Conservatives had lost their clear lead in the election race. Without a strong political majority to tackle Britain’s lumbering fiscal problems, investors could start to make it greatly more expensive for the government to raise funds, setting the stage for a potential double-dip recession, if not worse. "If you really want a fiscal problem, look at the U.K.," said Mark Schofield, a fixed-income strategist at Citigroup. "In Europe, the average deficit is about 6 percent of G.D.P. and in the U.K. it’s 12 percent. It is only just beginning."

Since the Labour government’s intense fiscal intervention in 2008 and 2009, yields on British government debt have soared to among the highest in Europe. And on a broader scale, which includes the borrowing of households and companies, the overall level of debt in Britain is the second-largest in the world, after Japan’s, at 380 percent of the country’s gross domestic product, according to a recent report by the consulting company McKinsey. In recent weeks, the focus has been on debt scofflaws in Europe like Greece, Portugal and Spain, countries where borrowing costs have shot up in line with their growing deficits as investors demanded higher rates to compensate them for the added risk of lending the governments money.

But the recent plunge in the value of the pound below $1.50 and the gradual move upward of Britain’s benchmark 10-year borrowing rate on gilts to above 4 percent suggest that investors are now getting ready to reassess the country’s fiscal condition. Britain is not in the 16-nation euro zone and, unlike Greece and other struggling countries that use the currency, it retains control over its monetary policy. As a result, it has benefited so far from a huge bond-buying program undertaken by the Bank of England — proportionally, the largest in the world — that has kept mortgage rates and gilt yields at unusually low levels.

That means the government and its citizens have been able to continue to borrow at interest rates that do not reflect their true financial situation. Indeed, the increase in private and government debt here contrasts sharply with the deleveraging that has been going on in the United States. British household debt is now 170 percent of overall annual income, compared with 130 percent in the United States. In an echo of the United States’ rush into subprime mortgages with low teaser rates, millions of homeowners in Britain have piled into variable-rate mortgages that are linked to the rock-bottom base rate.

As for the British government, it has been able to finance a budget deficit of 12.5 percent of G.D.P. — equal to Greece’s — at an interest rate more than two full percentage points lower only because the Bank of England bought the majority of the bonds it issued last year. "It’s not just ‘basket cases’ like Greece that can be considered candidates for sovereign crises," said Simon White of Variant Perception, a research house in London that caters to hedge funds and wealthy individuals. "Gilts and sterling will continue to come under pressure as scrutiny of the U.K. fiscal situation intensifies."

Adding to this concern is the precarious condition of the British consumer. As interest rates have hit new lows, the popularity of variable-rate loans has grown. At the end of December, 40 percent of new mortgages were tracking the government’s base rate. Despite comments from Mervyn King, the governor of the Bank of England, that he might restart his quantitative easing program in light of current economic weakness, the view among investors is growing that interest rates here will rise further, along with higher inflation and Britain’s increased risk profile.

In a speech this year, Andrew Haldane, the executive director of financial stability at the Bank of England, warned about how vulnerable Britain was to a rate increase, pointing out that an increase of one percentage point would cause debt service costs relative to income to double, to 13 percent. "This is a ticking time bomb," said Nick Hopkinson of Property Portfolio Rescue, a company that assists overleveraged homeowners. "There are over 400,000 people who are in arrears with their mortgage rates the cheapest they have ever been. When rates increase, a lot of people will be tipped over the edge."

As a result, those counting on the British consumer to take up the slack from any scaling back of government borrowing could be in for a shock. Consider Sheridan King, a sales manager who is struggling to pay off his £32,000 ($47,075) in nonmortgage debt. Far from thinking about going shopping, his first priority is keeping clear of his creditors. And even though his variable mortgage of about £100,000 carries a very low rate, interest costs are already chewing up a substantial portion of his pay, and he is deeply worried about the future. "If rates go up, it will be a very dangerous situation for me," Mr. King said. "It might lead me to consider bankruptcy."

For the time being, at least, the British government faces no such threat. Despite its borrowing and spending excesses, Britain still maintains a triple-A credit rating and much of its debt is long term. But with 29 percent of British bonds held by foreigners, Britain, like Greece, remains highly vulnerable to the vicissitudes of outside investors. Since early this year, foreign holdings of British bonds have fallen from 35 percent, a trend that has tracked the pound’s decline and contributed to the increase in the yield on its 10-year gilts. As to which political party he thinks is best placed to handle these challenges, Mr. King takes a skeptical view. "We are just struggling to get by with all this debt," he said. "It’s time the government got its house in order."

How Safe Is Britain's Proud Pound?
First the euro, now the pound. Britain's currency is coming under massive pressure as speculators bet that the UK's national debt will soon get out of hand. Like Athens, London has its share of problems -- and the Brits don't have any euro zone partners to back them up. Schadenfreude may be a German word, but it has never been a foreign concept in Great Britain -- particularly in recent months as the British watch the trials and tribulations of the European common currency, the euro. The budgetary and debt problems facing Greece, Portugal, Italy, Ireland and Spain have merely reinforced their conviction that staying out of the euro zone was the right decision. Unlike Berlin, London is not under pressure to come to the aid of Athens.

But speculators have not just taken aim at the euro in recent days. The British pound, too, has become a favored target -- showing Brits how vulnerable their own currency may actually be. At the beginning of the week, the pound slid to a 10-month low of just $1.4781. Since then, the pound has staged a mini-recovery, moving back above $1.50 on Wednesday. But market pressure on the British currency is not likely to disappear overnight. The most immediate trigger for the recent currency swoon came in the form of political surveys which indicated that a Conservative victory in general elections (which will likely be held in early May) may not be a foregone conclusion. Markets were alarmed out of fear that a close election could make it difficult for parliament to pass a strict package of savings measures.

Such political concerns are temporary. Given the British electoral system, a Conservative victory remains likely -- nor is it clear that a minority government would be unable to cap spending. More permanent, however, are the fundamental economic indicators that are becoming the pound's Achilles heels -- debt and budgetary problems that have fuelled the British currency's downward trend since October 2008. The problems start with the size of the country's budget deficit. With a budget deficit of 13 percent of GDP this year -- Greece's is 12.7 percent -- Britain is by far the deficit champion of the G-20 states. Britain has so far avoided an Athens-style crisis primarily by virtue of the fact that its economy is much more flexible and competitive than Greece's. Furthermore, most still believe that the country is capable of shrinking its debt without outside help. Also, unlike Greece, which is facing the need to immediately refinance €20 billion in debt, most British debt won't come due until 14 years from now.

But international financiers are beginning to lose their patience. Since the beginning of the year, the share of foreign investors in British bonds has dropped from 35 percent to 29 percent. Returns on 10-year bonds, one measure of the risk associated with them, have climbed to above 4 percent -- almost a percentage point above the German benchmark. The number of short positions on the Chicago Mercantile Exchange betting on a further loss of pound value has spiked upwards recently. The numbers reflect the market's growing skepticism. In recent months, the British have proudly pointed out the advantages of having their own currency in the midst of the crisis. Through the devaluation of the pound, exports have been made cheaper and investments in the country more attractive. The domestic economy has profited, too. Growth of around 1 percent is predicted for the first quarter of 2010 -- the first since 2008.

It has also enabled the Bank of England to intervene in grand style, holding down interest rates so that money is available cheaply to both the government and consumers. Attractive mortgage interest rates have also helped to revive the real estate market, which has in turn buoyed the general mood of the British. The downside of these monetary policies, though, is that they conceal the true scope of the crisis. The most recent bonds issued by the British government were fully subscribed because the Bank of England purchased the majority of them. That may enable the government to finance its deficit under favorable conditions, but the move risks jeopardizing the trust of the markets.

Mass consumer debt in Britain is whitewashed in a similar manner. With an average personal debt of 170 percent of annual income, British households are even further indebted than the Americans. And interest rates kept artificially low by the Bank of England are still feeding this bubble. Sooner or later, a rise in interest rates is inevitable -- at which point domestic demand could take a nose dive. If Britain had joined the euro zone when it was established, at least some of these excesses could have been prevented. The fiscal policy guidelines of the common currency would have ensured that. The average annual deficit of the euro-zone countries is currently only 6 percent. Great Britain also could have hid behind the reputation of more solid euro-zone members, just as the Greeks are now doing. As a relatively small country with its own currency, however, Britain is more vulnerable.

But in Britain, the opinion still prevails that the country is better off staying alone. Hope for a upswing is being nourished by a series of positive economic indicators. On Wednesday, the Markit Service Index, which measures the mood of British service providers, rose to its highest level in two years. It also helped to rally the pound again. Still, the currency remains weak. And though it is unlikely at this point that the rating agencies will downgrade Britain's creditworthiness, the possibility cannot be ruled out. In May 2009, Standard and Poor's cut its view of British bonds from stable to "outlook negative." If Britain were to actually lose its AAA rating, it could have disastrous consequences for the pound. And there would be no holding the speculators back.

There are reasons to be cheerful about UK gilts
by Gillian Tett

This week Greece's fiscal drama has been in the spotlight again, as Athens tried to stave off a crisis with budget cuts and a €5bn ($6.8bn) bond sale But at some hedge funds, there is another country whose bond market is now generating intense debate - Britain To be sure, there have been no true dramas in the gilt markets yet. On the contrary, in recent weeks, sterling government bond prices have remained relatively - and surprisingly - calm, even though the Bank of England has recently stopped buying gilts and the fiscal data look alarming. Yesterday, for example, the 10-year gilt yield barely moved at 4.02 per cent, even though the Bank maintained the suspension of its programme of gilt purchase.

Nevertheless, beneath the surface, tensions are rising in London - at least in the mind of many investors. Six weeks ago, Bill Gross of Pimco dubbed the gilt market a bed of "nitroglycerine", and warned that Britain's "high debt" and "the potential to devalue its currency" meant that investors should keep away. Last week Schroders, the UK fund management group, warned that the UK was "fast heading towards [ratings] downgrade territory", due to its fiscal mess. And there are numerous scary numbers which are now being bandied about at investor conferences. Most notably, the UK's budget deficit is currently running at about 12 per cent of gross domestic product, a level not dissimilar to that of Greece. Meanwhile gross public sector debt is projected to head towards 100 per cent of GDP in the coming years (or more if you include private finance initiatives).

Perhaps most worrying of all, British opinion polls currently suggest that this year's election may produce a hung parliament - which could undercut the ability of any government to tackle this debt. "The fiscal position and the politics are scary," says one hedge fund guru, who predicts that the "UK could make Greece seem like a sideshow." Is this fair? In some respects, perhaps. After all, the UK has made numerous policy errors in recent years and the political situation now does appear depressing. Given that, further sterling falls seem likely. Nevertheless, before investors get too gloomy, there is one number they would do well to note - particularly since it is something which has been almost entirely ignored in recent years.

This relates to the average maturity of UK government debt, or the frequency with which it needs to be refinanced. In most European countries, the average maturity of debt currently lies between five and nine years. In Greece, for example, it is almost eight years, while in Germany it is six years. Meanwhile, in the US, the number is actually below five years, leaving Washington staring at one of the biggest rollover challenges in the world. However, the UK is a stark outlier: the average maturity of the gilt market is currently 14 years, longer than almost anywhere else in the world.

In part, this reflects sheer dumb luck. Most notably, the British government is fortunate enough to have a large domestic pension industry which needs long-term sterling assets to match liabilities, and thus has hitherto been eager to buy long-term gilts. However, policy has also played a part. Over in America, Treasury officials have devoted relatively little attention to debt management in recent years, since they have hitherto found it easy to sell bonds. The UK, by contrast, has had the International Monetary Fund at its gates within the memory of senior government officials. As a result, top officials in the Bank of England and Treasury have always been fairly focused on debt management. Most notably, they have deliberately pushed to lengthen the maturity of UK debt in recent years. They have also introduced other innovations such as index-linked bonds.

And while those policies often appeared unnecessary during the credit boom, the UK bureaucrats kept quietly issuing long-term debt in the last decade (including even 50-year gilts), driven by a hunch - or memory - that this could eventually turn out to be prudent. Now, this pattern does not guarantee that the UK will avoid a crisis. The country will still need to flog some £550bn of new bonds in the next three years. That could be challenging, unless the Bank steps in again to buy more gilts.

But, if nothing else, the UK's unusually long maturity profile does offer a bit of breathing space; or, to put it another way, if the UK had the same debt profile as America right now, its predicament would be dramatically worse. So perhaps the biggest moral is that when it comes to formulating sensible policy, it sometimes pays to have suffered a recent crisis - in relation to government bond sales, as with anything else. American Treasury officials take note.

Bailout 'will cause revolution on Irish streets'
The Government was warned last night of a "revolution on the streets" if billions more of taxpayers' money is put into Anglo Irish Bank. But Finance Minister Brian Lenihan said decisions on recapitalisation will "have to take place soon" because the transfer of loans to NAMA is about to happen. Mr Lenihan again indicated that the Government will take further shares in the banks in return for additional investment. "If the taxpayer puts more money in, they will own the banks," he said. The minister said the setting up of NAMA was already having an impact on the banking sector. He said the results from Allied Irish Banks came as no surprise given the crisis that has hit our banking sector.

"But the results do show that NAMA is forcing the banks finally to face up to the reality of their bad loans. The banks engaged in excessive lending to the speculative property development. "NAMA is making the banks take the losses on these property loans up front. That is borne out by the large losses that AIB is reporting today," he said. But Fine Gael leader Enda Kenny warned of a revolution if there was more money put into Anglo Irish Bank, which he described as a "dead bank, which will not lend any more money".

"I put it to you, Taoiseach, there will be revolution on the streets if you do that. Whatever case can be made for AIB, there can be no case made for giving €6bn more of taxpayers' money to Anglo Irish Bank." Mr Cowen said: "We stand ready, if necessary, to provide recapitalisation to the banks."

Germany Snubs Greek Aid Plea as Protest Snarls Athens Traffic
Greece’s pledge to deepen planned budget-deficit cuts failed to yield an offer of assistance from Germany, Europe’s biggest economy, as protesters in Athens seized the finance ministry building and blocked roads in the city center. German Chancellor Angela Merkel said a meeting tomorrow with Greek Prime Minister George Papandreou won’t be "about aid commitments." Her finance minister, Wolfgang Schaeuble, said the third round of deficit-reduction measures this year were probably enough to convince investors to buy Greek debt.

While Papandreou is risking a backlash at home to meet European Union demands for more deficit cuts before allies even consider providing aid, Merkel is facing domestic opposition to tapping taxpayers to extend a financial lifeline to Greece. "There would be no understanding in Germany for bailing out Greece," Henrik Enderlein, a political economist at the Hertie School of Governance in Berlin, said by phone. "It’s a bit of catch-22 situation: if you give in to Greece and you put 5 billion or perhaps even 10 billion into some kind of rescue package or into some guarantees, then the German government would look irresponsible. However, if it doesn’t, then European Union leaders might put a lot of pressure on Merkel and say, look, we have to bail out Greece."

In Athens, about 200 members of the PAME union, aligned with the Communist Party, were reported at the finance ministry and protesters also took over the nearby General Accounting Office, according to a police spokeswoman. Another group blocked a central road, snarling traffic. The demonstrations followed the Cabinet’s backing yesterday of 4.8 billion euros ($6.6 billion) of cuts, Papandreou’s statement that said Greece was prepared to turn to the International Monetary Fund as a last resort. "We have fulfilled to the utmost all that we must from our side; now it’s Europe’s turn," Papandreou told his ministers yesterday, according to an e-mailed transcript. "It is a historic moment for the European Union."

Greek bonds rose to their highest in three weeks after the Cabinet endorsed a package of revenue-raising and budget-cutting steps, including higher fuel, tobacco and sales taxes and a cut of 30 percent in three bonus payments to civil servants on top of a wage and benefits freeze. The measures are "convincing," the European Central Bank said in a statement. The ECB appreciates the Greek government’s recognition of the need to "rapidly adopt and implement decisive structural reforms."

The euro dropped to $1.3662 as of 8:22 a.m. in Berlin from $1.3697 in New York yesterday, when it climbed to $1.3736, the strongest since Feb. 17. The premium investors demand to buy Greek government debt over comparable German bonds, the European benchmark, slid 2 basis points to 2.84 percentage points, extending yesterday 19 basis point drop. The Greek announcement "is as much about giving other EU governments more political capital in the event that they do eventually need to provide liquidity to Greece," said Gary Jenkins, head of credit research at Evolution Securities Ltd. in London. "They can make the claim to their own taxpayers that Greece has taken further measures as suggested by the EU." For now, none of the potential lenders has stepped up since a statement at a Feb. 11 EU summit promised "determined and coordinated action" to support Greece.

"There’s no need for such a thing at this point in time," French Finance Minister Christine Lagarde said late yesterday on Sky television. "If it was required, the partners in the club would be available to restore stability." After meeting Merkel in Berlin, the Greek leader is due in Paris two days later for talks with French President Nicolas Sarkozy. While Greece is pressing EU leaders to help cover the bloc’s largest budget deficit, Merkel’s comments were the clearest signal yet that Germany isn’t convinced. "I expressly want to say that Friday isn’t about aid commitments, but about good relations between Germany and Greece," Merkel said yesterday in an interview with N-TV, according to a transcript provided by her office. Greece’s steps are "an important signal" toward restoring confidence in the euro.

Greece faces more than 20 billion euros in debt redemptions in April and May. The EU is devising a plan to grant Greece about 25 billion euros in emergency aid should the need arise, German lawmakers have said, enough to cover the maturing debt. One option could involve using state-owned lenders such as Germany’s KfW Group to buy its bonds. Greece has pledged to trim a deficit of 12.7 percent of gross domestic product to 8.7 percent this year. Concern that Greece won’t be able to tame the shortfall saw the euro lose almost 5 percent against the dollar this year.

Greece has blamed market speculators for fueling the decline in its securities. European officials have warned hedge funds that they shouldn’t try to profit from the woes of the region’s nations. U.S. authorities have told some hedge funds not to destroy trading records on euro bets, according to a person with knowledge of the requests. Banks and regulators across Europe were summoned by the European Commission to discuss regulation of the market for sovereign credit-default swaps in the wake of the Greek debt crisis.

Greek Protests Mount as Parliament Passes Budget Cuts
Striking Greek workers shut down transport and tried to storm parliament as lawmakers passed 4.8 billion euros ($6.5 billion) in budget cuts, including wage reductions, needed to trim the region’s biggest budget deficit. Police with riot shields fired tear gas as demonstrators wearing biker helmets and gas masks pelted them with stones outside parliament in Athens where lawmakers approved the measures. Finance Minister George Papaconstantinou told parliament the cuts will show European Union allies and investors that Greece is making good on its deficit pledges.

"We didn’t create this crisis but now we have to pay for it," said Manthos Adamakis, who was protesting with other catering workers outside the five-star Grande Bretagne Hotel on Syntagma Square in downtown Athens. Tram, rail, subway and bus services shut in Athens and other cities as employees rallied against cuts to bonuses and holiday payments. A walk out by air-traffic controllers forced the cancellation of all 58 flights to and from Athens International Airport between midday and 4 p.m. and the rescheduling of another 135, according to a spokeswoman.

Papaconstantinou said European allies should now act to pledge aid should Greece need help financing its growing debt. "Obviously, the EU must undertake responsibility, which it hasn’t done yet," he told lawmakers. EU nations are working on a contingency rescue plan for Greece to be funded by European governments, according to two people briefed yesterday in Berlin by an EU official. Yannis Panagopoulos, the head of GSEE, Greece’ largest union, received first aid after being attacked by protesters at the rally outside parliament. GSEE called a 24-hour strike for March 11 and state employees won’t work for one day next week.

Yesterday, the PAME union, aligned to the Communist Party of Greece, took over the Finance Ministry building and the General Accounting Office. EU officials have praised the budget package announced this week and Greek bonds gained. German Chancellor Angela Merkel, who is due to meet Prime Minister George Papandreou in Berlin later today, told reporters in Munich that the Greek measures are a "courageous step" that’s already yielding results.

"Opinion polls show that a very large majority of Greeks understand that this in the interest of the country," European Central Bank President Jean-Claude Trichet said today in an interview with Belgium’s RTBF radio. "It’s normal that there are demonstrations when decisions are taken. What counts is the main interest of the country." Most Greeks oppose plans to cut wages and increase value- added tax, according to the first opinion poll published since the austerity moves were announced on March 3. Seventy-two percent of 530 people surveyed by Public Issue for Skai Television said they disagreed with a drop in bonus- vacation payments, while 68 percent opposed a value-added tax increase. Sixty-two percent said Greece will see social unrest in the next year, according to the poll broadcast yesterday.

The additional budget cuts aim to save 1.7 billion euros through a 30 percent reduction to three bonus-salary payments to civil servants, a 7 percent overall decrease in wages at wider public-sector companies and a pension freeze. The reductions are accompanied by an increase to 21 percent from 19 percent in the main VAT tax as well as in alcohol and tobacco duties. Teachers are also striking, closing some schools, and workers at the Public Power Corp SA, the country’s biggest electricity company and controlled by the state, have also called a 24-hour strike today. ADEDY, which has already held two 24-hour strikes this year after the government backtracked on pledges to grant civil servants a wage increase, is considering holding another 24-hour strike next week.

Greece must make £4.4bn cuts before EU bail-out
Greece will be offered a European Union bail-out in return for delivering an extra €4.8bn (£4.4bn) of austerity measures to deal with its debt crisis that has threatened the euro and unsettled financial markets. A blueprint to help Greece and to protect the "financial stability of the euro area as a whole" will be discussed in the run up to a meeting of EU finance ministers on March 16 and is expected to be agreed before an economic summit of Europe’s leaders 10 days later. However, Greece has indicated that it could be prepared to go to the International Monetary Fund for support if a deal is not agreed. News that the EU will step in to rescue the country saw the euro rise against the dollar after the announcement to about $1.37, after it had fallen to $1.34 on Tuesday, which was the lowest level since May 2009.

The "additional" Greek austerity measures were drawn up after weeks of negotiations between Brussels, Frankfurt and Athens, following intense pressure from Germany on Greece to step up its debt reduction efforts before it could count on any EU support. Officials, from both the European Commission in Brussels and Central Bank in Frankfurt, told Greece that its first austerity package amounted to only half of the required 4pc cut to the Greek annual budget deficit of 12.7pc. The new cuts, effectively dictated by the EU before they were announced by the Greek government yesterday , amount to the missing two percentage points needed to bring Greece back into line with eurozone budget deficit rules.

George Papandreou, the Greek Prime Minister, made it clear, as he told his countrymen of new tax rises and pension cuts, that the trade off would be an EU deal offering Greece some respite from volatile sovereign debt markets. "We are now justifiably expecting EU solidarity. That is the other side of this agreement. So Europe faces a historic responsibility," he said. Tomorrow, Mr Papandreou is due to hold talks with Angela Merkel, the German Chancellor, in Berlin to finalise the terms of EU support for Greece, or any other struggling country. He is also expected to meet Nicolas Sarkozy, the French President, in Paris over the weekend.

José Manuel Barroso, the Commission president, confirmed that following the new cuts, "solidarity" with Greece – EU code for financial support – was back on the agenda. "Greece’s ambitious programme to correct its fiscal imbalances is now on track. Regarding the overall issue of solidarity with Greece, Greece can count on this," he said. Greece is the first country in 11 years of European monetary union to need a pledge of EU support after concern over its profligate spending levels caused market turbulence that damaged the euro and lifted Greek bond yields, making debt servicing even more difficult for Athens. The crisis has also threatened to tear the euro apart after market jitters spread to take in other highly indebted eurozone countries, such as Spain and Portugal.

Mr Barroso acknowledged that officials were hard at work to draw up "a framework for addressing imminent threats for the financial stability of the euro area as a whole". "We are working on that issue now," he said. "There are now intense debates because of the situation in Greece. We have to have solidarity in the EU. The concrete instruments, we will present them in due time." Using similar language, Jean-Claude Juncker, the Prime Minister of Luxembourg and president of the eurogroup, praised the Greek cuts as "important for the overall financial stability of the euro area". "Euro area members stand ready to take determined and co-ordinated action, if needed, to safeguard the financial stability in the euro area as a whole," he said.

Greece could sell islands to cut debt - German MPs
Greece should consider selling some of its islands as one option to reduce debt, two members of the German parliament in Chancellor Angela Merkel's centre-right coalition said. Josef Schlarmann, a senior member of Merkel's Christian Democrats, and Frank Schaeffler, a finance policy expert in the Free Democrats, were quoted on Thursday as saying that selling islands and other assets could help Greece out of its crisis. "Those in insolvency have to sell everything they have to pay their creditors," Schlarmann told Bild newspaper. "Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption."

Greece has launched an austerity programme designed to secure European help to tackle its crippling debt burden. Opinion polls show Germans are overwhelmingly against taxpayers bailing out Greece. Greece's deficit was 12.7 percent of GDP in 2009, well ahead of the EU's 3 percent of GDP limit. Merkel will meet Greek Prime Minister George Papandreou in Berlin on Friday. "The chancellor cannot promise Greece any help," Schaeffler told Bild in a story under the headline: "Sell your islands, you bankrupt Greeks! And sell the Acropolis too!"

"The Greek government has to take radical steps to sell its property -- for example its uninhabited islands," Schaeffler told Germany's best-selling daily newspaper. Greek Deputy Foreign Minister Dimitris Droutsas was asked about the idea in an interview with ARD TV. "I've also heard the suggestion we should sell the Acropolis," Droutsas said. "Suggestions like this are not appropriate at this time." Germans have had an allergic reaction to reports their country may be part of a bailout for Greece. Europe's biggest economy itself is only just creeping out of its worst post-war recession

Greece prepared to seek IMF aid
Greece is prepared to turn to the International Monetary Fund for help if its European neighbours fail to provide the financial assistance it wants after announcing the toughest spending cuts in decades.
George Papandreou, Greek prime minister, will tomorrow tackle Angela Merkel, Germany's chancellor, during talks in Berlin before heading to Paris to meet Nicolas Sarkozy, French president, and to Washington next week to see Barack Obama, the US president, on a mission to drum up support for the crisis-hit country.

His government is braced for another wave of strikes after it yesterday imposed a freeze on pensions, further cuts in public sector pay, increases in value-added tax and duties on fuel, alcohol and cigarettes. Mr Papandreou said the latest austerity package, the third in three months, fulfilled Greece's commitment to its eurozone partners to bring its soaring deficit under control. The country's debt crisis has caused turmoil in bond markets, with investors worried that it could spread to other weak eurozone members. "We have shown we can take difficult decisions. We are waiting for European support - the other side of the agreement," Mr Papandreou said.

During a cabinet meeting, he told ministers that Greece could turn to the IMF for an emergency loan if its EU partners were unable to deliver adequate assistance, a senior government official said. Other eurozone countries have been adamantly opposed to IMF involvement. Germany welcomed Greece's decision to tighten fiscal policy but stressed financial aid would not be on the table when Mr Papandreou visited Berlin. Ms Merkel said tomorrow's meeting "isn't about aid commitments but about good relations between Greece and Germany".

Officials in Berlin said that Germany considered Greece to be "liquid till the end of March" with the real test of confidence coming in late April or May when it has to roll over about €22bn (£20bn) of debt. The European Commission responded to calls for tighter scrutiny of credit derivatives after the sell-off in Greek financial markets. It has summoned banks and regulators to a meeting this week to discuss regulation of sovereign credit default swaps, a form of insurance against the risk of default on government bonds. The US Department of Justice is taking a closer look at trading against the euro. It has told hedge funds to preserve trading records and e-mails about euro-related derivative trades.

Traders Seek Out the Next Greece in an Ailing Europe
Is Spain the next Greece? Or Italy? Or Portugal? Even as Greece pledged anew on Wednesday to rein in its runaway budget deficit, briefly easing the anxiety over its perilous finances, traders on both sides of the Atlantic weighed the risks — and potential rewards — posed by the groaning debts of other European governments. While investors welcomed news that Athens would raise taxes and cut spending by $6.5 billion this year, analysts warned the moves might not be enough to avert a bailout for Greece or to contain the crisis shaking Europe and its common currency, the euro.

Indeed, some banks and hedge funds have already begun to turn their attention to other indebted nations, particularly Portugal, Spain, Italy and, to a lesser degree, Ireland. The role of such traders has become increasingly controversial in Europe and the United States. The Justice Department’s antitrust division is examining whether at least four hedge funds colluded on a bet against the euro last month. "If the problems of Greece aren’t addressed now, there is a risk the market will focus on the next weakest link in the chain," said Jim Caron, global head of interest rate strategy at Morgan Stanley.

Whatever the outcome in Athens, the debt crisis in Europe threatens to tip the financial, as well as political, balance of power across the Continent. With Germany and France emerging as the most likely rescuers, leaders in Berlin and Paris could end up dictating fiscal policy in Portugal, Ireland, Italy, Greece and Spain. And in the months ahead, fears about the growing debt burden elsewhere in Europe are likely to return, according to investors and strategists. That is particularly worrying given that Western European countries must raise more than half a trillion dollars this year to refinance existing debts and cover their widening budget gaps.

The way fear can spread from capital to capital reminds Mr. Caron of how the American financial crisis played out. "What people are doing in the markets is no different from what they did with the banks," he said. "First it was Bear Stearns, then it was Lehman Brothers and so on. That’s what people are worried about."

France and Germany are emerging as the crucial backers of any lifeline for Greece, but they have slow growth and budget troubles of their own — deficits equaling 6.3 percent of gross domestic product in Germany and 7.5 percent in France. And among voters in both countries, "there is very little appetite for rescues," said Marco Annunziata, chief economist for Unicredit. The most vulnerable country after Greece, some analysts say, is Spain, which has been mired in a deep recession. Facing an unemployment rate of 20 percent, a budget gap of more than 10 percent of gross domestic product, and an economy expected to shrink by 0.4 percent this year, Madrid has little wiggle room if investors shun an expected 85 billion euros in new bond offerings this year.

Spain’s neighbor Portugal is also vulnerable. Large budget and trade deficits, combined with a shortage of domestic savings, leave Portugal dependent on foreign investors. And, as in Greece, there may be little political will to slash spending or raise taxes. That’s in sharp contrast to Ireland, which had been a source of anxiety last year. New austerity measures, including a government hiring freeze and public sector wage cuts, have put it in a stronger position as it raises 19 billion euros this year.

The Italian government is also heavily indebted — it has more than $2 trillion in total exposure — but it is also in a slightly stronger position than Spain or Portugal because its economy is expected to grow by 0.9 percent this year and 1.0 percent next year. In addition, its budget is not as far out of whack, with the deficit this year expected to equal 5.4 percent of G.D.P. According to Kenneth J. Heinz of Hedge Fund Research, the big hedge funds are now evaluating the response by other European countries in extending a lifeline to Greece before they probe weaknesses and opportunities in other countries.

Hedge funds, banks and other institutions are still wagering on a drop in the euro as well as the British pound. Those trades have been controversial for months in Europe. But the debate shifted to the United States on Wednesday, after it emerged that at least four hedge funds had been asked by the Justice Department to turn over trading records and other documents. That request followed a dinner in New York last month where, among several other subjects, representatives of some of these hedge funds discussed betting against the euro.

The funds that received the letters — Greenlight Capital, SAC Capitol Advisors, Paulson & Company and Soros Fund Management — are among the best-known names in the hedge fund universe. Greenlight and SAC declined to comment, as did the Justice Department. Paulson & Company, whose representatives did not attend the dinner, also declined to comment. In a statement, Michael Vachon, a spokesman for Soros Fund Management, denied any wrongdoing and said, "It has become commonplace to direct attention toward George Soros whenever currency markets are in the news."

The dinner, in a private room at the Park Avenue Townhouse restaurant in Manhattan on Feb. 2, involved about 20 people and was characterized as an "ideas round table" by several who attended. But people present at the dinner or knowledgeable about the discussion said the idea of shorting the euro occupied only a few minutes of the conversation. The presentation on the euro, by SAC, lasted less than five minutes, according to these people. Notes provided by one of the firms that attended the dinner summarized the discussion on the euro state: "Greece is important but not that important; instead you have to start thinking about every other country. What’s after Greece? Spain, Ireland, Portugal."

James S. Chanos, a hedge fund investor who has not been making bets on the euro, defended the positions taken by hedge funds, calling the inquiries into their activities "witch hunts." "Hedge funds and short-sellers are being blamed for the failings of other people," he said. Nevertheless, the anxiety in Europe is reflected on the Chicago Mercantile Exchange, where trading in futures on the euro soared to a record $60 billion in February — up 71 percent from a year ago.

"The Greek story is putting downward pressure on the euro," said Derek Sammann, a managing director at the CME. According to CME data, hedge funds are in their most bearish position in a decade in shorting the euro, said Mary Ann Bartels of Bank of America Merrill Lynch. "They have been short for a while, but in the past two weeks have really pressed it," she said.

Strong demand for 10-year Greek bond
Greece saw strong demand for its make-or-break bond deal on Thursday as Athens took an important step towards resolving its debt crisis. Athens will borrow €5bn in 10-year bonds, calming investor fears that the country would not be able to tap the international capital markets because of its deteriorating public finances. It comes 24 hours after Greece announced draconian new austerity measures, which have played an important role in settling the nerves of investors. Although order books rose to about €14bn, making the offer nearly two times subscribed, the Greeks still have to pay very high interest rates.

The coupon interest rate is likely to be 6.4 per cent, much higher than existing Greek 10-year bonds and about 2 percentage points more than Portugal, the second weakest eurozone country, and twice that of Germany. Greek bond yields, which have an inverse relationship with prices, fell in anticipation of extra supply. The 10-year bond yield rose 10 basis points to 6.08 per cent, taking the spread over the equivalent German bund close to 300 basis points. However, Greek equities rose as the markets considered the deal to be a relative success. The Athens General index rose 1.2 per cent to 2,035.38, outperforming the pan-European benchmark FTSE Eurofirst 300, which remained flat in early afternoon trade.

Significantly, most of the demand from the bond came from commercial banks, pension funds and life insurance companies, according to bankers. There was little demand from hedge funds. The five banks managing Thursday’s sale, which should be priced later, are HSBC, Barclays, Nomura, National Bank of Greece and Piraeus Bank. Investors accused the banks on the previous bond syndication, which was priced in late January, of mismanaging that deal as the bond sold off sharply once it started trading following controversy over reports – later denied – that Greece was wooing Chinese investors to buy the debt. Credit Suisse, Deutsche Bank, Morgan Stanley and Goldman Sachs were among the banks that managed that syndication.

Greece needs to find around €20bn of funding over the next three months, so it is critical for the country to be able to attract buyers in the market or it will have to turn to the EU – or even the International Monetary Fund – for financial assistance. Gary Jenkins, head of fixed income research at Evolution, said: "This is the most important deal so far this year for Greece, the markets and the eurozone itself. However, even if the Greeks are successful today, they still need to come to the market again. The Greek debt crisis is far from over, even with strong demand for the bonds today." Spain also raised €4.5bn of new benchmark five-year bonds, with strong demand. The deal was priced with a coupon of 3 per cent.

JPMorgan, Citi Lead Bond Market as High-Yield Issues Set Record
The thawing of the credit markets in 2009 spawned record debt sales as companies sought to ensure they had enough capital to run their businesses and meet their debt obligations. Corporate bond sales worldwide climbed 31 percent to $3.04 trillion and issuance of high-yield, high-risk securities -- the most lucrative market for underwriters -- ballooned by 181 percent to $207 billion, Bloomberg Markets reports in its April issue. Both set records. The new bond issues earned bankers $18.8 billion in fees from debt underwriting, a 31 percent increase over 2008 and equal to the record set in 2007.

"You saw an onslaught of issuance because issuers were focused on liquidity after they saw the market dry up in the latter part of 2008," says James Glascott, head of global debt capital markets at Barclays Capital in New York. "The psyche of the clients in the first quarter was one of liquidity, not one of worrying about the cost of borrowing." JPMorgan Chase, which shared the No. 1 spot with Citigroup in 2008, was the No. 1 underwriter in 2009, increasing its fees by 18 percent to $1.33 billion, according to Bloomberg Markets’ annual ranking of the best-paid investment banks. Citigroup slipped to No. 2 after a five-year reign as the top firm, with its fees growing by 8 percent.

Now that the appetite for riskier securities has returned, bankers predict that their fat fees from selling junk debt will continue in 2010, particularly if mergers and acquisitions increase. The average premium above similar-maturity Treasuries that speculative-grade U.S. companies pay to borrow shrank to 6.58 percentage points on March 2 from 18.12 percentage points at the end of 2008, according to data compiled by Bank of America Merrill Lynch. Underwriters reaped $4.1 billion worldwide from speculative-grade offerings last year, up more than threefold from 2008 levels, as companies ranging from Las Vegas-based casino operator MGM Mirage to Dallas-based video rental chain Blockbuster Inc. sold bonds to refinance existing debt.

High-yield securities are rated below Baa3 by Moody’s Investors Service and lower than BBB- by Standard & Poor’s. John Cokinos, head of high-yield capital markets at Bank of America Merrill Lynch, predicts junk bond sales will reach $175 billion in the U.S. this year. That would be a new high. "There’s still a lot in the bank and bond market that needs to be refinanced," Cokinos says. "We’re also going to see M&A activity pick up, which was pretty absent last year. This year, we expect that to increase and to see a modest amount of leveraged-buyout activity."

Bank of America Merrill Lynch was the third-biggest underwriter of debt in 2009 after taking home $1.13 billion in fees. In 2008, Bank of America was No. 4 and Merrill Lynch took the No. 7 spot. The firms merged in January 2009. Barclays Capital, which took over Lehman Brothers’ U.S. assets, fell one level to No. 4 in 2009, even as its fees grew by a third to $1.07 billion. The reopening of the bond market was driven by the U.S. Federal Reserve’s zero-interest-rate policy and spread across all industries -- even those that were out of favor at the height of the financial crisis, Cokinos says. Dearborn, Michigan-based Ford Motor Co., the only one of the Big Three U.S. automakers to avoid filing for bankruptcy in 2009, was the biggest issuer of junk securities, selling $4.6 billion of them.

Corporate bond sales may decline in 2010 because last year’s record offerings reduced the need to refinance maturing debt, says Peter Aherne, head of North American capital markets at Citigroup in New York. He predicts the issuance of investment-grade bonds by nonfinancial companies will shrink by 20 percent. The recovery of the commercial paper market may prompt companies to cut back on bonds and issue more short-term debt, which is typically cheaper, to finance themselves, he says.

Banks also won’t need to sell as much debt because they’re reducing leverage after the worst financial crisis since the Great Depression, Aherne says. "On the financial side, balance sheets are shrinking, not getting bigger, so the natural financing need isn’t there," he says. Aherne says Citigroup plans to sell about $15 billion of bonds this year, for example. The bank issued $70.5 billion of bonds in 2009, Bloomberg data show. Proceeds from bond sales may be used to finance M&A and share buybacks because companies are refocusing on boosting shareholder returns. "It’s a compelling time to debt finance a sound strategic transaction," Aherne says.

Borrowing started to make a comeback in 2009 as a way to fund acquisitions: The year’s biggest bond sales were New York- based Pfizer Inc.’s $13.5 billion, five-part offering, which financed its purchase of Wyeth, and Basel, Switzerland-based drugmaker Roche Holding AG’s $16 billion, multi-tranche issuance to fund its takeover of Genentech Inc. Bankers hope more sales like those will fill their coffers in 2010.

Spain's Woes Start to Sting Big Banks
Spain's property woes and economic downturn finally may be catching up with the country's two largest banks, Banco Santander SA and Banco Bilbao Vizcaya Argentaria SA. The big banks have remained profitable throughout the financial crisis despite the bursting of the housing bubble in Spain, high unemployment and other problems. One reason: the government's strict requirements for Spanish banks to maintain high reserves against bad loans, in part a response to a previous property downturn in the 1990s.

But now there is concern whether these cushions can withstand the impact of an increase in nonperforming loans. As these mandatory reserves wane, the banks' profits could be hit by the same economic and real-estate-related losses that have dogged banks in the U.S. and Europe. "Having outperformed the sector during the credit crisis … recent results cast doubt over the adequacy of generic reserves to absorb future losses," said Barclays Capital analyst Tom Rayner in a recent note. Barclays ranks the banks "underweight." Both Santander and BBVA maintain that their provisions are adequate and in compliance with the central bank's rules.

At the same time, some analysts have raised questions about whether the Spanish banking sector in general is underreporting problem loans, by agreeing to loan modifications that help borrowers make payments before the loan is officially categorized as delinquent. Recent data from Spain's National Statistics Institute show a 55% rise in mortgage "novations," or changes to the terms of a mortgage, to 435,835 in 2009, for the sector. A spokesman for Santander said the bank doesn't say how many mortgages it has restructured, but said the bank has a policy of helping good customers before a loan goes bad. A spokesman for BBVA said it will work with customers in modifying some loans, but its residential mortgage book consists of mostly first-home mortgages on which people are unlikely to default.

A spokeswoman for the Asociacion Espanola de Banca, Spain's bank association, said the jump in novations likely was due to borrowers moving from a fixed to a variable rate, and it is unlikely to minimize troubled-loan ratios. Analysts, however, said these modifications could make risky loans—specifically, those on which the borrower needed to change the terms in order to be able to pay—look better in the short term and help the bank avoid taking a charge. "The banks wouldn't have to recognize the restructured loan as problem loans," said Alastair Ryan, an analyst at UBS AG, which ranks the banks "sell." "But this could generate a drag on income in the future," if the bank is accepting lower interest or the loan eventually defaults.

Thanks in part to significant business operations outside of Spain, Santander and BBVA have managed to ride out the financial crisis better than its peers. Santander posted an €8.9 billion ($12.19 billion) net profit for 2009, up 1% from the prior year, and BBVA, €4.2 billion, down 15% from 2008. Certain provisioning requirements by Spanish regulators have been a big factor. The Bank of Spain requires that lenders set aside funds to offset future losses, according to a formula related to lending that regulators have fine-tuned over the past several decades. When setting aside cushions against souring loans, the banks typically use a combination of these provisions along with additional funds from recent profits, as needed.

These cushions, while currently adequate, have dwindled in relation to problem loans. The amount of funds that Santander set aside, compared with the amount of problem loans on its books, stood at a ratio of 75% at the end of 2009, up from 73% in December but down from 134% at the end of 2008. BBVA reported this "coverage" ratio at 57% at the end of 2009, down from 92% in 2008. Coverage for the Spanish books are lower still. In 2009, the percentage of Santander and BBVA's nonperforming loans to total loan books was 3.2% and 4.3%, respectively, up from 2% and 2.3% a year earlier. In 2009, Santander reported a core capital ratio of 8.6% and BBVA reported a ratio of 8%. Analysts say the banks remain well-capitalized.

The problem now is that the Spanish economy is continuing to deteriorate, making the dynamics of the property market even worse. Unemployment is expected to hit 20% this year, by some estimates, and Spain's gross domestic product contracted 3.6% in 2009 and is expected to shrink again this year. Property prices have fallen an estimated 15% from their highs and are expected to keep declining. Yet the cocktail of problems is taking a toll. While analysts said Spain's two biggest banks are well-capitalized, they said reserve provisions will wear thin by the end of the year for BBVA and by 2011 for Santander. This will cause the banks to pony up more funds to cover problem loans, weighing on profitability in 2011 and 2012.

Santander's share price has fallen 15% in the past three months, closing at €10.05 ($13.76) Thursday in Madrid, up 1.1%, while BBVA's share price was down 23% in the same period, closing Thursday at €10.06, up 1.4%. Meanwhile, the Dow Jones Total Europe Financials index fell 10% in the same period.

French Banks to Raise Credit to Small Firms
French banks pledged to increase the amount of credit available to small and medium-sized companies by 3% this year, Baudouin Prot, chairman of the French Banking Federation said Friday.
At a meeting with President Nicolas Sarkozy, the heads of the country's largest banks agreed to put as much as €96 billion ($130.47 billion) at the disposal of smaller companies, which have complained of a lack of access to credit, said Mr. Prot, who is also chief executive of BNP Paribas SA. The heads of France's largest banks, including Societe Generale SA and Credit Agricole SA, met with Mr. Sarkozy, Bank of France Governor Christian Noyer, Prime Minister Francois Fillon and Finance Minister Christine Lagarde to firm up the banks' lending commitments to the French economy in 2010.

Mr. Sarkozy has assembled French bank chiefs several times during the past two years to address issues like tax havens and bonuses. On Friday, Mr. Sarkozy also called on banks to comply with G-20 rules on market operators' remunerations. "The President called on French banks to remain exemplary and to moderate the distribution of bonuses, considering the state's exceptional effort during the financial crisis," according to an Elysee press release. Michel Camdessus, former head of the International Monetary Fund, will hand in a report to the President on the subject, the Elysee said.

Iceland defiant as experts warn of effects of No vote
Confusion reigned in Reykjavik yesterday as voters prepared to spurn a controversial compensation deal for British and Dutch investors and the Icelandic government scrambled for a formula that would allow it to cancel tomorrow’s planned referendum. The vote was triggered against the government’s wishes when President Ólafur Grímsson refused to sign a law detailing a package to reimburse investors in the failed Icesave online savings bank.
A rejection of this package in Saturday’s referendum could have grave consequences, observers said yesterday.

Iceland risks a fresh bout of financial turmoil, delayed loans from the IMF and European allies as well as derailed plans for European Union membership. A No vote would also represent a crushing blow to Jóhanna Sigurdardóttir’s centre-left coalition, which only a year ago was hailed as heralding a new start for the troubled north Atlantic nation. Icelanders, however, seemed willing yesterday both to defy their government and to run the risk of financial fallout by voting No. An opinion poll published on Tuesday said that three-quarters of voters would reject the Bill, which would force them to pay €3.9 billion to the UK and Dutch governments. Apart from the magnitude of the money involved, Icelanders are still stung by the British government’s use of anti-terror legislation to freeze Icelandic assets in the wake of their banking crisis, a move they believe intensified their predicament.

Resentment against the British prime minister runs deep and this is boosting anti-referendum sentiment. "Perhaps it’s because people are unwilling to give in to the bullying behaviour of Brown," Eiríkur Bergmann, a political scientist at Iceland’s Bifröst University told The Irish Times . The anticipated rejection of the compensation package would be "a direct message to Gordon Brown", Prof Bergmann said. Icelanders, he added, were willing to fulfil their legal obligations in accordance with the EU depositary bank scheme by providing compensation, "but it must be fair". According to one estimate, the amount of money due under the referendum package is the equivalent of €100 a month for eight years for each of the country’s 317,000 inhabitants.

And although the repayments schedule is spread over 15 years with a seven-year grace period, most Icelanders believe the 5.55 per cent interest rate charged is excessive, jeopardises economic recovery and puts too heavy a burden on future generations. But in the absence of an alternative deal with the UK and the Netherlands – which Iceland’s government has been battling to secure – the country’s immediate prospects are troubled. In the absence of hard proof that Iceland is willing to live up to its financial responsibilities, the IMF would almost certainly postpone the next tranche of its $2.1 billion emergency loan. Other lenders, including Iceland’s Nordic neighbours, would also be likely to hold back on disbursements pending concrete indications of fiscal responsibility.

Additionally, Iceland’s membership of the European Union is likely to be blocked by the UK and the Netherlands until it delivers a compensation package. All of these arguments, however, appear to hold little sway with Icelandic voters. Economy minister Gylfi Magnussen said yesterday that delaying the settlement of the Icesave problem could deepen the country’s projected 2010 economic growth contraction of 2-3 per cent to 5 per cent. But a sense of resilience prevails: "We’ve been living with this situation for 18 months, but life still goes on. We’re not travelling abroad so much any more, but there are more people in Reykjavik’s restaurants," said Prof Bergmann.

Bankers Blow $20 Billion Faster Than Gamblers
The big buzz in Singapore is about the casinos beginning to dot the city-state.Singapore prefers to call them "integrated resorts." Gambling is what it is, though. Welcoming Las Vegas tycoons Sheldon Adelson and Steve Wynn is intended to woo tourists and diversify the economy. It’s not exactly a new idea. The truth is that Singapore has been gambling for some time now, and not very well. The die was cast when the Government of Singapore Investment Corp., which manages more than $100 billion of state currency reserves, bet big on Zurich-based UBS AG. It took three days to agree to prop up debt-laden UBS in 2007. It may take 10 years to recoup that $10 billion.

Singapore isn’t alone in massive losses that may reshape markets -- and perhaps for the better. Two years ago, sovereign wealth funds were heralded as saviors of world markets. That was when Lehman Brothers Holdings Inc. seemed too big to fail. It was a quainter time, when Iceland was a country, not a failed hedge fund, and American- style capitalism still had some appeal. The thinking then was that the trillions of dollars that resource- and cash-rich governments were pouring into markets would out-Greenspan the "Greenspan put."

Former Federal Reserve Chairman Alan Greenspan liked to rescue markets with lower rates when things got dicey. Likewise, investors figured this almost infinite source of demand would support riskier assets and stabilize markets. Capitalism suddenly seemed safe for all gamblers. Markets had a new shock absorber and it appeared to work brilliantly. As the global crisis heated up and banks shuddered, government investment arms helped support Citigroup Inc., Merrill Lynch & Co. and UBS, as well as Barclays Plc, Credit Suisse Group AG and Morgan Stanley.

Then the roof fell in. Investments totaling more than $69 billion by state investment funds produced $20 billion in realized and paper losses, according to data compiled by Bloomberg. Blowing that much money means managers of these funds will be under greater scrutiny than ever. China Investment Corp. is the big money in this tale, since China has $2.4 trillion of reserves. It still has explaining to do over a $3 billion investment in Blackstone Group LP in 2007. Blackstone shares have fallen 52 percent since Jan. 1, 2008.

Abu Dhabi Investment Authority may face a $4.8 billion paper loss when it’s forced to convert its so-called Citigroup equity units to shares starting this month. In Singapore, Temasek Holdings Pte, a state-owned investment company that oversees $120 billion, sold its shares in Bank of America Corp. -- BofA bought Merrill Lynch, in which Temasek invested -- for a $4.6 billion loss in early 2009.

Such investments may pay off in the long run. For example, in the Government of Singapore Investment Corp.’s annual report, published in September, Chief Investment Officer Ng Kok Song said he still has "confidence" in the long-term prospects of the UBS investment. GIC declined to comment for a March 3 Bloomberg article. Expect to see far greater conservatism on the part of governments investing overseas. It’s not such a bad turn of affairs. This whole idea that massive state investment funds would save capitalism was always a bit surreal. It’s a wonder the free-market crowd was ever peddling it.

Let’s call it what it is: Thatcherism in reverse. During the 1980s, U.K. Prime Minister Margaret Thatcher championed a process of selling national assets, arguing that private managers create more wealth than public ones. Recently, we have seen a kind of renationalization of companies across borders. Is this how capitalism is really supposed to work?

If so, tensions will rise markedly. Would the U.S. sit idly if China went shopping for big stakes in Silicon Valley? What about Australia, New Zealand and Canada as foreign governments consider buying key resource companies? How might Japan or South Korea react to acquisitions of their banks? These questions were touchy before the worst global crisis since the 1930s. Its fallout makes them even harder to tackle as nations turn inward to boost employment and shelter populations from global shocks. This year has served up its fair share of disorientation. Look no further than market chatter about Greece turning to China for a bailout. After all, China’s cache of reserves dwarfs what the International Monetary Fund has on hand to deploy.

If the doomsayers are correct that an even bigger crisis is looming, sovereign wealth funds may be expected to save the day. As the world shifts from economies that are too big to fail to those that are too big to save, it will be tempting to access all that state money sitting around. Greece is one thing. Think of the cost of bailing out a $1.6 trillion economy like Spain or even larger ones. Governments aren’t meant to dominate markets in the long run. The global crisis brought them in to stabilize things, and greater regulation is needed to avoid another meltdown in the not-so-distant future. When we talk about exit strategies, though, we should think about more than winding down stimulus efforts. We also should consider whether governments really should dominate the global finance game in the years ahead. Talk about gambling with capitalism’s future.

Seven Ideas to Beat the Crisis
Times are tough. But not so tough, as it turns out, that you can't make a buck. From bovine meditation to organic bird buffets, SPIEGEL ONLINE brings you seven strange business ideas that should never have worked -- but did. The German economy isn't what it used to be. Just this week, it was announced that the economy didn't grow at all during the fourth quarter of 2009, leading many to fear that the country might have to wait a while longer to recover from the economic downturn.

Even worse, the European common currency, the euro, is in turmoil as speculators continue to try and profit from Greek budgetary woes. The currency has fallen substantially against the dollar in recent weeks and there are fears that it could continue to plummet. Indeed, things have gotten so bad that a Greek consumer group has called for a boycott of German products, as a result of criticism from Germany -- most particularly in the form of a tasteless cover from the newsmagazine Focus -- of Greece's financial practices.

But while many would prefer to stick their heads in the sand and wait out the crisis, there are those who prefer to confront uncertainty with ingenuity. If you've got the right idea, now might just be the time to start up your own business. Why not begin baking specialty products for pets? Or start a travel agency for stuffed animals? Meditation with farm animals is certainly also a good opportunity for instant profits. After all, a bit of time in the stall is sure to calm the nerves of today's stressed out managers. For those who think they might have a good business idea, but are too shy to try, SPIEGEL ONLINE brings you some inspiration -- in the form of seven business concepts that never should have found success, but did.

Travelling Teddies
Apparently there are around 1.2 billion cuddly toy animals in the world --  and you can bet that most of them have never seen the city of Prague. Or indeed, many other prime European tourist destinations (unless it happens to be their home town, of course). Now a Czech company, The Czech Toy Traveling agency, aims to change all that. Send them your inanimate, furry friend and they will send you pictures back of your stuffed beast in front of various landmarks around Prague. The concept, which was inspired by the French film "Amelie," in which a character receives mysterious pictures of his stolen garden gnome posed in front of famous monuments around the world, received support after it appeared on the Czech version of the reality television investment show "Dragon's Den." In the Czech Republic, the show is called "Den D" (or D-Day).

A basic package tour for your teddy bear costs €90 and includes 30 photos on a disc, a certificate of proof that your bear was there, a profile created on your bear's behalf on social networking sites and daily e-mail contact from your bear, or any other stuffed toy you care to send their way. The most expensive package, which costs €150, includes a special travel box, with a pillow and blanket, so that the cuddly toy travels first class all the way back home. Owners can also specify whether their insensate sweeties are vegetarian or should be allowed a drink after dinner. "We are focusing on North American, Southeast Asia and the European markets," agency co-owner Tomio Okamura told SPIEGEL ONLINE. "We launched our business last week and we already have dozens of orders, mostly from the US, Japan and Germany."

Okamura, who is one of the businessmen supporting the venture financially and also the vice president of the Association of Tour Operators and Travel Agents of the Czech Republic, explains that once a travel reservation has been made for a toy, and payment received, the fluffy friend can be posted to the company. Sightseeing in Prague will take between one and three days and the Toy Traveling Agency will also take stuffed animals to special events upon request. "We already have a request from Japan to take the toy to see a top-flight European football match," Okamura says. Eventually the company's founders also want to be able to offer toys travel opportunities to other European cities, including Berlin, Munich and Bratislava.

First on the Dance Floor
The party is great, the music is playing, your feet are tapping. But the dance floor is empty. Even though you are aching to get out there and shake your proverbial thing, you don't dare to hit the dance floor all alone. And then all of a sudden, there they are: Two enthusiastic hoofers who don't seem to care who sees them getting down. Relieved, you -- and all the other bashful bootie shakers -- migrate to the dance floor while the host stands by, satisfied and smiling broadly that this fest is such a success.

Such success, as it turns out, can be bought. A Berlin company, called Be My Dancer, hires out people to break the dance floor ice. Most of the firm's business involves the time honored profession of the "taxi dancer," the name first given to the courteous men who hired themselves out as dancing partners after World War I where there weren't enough masculine dancing partners around. The trade has survived primarily on cruise ships, providing elderly, single ladies with a waltz partner. But in Berlin, the modernized Be My Dancer provides male and female dance partners to suit any occasion, from one's first cha cha session to themed swing nights and tango parties. The Be My Dancer crew can be rented solo or as a team and each dancer costs around €40 an hour. It is also possibly to hire the trained professionals as private dance teachers. Most often the company's employees can be seen strutting their stuff at the Bohème Sauvage, themed 20s costume parties in historic locations.

Meditating with Cows
Forget staring at stones or focusing for hours on single blades of grass. A Dutch farmer, Corné de Regt, has come up with a whole new method for meditation. And it all takes place in his cow stalls on his property on the outskirts of Denekamp, near the German border. One of the services de Regt's business, "Rode Wangen" (Red Cheeks) offers is a wellness retreat for stressed out businessmen. And when it comes time for a spot of meditation, de Regt and his clients head out onto the farm. Into the cow stalls, to be more exact -- where they will sit on hay bales together and meditate. "Unfortunately the silence is often broken," de Regt told German freelance journalist Helmut Hetzel. "When a cow drops something, or when the animals are unsettled. But all of that belongs to the meditation sessions. Some of my guests complain about the smell. But that too, is all part of it. Ultimately all of one's senses are stimulated through meditating alongside the animals. It is a unique experience. And most of the managers that come here like it."

Besides finding metaphysical peace with our bovine friends, the stressed will also be able to relieve their anxieties through other farm-based activities. Excess energy is expended through a hearty round of testosterone-fuelled wood chopping, which can then be followed up with a skinny dip in a nearby stream. There's also plenty of fresh farm food, historical walks and the enterprising de Regt also offers a selection of goods for sale, including wooden toys, baked goods, woolen hats and slippers and apple juice. "My concept for therapy counts upon the fact that the business men who come to me have red cheeks before they leave. They are 'refueled' -- and not only with fresh country air but also with the unique experiences they have on the farm and in the cow stalls," de Regt says.

Breaking Up with the Help of the 'Terminator'
So you want out but you just cannot bear to tell your erstwhile loved one it's all over? Call the professionals. As the Web site for Berlin-based firm, The Separation Agency, says: "We can end it -- perfectly and forever. We will turn one unhappy couple into two satisfied singles. Either that, or your partner gets one last warning, as delivered by us." The agency offers a variety of packages. If you just can't face it, then for €29.95, the agency will conduct the split over the telephone and make sure you two stay on friendly terms. For a little more -- €64.95 -- they will conduct that conversation with your soon-to-be-ex in person. If you are literarily challenged, then they will help you write the most appropriate "dear John" letter. And if you have just, plain and simple, had enough and want them to go away and leave you alone, then the agency will let the lover-turned-stalker know that too.

Along with all of the above, the agency guarantees "delivery of the unwelcome news, de-escalation of pent up emotions, guidance on the difficult talks" and, best of all, your stuff back. Since it was founded in 2006, the agency which is run by former insurance salesman Bernd Dressler, has been a success. The "Terminator", as Dressler has come to be known, doesn't do any jobs without money up front and most of his customers are women in their 20s. He has even written a book about his experiences. Dressler says he delivers the message in a style that it is in accordance with his customer's wishes. As he told the British media: "I say to them: 'Good day, my name is Bernd Dressler from the Separation Agency and I have been asked by your partner to inform you that he or she wishes to end your relationship.'"

Table Football Fashion
When it comes to sports in Germany, there is really only one game in town. Newspaper sport sections, to be sure, report copiously on handball, ping pong and luge -- or on any other sport that a German athlete may excel at. But football is the undisputed national pastime. And for those without the hand-foot coordination to succeed on the pitch, there is table football --  known to Americans as foosball. It is a serious pastime in Germany, accompanied with shouts of joy, groans of dismay and no small amount of perspiration. To the consternation (and distraction) of non-players, tables can be found in offices across the country. The best players can even get the static plastic figures to pass the ball to each other.

Perhaps it comes as no surprise then, that a German company offers little jerseys for the little players. For just €15.90, you can outfit your entire team with the football shirt of your choice -- the company, known as Kicker Trikot -- has a number of national teams on offer along with a selection of German league teams. Recently, the company has even begun making custom jerseys to order -- for €49.90 a set. The company, based in Hamburg, started in 2006 and has seen a steady rise in turnover since then. With the World Cup just around the corner, the company is no doubt hoping for another uptick in sales. North Korea anyone?

Baking for the Birds
Germans love organic food. Despite the economic downturn and ongoing uneasiness about the robustness of the recovery, people in Germany have continued to pay extra for the knowledge that their foodstuffs are free of pesticides and insecticides. "Fears that consumers would save on their purchases of organic products during the financial and economic crises have proven false," said the market research group GfK in a statement earlier this month.

With such an addiction to food purity, it is perhaps no surprise that a company near Bielefeld offers organic snacks for parrots. Called the Parrot Bakery, the company's product line includes palm oil muffins, Eucalyptus snacks and nut balls for your favorite feathered friend. "Only the best for your parrots," is the company's motto. Products are available both in Marita Grabowski's small shop as well as on the Internet. Grabowski started her company when, in 2007, her Gray Parrot "Charlie" fell ill and she had to make him crackers without seeds. Her company has since found substantial success, supplying pet food stores across Europe. She has even written a book: "The Cookbook for Parrots and Parakeets."

The Karaoke Cab
"Turn it up, driver, I love this song." It's a common enough refrain, heard in taxis all over the world as they ferry a weekend's worth of merry makers to their destinations. And although some cab drivers find this annoying, there is one clever chap in the German city of Münster, in the state of North Rhine-Westphalia, who is making a business out of those kinds of requests. Taxi driver Nizamettin Kilincli has installed a screen in the back of his eight-person taxi van, over which he can play karaoke tracks, or even movies. The reasons passengers like his service are as varied as the passengers themselves, Kilincli told the online city magazine Echo Münster.

During the day Taxi Niza, as his business is known, drives around the city like any normal van-for-hire. The screen in the vehicle might be used for a family who wants to keep the kids quiet on the way out to the airport. But by night, it becomes a rolling fun palace, with party goers on the way to a club or a disco entertaining themselves by belting out a few numbers. Best of all, the service costs no more than any other cab ride. All of this has seen the clearly very tolerant Kilincli gain a regular clientele who prefer a ride in his taxi above all others. As for the kind of drunken, often tuneless, yodeling coming from the back seats, Kilincli does not mind it at all. He's never been one for singing along, he told the Münster magazine, and anyway, he has to concentrate on the road.


$$$Dollar$$$ said...

Credit contract, and thus deflation, are really beginning to slow. Everyone has seen the chart of debt:gdp (which is 4:1 or more since much of the debt is off balance sheet) and credit is actually growing again in some forms? I don't know if 2010 is going to be a bad year, but I wish it would be, because if the elites get "credit flowing again" then we will just go straight until everything blows up and the US disappears as a political entity. I don't see what is so hard about this to understand.

$$$Dollar$$$ said...

The link to credit growth:

Also remember that the government (state and federal) are increasing their debt loads too. This will end well. Any thoughts from Stoneleigh on this?

Gravity said...

Oh farmers, pray that your summers be wet and your winters clear.

VK said...

I really wonder, what goes through the heads of the public officials who say things such as Herbert Allison? I would love to put them under a CAT scan or an MRI scan to see what their brain activity is like?

Are they consciously lying or are they genuinely deluded? Tim Geithner, Ben Bernanke Under the Hood. What is it that makes debt so difficult to understand?

Maybe all elected officials should be sent to meditate with cows. Have a little cheese & milk, connect with nature and reality.

Bigelow said...

If China can do it, why not the Los Angeles City Council…
Los Angeles Fires First Shot In California's War On Banks, As Cities Seek To Wrangle Out Of Swaps

Jim R said...

Yep, a long hot summer. And after that, it's gonna just get hotter:
Siberian Methane Could Fast-Track Global Warming - Science and Tech - The Atlantic

VK said...

Energy by itself means little without mechanisms to extract it and use it.

For example a country like Nigeria is rich in oil, yet most of it's energy is for export. It has a very limited industrial base and poorly developed credit markets.

Energy surplus by itself means little, without an accompanying rise in complexity and the rule of law. I may have all the oil in the world but if I have no factories, no credit system, no rule of law then it means little and energy in such a system is meaningless and it simply has no place to go.

There are many countries in Africa that have energy surpluses, think of Angola & Nigeria. But they can't use their energy domestically, so most of it is exported abroad.

For a complex society and consequent large scale energy use one requires;

1) Functioning credit system to facilitate trade and development.

2) An educated population with access to high quality Universities and research options and job opportuities.

3) A strong rule of law, with minimal bureaucracy to facilitate business and to protect creditors and borrowers where necessary and to enforce those regulations.

4) Trust. The importance of trust, which is non quantifiable is key, this is built over years and decades - even centuries. Low interest rates imply faith, trust IMO. People on this blog are mainly Europeans and Americans, given the chance how many would actually choose to live in South America or Africa? Even China? Not many.

5) Openness, open socieites function better. For example, freedom of speech, movement, religion etc. Our body consists of 50,000,000,000,000,000 cells that are in constant communication with each other for their survival. If information is hidden, the body develops disease. Societies are also dependent on this openness for stability. Closed societies, opaque ones, are doomed to develop abnormalities and wound themeselves fatally.

6) Leadership. Difficult to quantify but readily observable. For eg, in the 8th Century the Chinese emperor decided to wall of China from the rest of the world. Their ship building & weapons technology was far superior at the time and they could've conquered the world back than. Yet one decision, altered the very course of history.

$$$Dollar$$$ said...

US tells China not to trade with Iran. China tells the US to get stuffed. US carves out an exemption for China and pretends permission was given to China. Time for America to come to grips with the post-colonial world.

VK said...

@ $$$Dollar$$$

Via ZeroHedge

Today, the market spiked in the last hour of trading after it was announced that total consumer credit increased for the first time in a year (not all credit, mind you, just car loans; consumers are still eagerly paying down their credit cards). And who was the source for this generosity you may ask? Why, the US Government of course. Not only that, but Non-Seasonally Adjusted Consumer credit was actually down by $4 billion. But let the government have its smoothing fun. On a non-seasonally adjusted basis, consumer credit has declined by $108 billion in the past 12 months. What may be surprising, is that were one to strip away the contribution from the Federal Government of $78 billion, the decline would have been almost double, or $187 billion. Furthermore, in January, NSA consumer credit would have declined by $14 billion had it not been for the... wait for it... Federal Government, which sourced $10.4 billion in new consumer credit.

jal said...

Dear oh dear! What will happen?

1. But the Fed is due to stop buying MBS this month and will eventually begin selling the securities to return its balance sheet to a more normal level as part of an end to the unconventional tools used to supplement a policy of near-zero interest rates and get credit flowing.

2. Last month Mervyn King, governor of the Bank of England, said he would not extend a UK scheme that allows banks to swap MBS for government bonds in spite of pressure from the industry.

3. "Those in insolvency have to sell everything they have to pay their creditors," Schlarmann told Bild newspaper. "Greece owns buildings, companies and uninhabited islands, which could all be used for debt redemption."

4. If you want to buy real estate, beware and be warned. Your financial massacre may follow your purchase. You cannot reasonably buy in this environment except with aggressive price negotiations, a close study of national and local price trends, intelligent courage, and your eye lids burned off by what you read here. Fools rush in where wise men fear to buy.
Now ... tell me who has enough money to cherrie pick those assets and to do aggressive price negotiation?

Give the man a kiwi doll, from China, for saying China.
Re.; unemploment
"And everybody - everybody - is inclusive in those cuts."
Yes, retire before getting a layoff. The budget for wages will get balanced but the money outflow will not be diminished because the pension outflow will increase.
hehehe Great funny way to balance the budget.

$$$Dollar$$$ said...

Vk - Credit is credit. Principal + interest. If it is going up, then that means even more debt will have to be defaulted on, I don't care who the source is. If I pay $1 on my credit card and take out $2 for my car loan, I have increased my net debt and put myself further in the hole. On some level, this is what matters most. We are hanging ourselves further. Sure, we may have a very short lived respite, but the already catastrophic hangover is going to be made even worse. Basically, debt is increasing in the system (public and private) and some minor form of reflation (or halting of deflation) is taking place. That is what the figures are saying. Curiously, almost none of the bloggers (Mish, Denninger, etc.) have been speaking about this, ZH excepted. This actually makes me somewhat angry. It is as if common sense just cannot be used with the herd. YAY! People are going into even more debt that they can afford. YAY! RALLY!

Bryan McNett said...

>For example a country like Nigeria
>is rich in oil, yet most of it's
>energy is for export.

The empire prefers it this way. If Nigeria tried to leverage its resource wealth into development and political power (as the USA did) the empire would kill it with economic hijinks and/or violence.

Bryan McNett said...

>Are they consciously lying or are
>they genuinely deluded? Tim
>Geithner, Ben Bernanke Under the
>Hood. What is it that makes debt
>so difficult to understand?

It's not their job to understand debt. Their job is to keep us distracted by economic myths, while the ruling class is busy looting us.

These people may or may not understand debt, but that is unrelated to their function, which is to make sure that none of us understand debt.

ben said...

tom, you said,

"Yet another theme in the comments is the issue of the Dutch Tulip Crisis and GD 1.0 etc not being explained by PO. A number of other astute commenters have already discussed on TAE that it is treacherous logic to presume that financial crises share common mechanisms."

the underlying mechanism in capitalism is the profit motive, so i must assume the rapacious form of this mechanism applies to all capitalist financial crises.

what we are talking about here, today, as it was in GD 1.0, unless i'm mistaken about the dynamics back then, is the disaster stage of the financialization of a capitalist economy.

since when has a financializing economy ever needed a catalyst other than the profit motive.

here - treachery, by giovanni arrighi:

"The logic of this process... is that when competition intensifies, investment in the material
economy becomes increasingly risky, and therefore the liquidity preference
of accumulators is accentuated, which, in turn, creates the supply
conditions of the financial expansion."

greedy death throes of financial hegemony happened in genoa, holland, and england before it ever happened in conjunction with the oil peaks of 1971 and 2005.

it would appear that profit peaks in the material economy have superceded resource peaks.

we're all well aware of the oil motive here but it does not a soap opera make, right now.

trojanhorse said...

ilargi, re Fannie and Freddie. What are the mechanics and timing involved in your statement: "Wait till they are forced onto the US federal budget. ".

Ilargi said...


Republicans are clamoring for F&F to be included in federal budget. They are de facto federal entities already, so they really should be.

Hard to say, overwhelming incentives not to include them, but the silliness factor involved in not doing so is running out of hand.


trojanhorse said...

Thanks i, I do not follow US politics except as the need arises and would, in that darkness, think that, other than to politically embarrass the Democrats, I am not sure the Republicans would have any mad desire to see F&F on the books. Embarrass the Democrats and then join them in kicking that F&F can down the road, I dunno.

M said...

Bruce, the Woody Guthrie wannabe pretender, looks like another aging rocker advertising the age defying system of his personal fitness trainer. He’s no Neil Young, that’s for certain. All hyped up on E Street adrenalin and non-stop Bruce fist pumping in the air, The Wall Street gang that occupies the very expensive front row seats of a NY Springsteen concert wouldn’t last a minute into a Greendale set. Some music presents too raw of a societal reflection for the evening pretenders to tolerate.

The “Boss” went mainstream generic quite a while ago, replacing his truly great efforts from Nebraska with a party, party, party everyone deserves to feel good message for his hyped-out audiences.

So party on with your amusing track record of seasonal predictions, along with a curious sense of Springsteen sentimentality. Myself, I’ll listen to a real musical talisman and plan on Snow and Rain

Bryan McNett said...

aargh: US politics is like professional wrestling: there is always a "face" (obama) and a "heel" (palin cheney bush.) conflict is staged with the purpose of distracting the people with meaningless drama. this is to keep the people from engaging meaningfully with reality.

america is unique among countries - its people literally believe the entirely fake drama of national politics. the people of other countries know better.

Brunswickian said...

It just ocurred to me in the afterglow of Springsteen - that should he have not emigrated instead of rubbing shoulders with the establishment?

scandia said...

@ your post yesterday, " is a natural resource play".
That was my conclusion as well. Gov't spin this morning is the 7% increase in GDP will come from creation of full time jobs with benefits because" we are the elected gov't so we will do it and that is what people want".
Well, okay then...
Enjoyed your Friday music selection, Glendale Train.

Tom Therramus said...

Hi Ben,

" would appear that profit peaks in the material economy have superceded resource peaks."

This is a starting hypothesis. Defining what your quantitative definition of "profit" is probably a necessary next step. If this can be done let's see the data comparing the previous crises you list and the present case.

I detect a hint of proverbial Marx in your analysis. I respect Marx. However, I think history has provided him (or least the interpretation of ideas by his acolytes) a fair test. The brutal social consequences of implementing Marx's ideas are now all to plain. Personally I'm all for free enterprise, its licentious enterprise that I object to.


Apols for being slow. Thinking about your posts. Shuffling the propositions to an algorithm has it attractions, but it also causes unease.

This is probably due to my training and experience (often bitter experience) as a biologist. Although DNA sequence is 5' to 3', nearly all other biological phenomena resist the confines of linearity.

Best wishes,


jal said...

Reality check ...

This is the 26 bank closing for 2010
Centennial Bank Ogden UT 34430 March 5, 2010 March 5, 2010
Waterfield Bank Germantown MD 34976 March 5, 2010 March 5, 2010
Bank of Illinois Normal IL 9268 March 5, 2010 March 5, 2010
Sun American Bank Boca Raton FL 27126 March 5, 2010 March 5, 2010

This is the 4th federally insured credit union liquidation in 2010.

Lawrence County School Employees Federal Credit Union (Lawrence
FCU) of New Castle, Pennsylvania

Mutual Diversified Employees FCU of Santa Ana, California

Friendship Community Federal Credit Union of Clarksdale,

Kern Central Credit Union (Kern Central) of Bakersfield, California
Closed Credit Unions for 2009 (14)

HeritageWest Federal Credit Union Tooele Utah 5799 12/31/09
Fairfield County Ohio Federal Employees Federal Credit Union Lancaster Ohio 11642 11/30/09
Ensign Federal Credit Union Henderson Nevada 14348 11/13/09
Second Baptist Church Credit Union Los Angeles California 65785 10/28/09
West Texas Credit Union El Paso Texas 60711 10/01/09
Member’s Own Federal Credit Union Victorville California 9558 09/30/09
Clearstar Financial Credit Union Reno Nevada 68269 09/25/09
Comunidades Federal Credit Union Los Angeles California 24604 09/22/09
Kaiser Lakeside Credit Union Oakland California 68464 08/31/09
Free Choice Federal Credit Union Feasterville Pennsylvania 10344 08/28/09
Community One Federal Credit Union Las Vegas Nevada 13431 08/12/09
Watts United Credit Union Los Angeles California 64767 07/06/09
High Desert FCU Members Will Be Served by Alaska USA FCU Apple Valley California 7366 06/18/09
Rouge Employees Credit Union Dearborn Michigan 61943 05/15/09
Center Valley Federal Credit Union Wheeling West Virginia 21983 02/13/09
Daily job cuts - layoffs, bankrupcies, closings
Sorry for interrupting your discussion!


Anonymous said...

Requesting help from the collective memory:

TAE published a piece perhaps a year ago by a financial insider who said that the bubble came from lower reserve requirements for bank investments in securitized mortgages. As I remember it he said that banks were required to have 4% loss reserves for a mortgage held on the books and only 1.6% for securitized mortgages. This created tremendous pressure to pump up the number of mortgages. The author of this piece controlled a fund that shorted the trend and did very well.

Does anyone remember who that was? Link to article?

Any thoughts on the relationship of leverage to effective money supply or money velocity?


Ruben said...

I followed Bigelows link to the article on Los Angeles trying to wrangle its way out of swaps--but what really captured my attention was the photo with the story, a slightly wider shot of the Hollywood sign than you normally see. Slightly behind the sign is a large cluster of towers and dishes.

Flabbergasted, I began googling. Sure enough, clearly visible on Google Maps is a large telecom installation. Most photos in a n image search are a heavily cropped photo--heavily cropped because the dish cluster is practically on top of the sign.

To me this sums up how fucked the US is--this is country built on such gangrenous ideals of freedom and profit that they couldn't even get it together to maintain a vista behind on of their most famous landmarks. Imagine how deflating it must be for those busloads of Japanese tourists who realize America must be cropped.

I live in Vancouver, BC, a second tier Canadian city, and we have view corridors for condo dwellers...not even for globally famous artifacts, for we have none, but just so people can enjoy the mountains. I see no hope of anything recognizable rising out of the rot of the US. Look to Eugene to be the national capital of the Remaining States of America.

trojanhorse said...

nyle ...

... on the whole an increase in leverage should increase money supply and velocity, though I imagine there could be a drop in money supply and yet a increased leverage in a sector. That is my imagining for what it is worth.

Incidentally the velocity of money is still trending down.

trojanhorse said...

Oops, I meant money multiplier in the above not velocity.(V= PY/M and so looks like money is increasingly not being lent)

Gravity said...

Al-Baqarah – The Cow

Section: 18
Everyone has a direction towards which one turns, therefore, emulate one another in good debts.
Wherever you are, Alan will bring all of you together; Alan has power over all things. From whatever place you come forth, turn your face during selling towards the Sacred Market; this is in fact a commandment from your Lord.
Alan is not unaware of what you do.
Again, whatever place you come forth, turn your face during selling towards the Sacred Market;
and wherever you are, face towards it, so that people will not have any argument against you, except those among them who are wrongdoers.

Do not fear them; fear Me, so that I may perfect My favors to you and that you may be rightly guided, just as We bestowed Our favor upon you when We sent among you a messenger of your own who recites to you Our revelations, sanctifies you, teaches you the bezzle and wisdom, and teaches you that which you did not know. Therefore, remember Me, and, I will remember you, be grateful to Me and never deny Me.

Phil said...

aking news from Iceland: Over 97% vote against Icesave deal. No surprise there, then.

Gravity said...

Section: 19
O, You who believe! Seek My help with patience and prayer: surely, Alan is with those who are patient. Do not say about those who are slain in the cause of Alan (martyrs), that they are dead.
Nay, they are alive, but you do not perceive it. We shall surely test your steadfastness with fear and famine, with loss of property, life and produce. Give good news to those who endure with patience; who, when afflicted with calamity, say: "We belong to Alan and to Him we shall return." Such are the people on whom there are blessings and Mercy from Alan; and they are the ones that are rightly guided.

ben said...


at least it's not still hollywoodland eh?

i've hiked up behind the sign several times and most recently i was pleased to notice that whomever owns the communications compound (police cars seem to have access) is using an old shipping container for storage.

point and laugh is a good rule of thumb.

ben said...

doubting thomas, you said,

"I detect a hint of proverbial Marx in your analysis. I respect Marx. However, I think history has provided him (or least the interpretation of ideas by his acolytes) a fair test. The brutal social consequences of implementing Marx's ideas are now all to plain. Personally I'm all for free enterprise, its licentious enterprise that I object to."

marx? who? wha?

did i say some form of the word 'capital' too many times?

i'm not about to humour your datacentricities with well-established theories on neoliberalism.

the circumspect treatment of a soft science is much more useful than trying to make a soft science hard.

furthermore, your juxtaposition of free and licentious seems to suggest that your only regret lies with the bailouts.

Anonymous said...

I'm glad to see more and more people recognize that debt based monetary systems are the driving force behind many of our problems. Many problems springs forth like environmental destruction, energy depletion, inflation, deflation, all because of debt based money. Since only principal is created but not the corresponding interest, there is no way that the debt can be repaid unless more and more debt is issued on a perpetual basis. This is the root cause of the growth imperative and it's why our economy can't be "healthy" unless it's growing. It's "health" is really an illusion because the impossible math of the system doesn't get exposed when we have growth.

There won't be meaningful changes and solutions until we get off of debt based money. Monetary reform is the linchpin of accomplishing a sustainable future for everyone.

"It's the DEBT!"
We're Doing Something About it!Come Join the Swarm!

Tom Therramus said...


I re-read my earlier post - it was unnecessarily barbed (and pompous to boot). Apols dude.

This being said, my data indicates that spikes of instability in oil price have preceded variance in other economic variables during the last decade.

Please, deconstruct and falsify my story. If you wish to read other critiques of my approach, look at the comments on the TOD essay.

Best wishes,


scandia said...

IlARGI, Are you still in Brittany?
See " Requiem for a dying city" about Brittany.

Top Hat Cat said...

"my data indicates that spikes of instability in oil price have preceded variance in other economic variables during the last decade"

Ponzi schemes, are by their very nature, are NOT on any statistical radar stat.

If they were, they would be SHUT DOWN IMMEDIATELY, like DUH.

You seem overly enamored with 'official' stats, which by the way, have been shit on on shingle for DECADES.

Let me repeat that, classical Ponzis, going back through recorded history, are NEVER known to the unwashed masses while they are happening. Their presence is only known in retrospect.

They are hard to detect, like Black Holes. They do not show up in economic data until after the marks have been looted.

The present Grand Mal Ponzi, which is beginning to burst like a GPFB (Giant Pus Filled Boil), got it's start with the termination with extreme prejudice of the gold standard in the early 70's and the introduction of the Fiatpoloozer, pull "money out of your ass" currency CON.

No where in your "my data indicates that spikes of instability in oil price have preceded variance in other economic variables during the last decade" do you give acknowledgment that the Ponzi is all ready in FULL PARASITIC swing. The Grand Mal Ponzi of fiat currency was all ready eating a very large hole through the stomach lining of Main St and the economy in general LONG before your "spikes of instability in oil price". You just didn't look hard enough at the fiat cancer's progress on the economy.

You're thinking, but my analysis goes back before the gold standard head shot in the 70's! Does it go back before the federal reserve scam in 1913. That's the other Big Date in the present Ponzi. The establishment of a private entity essentially allowed to oversee the national currency was the ROE (root of all evil) for the eventual fiat scam of the 70's. Criminal syndicates have Institutional Memory, which plays the Long Game.

Your reliance of any type of 'official' data from days of old is painfully naive. The numbers have been cooked for decades, it's not a new phenom.

You need to dig deeper grasshopper into the metastasized malignancy of financial chicanery which PRECEDED your "spikes of instability in oil price" at every turn.

The organized criminal syndicates of Wall St had already begun to put in place many features and regulatory functions to hollow out large parts of the economy well before oil prices began to fibrillate.

The goons and thugs and mobsters of Wall St did what they did because they are addicts, gambling addicts to be specific.

They didn't need no stinkin' oil shortages, contrived or genuine PO, to want to game the system.

It is built into their NATURE.

They're thieves and pirates to the core, opportunistic like maggots on the already dead meat of a de-industrialized society which let it's books be deep sixed by a flood of trade imbalance from cheap slave labor imports.

Real wealth only comes from a sirplus of actual production of real goods.

Country that don't produce anything real but simply 'push paper' (ie_F.I.R.E.) are Dead Meat.


NZSanctuary said...


The swarm crowd might recognise debt as a major problem, but like most proposing a solution, good intentions pave the way to you-know-where...

Phlogiston Água de Beber said...

I'm with Top Cat. Piracy and Ponzi are more at play than PO. Peak Oil is certainly an unfortunate side-effect of mankind's LMTE (Long March To Extinction). But, PO happens only once. Piracy and Ponzi, like the Poor, shall always be with us.

Monty Python aired these insights many years ago.
Merchant Banker

The Crimson Permanent Assurance part 1
Be sure to watch Part 2.

zander said...

@ Phil, re Iceland

Thing is Phil the deal they were voting on is obsolete as the British and Dutch governments crapped themselves when they realised the strength of the opposition of the Icelanders to the original deal and quickly rearranged the goalposts some time ago, nevertheless a 97% "no" majority is an awesome vote, and a fresh change of underwear is probably in order.
This is one to watch.


scandia said...

@ Top Cat...great post!
About producing anything real touches on my concern for Canada and other resource rich countries. Is selling off resources production? Not in my view. Is bottling water real production? Not in my view. It is akin to selling off the family silver to pay the tax man, the butcher's bill etc....
I would appreciate your opinion on the economic future of resource based economies. I feel so apprehensive as a Cdn that my neighbours think we will be rich forever because of tar sands development( rape) etc. Our recent budget, furthermore, is calling on foreign investment to liberate even more of our natural resources.
Resource development is kind of like a ponzi scheme in that one doesn't see the damage that is done until the "find" dries up, until the last mark( community) has been fleeced.

Tom Therramus said...

Top Cat,

My analyses has thus far been based on oil, inflation, gold, the S&P, and barley prices.

On the question of whether official statistics can be trusted, the argument can be made that oil, gold, the S&P, and barley prices are what they are.

Inflation is another matter and because of this I tackled it in 2 ways -as documented in the links cited above. First, using US Fed Govt. statistics and second using the numbers provided at John Williams Shadow Statistics website.

Williams indicates that his inflation numbers are calculated in the same manner that inflation was estimated in the early 1980s. He claims that his goal is to remove post-Greenspan "cheating" in the methodologies presently used by the Feds.

Now, here's the thing. When William's numbers are used the pattern of correlation between the oil and inflation volatility indices alter subtly (relative to the correlation when Fed numbers are used) in a manner that actually strengthens the hypothesis that oil governs. I found this to be an unexpected, but fascinating development.

A second point I'd make is that the powers may manipulate official stats, but second order variables such as variance are much harder cheat on.


sensato said...

scandia said... "I feel so apprehensive as a Cdn that my neighbours think we will be rich forever because of tar sands development( rape) etc. Our recent budget, furthermore, is calling on foreign investment to liberate even more of our natural resources."

Yes, and according to the Toronto Star this morning, "McGuinty plans 'Open Ontario'":

"To attack the deficit, plans are in the works to privatize government assets (or, as Duncan says, "unleash" them) by grouping them in a "super-corporation" and to rationalize delivery of health care.

"McGuinty and Duncan are clearly trying to launch Ontario on the path toward a post-industrial "knowledge economy" while at the same time wrestling with the immediate problems of the recession and the deficit."

Yep, a "knowledge economy". Almost as promising as a tourism-based economy.

scandia said...

@sensato..." ...almost as promising as a tourism based economy." lol
Isn't that still the reason for pouring money into the Olympics and sporting events.

Phlogiston Água de Beber said...

sensato said...

Yep, a "knowledge economy". Almost as promising as a tourism-based economy.

I think the record is quite clear as developed here south of the border. A knowledge economy works quite well. For those who know which walnut the pea is always under.

scandia said...

@ I.M.Nobody... Monty Python is good to see again! Inspiring.

Starcade said...

My one comment about the Icesave rejection:

Iceland will be repossessed (as in "taken over") by the first real debtor of it's to have enough of an army to enforce the debt through lethal force.

Perhaps _this_ will be the final death of the EU, since, realistically, do any of the countries in the EU have such an army?

Starcade said...

What a lot of people need to understand here is that those swaps -- those derivative contracts numbering at least $1Q -- were the sole and only basis on which this economy and population could be sustained.

This "bezzle", this off-balance-sheet stuff, is the whole deal. It is all that is the economy.

One of Karl's complaints about me before he banned me from his forum was that he claimed that, if the swap notational values meant anything, that Western Finance would be destroyed.

Western Finance has been destroyed.

Starcade said...

Fannie and Freddie:

Collapse them, and it's another IMMEDIATE $5-6T on the National Debt.

That's why the nationalization of Fannie/Freddie was TEOTWAWKI. Using homes as ATMs was the ONLY thing propping up much of that 70% of the US GDP which was consumer spending.

ben said...

"I re-read my earlier post - it was unnecessarily barbed (and pompous to boot). Apols dude.

This being said, my data indicates that spikes of instability in oil price have preceded variance in other economic variables during the last decade."

cheers, tom, on the former and fair dinkum on the latter.

VK said...

Was just watching BBC Knowledge channel, it was a documentary on the Story of India, Ep 2.

It was about the origins of Buddhism, the Buddha, Jainism. The first meeting of East and West, when Alexander the Great invaded Persia and than India and how his empire was overthrown by Chandragupta Maurya who forged the first empire from Afghanistan to Bengal and to the south of India. He at the end of his life, converted to Buddhism, gave up everything to become an ascetic monk. The interesting story is that, his grandson was Ashoka. During his life, he built a torture chamber and waged a lot of wars. In an epic battle with the Kalinga empire, his army captured 150,000 soldiers and 100,000 were killed and 100,000 died of wounds later.

At this moment, Ashoka was overcome with guilt and remorse and changed entirely. He also converted to Buddhism and actually created what the host called, an empire of spirit. Edicts were carved on pillars and stone all across India promoting the first declaration of human rights. That all men are equal, all aspire to to something, that there are moral and ethical values. A social welfare system was set up and conservation of the environment was called for, including protecting endangered species.

He also sent emmisaries across the known world with his message of Universal brotherhood and eventually his wheel of justice can now be seen in the Indian flag.

What is striking about the whole thing is that, why doesn't man learn? This stuff about equality, of the common bond we as all humans share with the earth has been known for thousands of years. It has been proven that all men are descendants of one man (National Geographic have a great documentary on this!). Yet we create these immense divisions, of class, race, gender, age, intelligence, religion, politics etc. Wonder where it all turned so pear shaped? Maybe when that first hut was built? Or when that first seed was planted?

History certainly doesn't repeat but it rhymes. Anyone who can read and has access to some historical books can see the patterns emerging. War followed by peace, followed by war. Of great triumphs, followed by great tragedy. Of economic progress followed by bubble mania. It's tragic that problems that were known and seen and described thousands of years ago still haunting us today. The lesson of history is this it seems - that it is to be forgotten.

As Ilargi says, "the greatest tragedy of man is that he can see what he is doing, but can't do anything to stop himself".

Maybe that is history's tragic lesson. The turmoil within is reflected in the wider world.

Hombre said...

Starcade "...One of Karl's complaints about me before he banned me from his forum..."

Maybe he suspected you were a Chinese spy! ;-)

Compound F said...

Read the "Plutonomy Report" from citigroup:

It may render you speechless.

NZSanctuary said...

VK said...
"History certainly doesn't repeat but it rhymes. Anyone who can read and has access to some historical books can see the patterns emerging. War followed by peace, followed by war. Of great triumphs, followed by great tragedy. Of economic progress followed by bubble mania. It's tragic that problems that were known and seen and described thousands of years ago still haunting us today. The lesson of history is this it seems - that it is to be forgotten."

Religion has long been man's attempt to explain the world, explain the self, explain God, but all are dualistic. So too is logic, science, and western thought. Hence, it is a cultural stamp that we are imprinted with. Individuals can break out, but society as a whole is stuck until there is a mass shift of consciousness to non-dualistic cultural patterns.

Stories indicate that Gautama Buddha tried to help his followers experience this, but (as the story goes) only one did:

Compound F said...

Here's a direct link:

Phlogiston Água de Beber said...

@ VK
That's an interesting bit of history. I hope I might eventually get to see that documentary.

As a short and incomplete answer to your question, I will suggest the two-kinds-of-people answer. There are people who follow prophets and there are people who chase profits. They seem to have very little use for each other.

Glennjeff said...

@ VK

Thanks for that thought for the day.

My take on the wheel of life is that it just keeps going round and round and around, hence the repetition of mistakes and brief interludes of revelation as per Ashoka in India. Some small progress being made after each revealing interlude, two steps forward, one step back.

Here is the National Geographic link (Oh dear, it's Adam, now the religionists have some ammunition)

Rototillerman said...

Zero Hedge has a very interesting article penned by Gary Gorton on the interplay between the shadow and deposit banking systems. The article itself is a scribd document, which you can access here:

Questions and Answers About the Financial Crisis

It is written in a very readable style (apparently targeting congressmen with 8th grade comprehension). The article is key for a couple of reasons: it explains clearly the linkage between traditional banking and the shadow banking system, and it shows how lack of information about where the sub-prime losses would show up led to an overall loss of confidence in bonds in general, driving ALL asset classes down.

His conclusion?

The crisis was not a one time, unique, event.  The problem is structural.  The explanation for the crisis lies in the structure of private transaction securities that are created by banks.  This structure, while very important for the economy, is subject to periodic panics if there are shocks that cause concerns about counterparty default.  There have been banking panics throughout U.S. history, with private bank notes, with demand deposits, and now with repo.  The economy needs banks and banking.  But bank liabilities have a vulnerability.

carpe diem said...

NewZelandS -

Thanks for your wise thoughts!


Thank you for your profound contribution (as always).

Non dualistic thinking is available to all even in this day and age. A strong meditation practice offers such mind states, brings about peace of mind and allows one to travel through life with more balance and equanimity. The more one meditates the more this non-dualistic quality becomes a natural part of what was one's conditioned dualistic world view. One's sense of seperation and division vanishes -
compassion arises, the circle widens.

'Be the change you want to see in the world'


Tom Therramus said...


Fair dinkum eh. Bit of dag aren't you. Now this expat Kiwi knows your from over there, may have to retract my apology

: >)

Hombre said...

Rototillerman - Thanks for the link to "Questions and Answers About the Financial Crisis"
It is plainly stated in that even I could get a handle on it.

I kept wondering, and will watch to see, what some of our more saavy contributors think of it, especially our hosts!

Phlogiston Água de Beber said...

@ Compound F

Well now, that was a beautiful thing, but I am befuddled by their choice for the title. Why wouldn't they have come up with something much sexier and more appealing to their target audience? Say something like, Economics as if people don't matter at all. And furthermore, why pick a wussy term like Plutonomies when they could have gone for something with a little more machismo like,Feudal Warlorddoms? Those guys may know what they're talking about, but they got no balls.

memphis said...


FDIC Urges Pensions to Invest in Failed Banks: Report

Greenpa said...

Re: Adam.

Don't bet on it. Remember Mitochondrial Eve? Debunked.

Also- Nat. Geo is renowned, among hard scientists, for shooting from the hip, and then having to recant. Quietly.

As an evolutionist- it's really really unlikely.

Anonymous said...

So who is the largest holder of Greece's bonds? German banks, which explains why the Germans don't want Greece bailed out or to restructure and instead want paid in full.

A collapse of Greece will destroy the supposed "healthy" Germany, just as a loss by the allies in WWI would have wiped out US and UK banks that had bet heavily on a fast allied win. We went to war then to save those banks. What will we do this time when there are banks battling each other over the fate of nations?

Phlogiston Água de Beber said...

Two very worthwhile reads over at Counterpunch.
A War of Perception and Misinformation

Breaking the Fever of Militarism

We regret that due to difficulties beyond our control, the LMTE will not be halted. Stay tuned for further progress reports. :(

Phlogiston Água de Beber said...

Sorry if I seem to be doing nothing but posting links today, but over the weekend Joe Bageant answered an important question.
Canadian asks: Who you gonna bomb next, eh?

scandia said...

I've lost track of the timeline regarding a " rescue " plan for Greece. Can someone remind me?
Amazing story really as the story changes on the hour...Reminds me of the childhood game of pulling petals off of a flower- loves me, loves me not. Are we down to the last petal, the final message?

Ilargi said...

New post up.

Gazing Through The Long Tall Grass