Friday, November 25, 2011
Russian warships that have reached waters off Syria in recent days were carrying, among other things, Russian technical advisors who will help the Syrians set up an array of S-300missiles Damascus has received in recent weeks, a report in the London-based Arabic language Al Quds-Al Arabi said Thursday. Citing sources in Syria and Russia, the paper said that Moscow sees a Western attack on Syria as a “red line” that it will not tolerate.
Despite the mounting opposition in the West and even in the Arab world against Syrian dictator Bashar al-Assad for his assaults on protesters seeking to unseat him as leader of the country, Russia maintains its support for Assad, the report said. Russian and Syria military officials are working together to maintain Assad's rule, and to deflect a possible attack by NATO or the U.S and EU.
Along with the missiles, the report says that Russia has installed advanced radar systems in all key Syrian military and industrial installations. The radar system also covers areas north and south of Syria, where it will be able to detect movement of troops or aircraft towards the Syrian border. The radar targets include much of Israel, as well as the Incirlik military base in Turkey, which is used by NATO.
The S-300 system is regarded as one of the most potent anti-aircraft missile systems available. The system's radar is able to simultaneously track up to 100 targets while engaging up to 12. Deployment time for the S-300 is five minutes, and they have a very long life span, with no maintenance needed.
Russia had attempted to sell the system to Iran, but that sale was cancelled due to pressure by the U.S. and Israel, with Russia returning Iran's deposit. According to thereport, the Iranians paid for Syria's S-300 missile system. It is not known if some of themissiles have reached Iran as well.
HYDERABAD: The largest and last solar eclipse of this year will occur on Friday. A partial solar eclipse, it will be visible in Antarctica, Tasmania, New Zealand and the southern tip of Africa.
According to Planetary Society of India, the eclipse can be called the largest as the moon will eclipse 90 percent of the sun. The eclipse will begin at 9.53 a.m and end at 1.47 p.m.
The next opportunity to see a major solar eclipse in India will only be on December 26, 2019. Another solar eclipse will occur in 2016 and will be visible only in a few Indian states for a few minutes, said Raghunandan Kumar, general secretary, Planetary Society of India.
There have been six eclipses this year out of which four were solar and two lunar. Kumar added this 4:2 ratio in a single year is significant as it is rare and will occur only 6 times in the 21st century- 2011, 2029, 2047, 2065, 2076 and 2094.
STOCKHOLM — For some reason, Scandinavia is not its frigid self, with unusually warm weather delaying the onset of winter in northern latitudes normally decked in white.
The lack of snow has been bad news for winter sports — World Cup ski races have been dropped, or held on artificial snow, and mountain ski resorts are unable to open
There are even reports of bird song and blooming gardens in some places typically entering the winter freeze at this time of year.
“Some flowers, like roses, have actually begun to blossom for a second time,” said Mats Rosenberg, a biologist in Orebro, south-central Sweden.
Weather experts say this fall is on track to become one of the warmest on record in the northern part of Scandinavia, where the start of winter has been delayed by more than a month in certain locations.
In the Finnish town of Sodankyla, 80 miles (130 kilometers) north of the Arctic Circle, snow cover started Nov. 17, the latest date in 100 years, said Pauli Jokinen, spokesman at the Finnish Meteorological Institute.
Animals — such as stoats, hares and willow grouse — that change color with the season turned white weeks before the snows came, bringing an eerie feeling to the snowless wilds of Lapland.
“It was really very weird — ghost-like white figures darting among the yellow leaves and lichen,” said Viljo Pesonen, mayor of the town of 9,000.
“They don’t go by the weather conditions, time determines when they turn white. It has also made the place much darker as there has been no snow to lighten the shortening days,” he said, adding that heavy rain during the day had already cleared fields of snow.
Earlier this month, World Cup Alpine skiing races were moved from Levi, Finland, to Austria because of the lack of snow.
Cross-country World Cup races in Norway last weekend had to be moved from barren ground in Beitostoelen to Sjusjoen, where at least it was cold enough for artificial snow to stick.
Ski lifts remain idle in Are, Sweden’s biggest ski resort, which normally opens in the first half of November.
“But there is some snow at the very top, and so you have to throw the skis over the shoulder and make the 4-mile (6 kilometer) walk up there if you want to ski,” said Benny Paulsson, a spokesman for Are’s tourist office.
According to Sweden’s meteorological office SMHI, the average temperature measured for November so far is 12.6 degrees Fahrenheit (7 degrees Celsius) above average.
For example, the residents of Kiruna city, northern Sweden, had do deal with temperatures of 32 degrees Fahrenheit (0 degrees Celsius) on Thursday night, much warmer than they are accustomed to.
The Washington Post
Nov. 25 (Bloomberg) -- European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo urged euro-area politicians to take bold steps toward fiscal union to end the debt crisis, and said they should not rely on the ECB.
“Governments cannot expect the ECB to finance public deficits,” Gonzalez-Paramo said in a speech in Oxford, England, yesterday. “It is now a time for politicians to be bold and courageous” and “complete as soon as possible the great project begun 60 years ago towards ever closer union,” he said.
The ECB has rebuffed calls from politicians and investors to use its unlimited firepower to backstop euro-area bond markets as the debt crisis spreads to Italy and Spain. Backed by Germany, the ECB says asking it to rescue governments would compromise its independence and cause long-term damage to the 17-nation monetary union.
Gonzalez-Paramo said it is an advantage for the euro area that the ECB is prohibited by its founding treaty from printing money to finance member states, known as monetary financing.
“They must be commensurately more ambitious in their economic policies and more disciplined in their management of public finances to support their debt levels,” he said. “By forcing policy makers to focus their reform efforts on the right priorities, the monetary financing prohibition offers an incentive to closer economic and financial union.”
‘Transfer of Sovereignty’
Germany and France said yesterday they will make proposals to amend European treaties in coming days to impose greater fiscal discipline on euro-area countries as they struggle to win back investor confidence. French President Nicolas Sarkozy also agreed to stop pressuring the ECB to do more after resistance from German Chancellor Angela Merkel.
Gonzalez-Paramo said there is a need for “more economic and financial integration for the euro area, with a significant transfer of sovereignty to the EMU level over fiscal, structural and financial policies.”
He said the ECB’s role is to preserve price stability and the purchasing power of the euro, not to be a lender of last resort for governments.
Market participants who call for that “may care only about the nominal value of their assets and the need to avoid losses,” Gonzalez-Paramo said. “Whether or not the underlying asset -- our currency as store of value -- has been depreciated seems unimportant to them. But survey after survey shows that the people, the citizens of the euro area, want price stability.”
In questions after his speech, Gonzalez-Paramo said that common bonds for the region will exist in future even if “at this point in time they would not be commensurate with the degree of integration in the euro area.”
“If you have a euro bond without a common budget, you are offering an easy way out for countries,” he said.
China's navy will carry out exercises in the Pacific Ocean in the coming days, amid continuing tension over maritime disputes in the region.
The defence ministry said the drills were routine and were not targeting any specific country.
China is locked in territorial rows with several nations, and the US has recently made a series of announcements bolstering its presence in the region.
A Pentagon spokesman said the US had no problem with the naval exercises.
Captain John Kirby said that China was "entitled to exercise their military in ways they deem fit".
A short statement on the defence ministry's website announced the exercises late on Wednesday.
"This is an annual, planned, routine drill. It is not directed at any specific country or target and is in keeping with relevant international laws and practices," said the statement.
"China's freedom of navigation and other legal rights should not be obstructed."
Japanese defence officials reported seeing six warships sailing in international waters near the country's southern Okinawa prefecture.
China has clashed with several other nations in the South China Sea, where countries including Vietnam and the Philippines have overlapping claims.
US President Barack Obama announced last week that the US was boosting its presence in the region, and will base a full Marine task force in northern Australia.
Analysts say the US move is a direct challenge to China's attempts to dominate the area, and is likely to bolster US allies in the South China Sea dispute.
Ms Merkel instead used a three-way summit with France and Italy in Strasbourg to insist that new treaty powers to intervene and punish sinner states remained the key focus of Europe's rescue efforts. She said: "The countries who don't keep to the stability pact have to be punished – those who contravene it need to be penalised. We need to make sure this doesn't happen again."
Even suggestions that the ECB could extend longer loans to countries over a period of up to three years appeared to be ruled out. Ms Merkel said: "The ECB is independent, the modification of the treaty does not concern the ECB, which is dealing with monetary policy and financial stability. We are worried about a fiscal policy. It's a very different chapter. It has nothing to do with the European bank."
But at the start of the day, Jean Leonetti, French minister for European affairs, said: "France wants the ECB to have the same role as the Federal Reserve... Why is the euro under attack? It's simple. In the US there's a Federal Reserve. Europe has the ECB, but the ECB does not buy up sovereign debt if needed."
The calls were backed by Ettore Gotti Tedeschi, chairman of the Vatican bank, who also praised proposals to issue jointly guaranteed debt or eurobonds. Alistair Newton at Nomura said in a note: "The threat to the euro is greater now, in our view, than it has been at any time since the crisis started, with only the ECB now capable of averting a catastrophe."
After a clearly fractious meeting, Nicolas Sarkozy tried to crush the doubts Fitch cast over France's AAA rating on Wednesday. "[Fitch] said the AAA rating of France is stable - maybe that translation has not crossed the Rhine river," he said.
But after the summit, Mr Sarkozy had been forced into submission. "We all stated our confidence in the ECB and its leaders and stated that in respect of the independence of this essential institution we must refrain from making positive or negative demands of it," he said.
He added that proposals to change European treaties would be presented ahead of the EU summit on December 9. Italian premier Mario Monti pledged to balance the budget by 2013 - but failed to prevent the country's 10-year bonds closed in the danger zone again at 7.13pc.
As stock and bond markets lurched, there was bemusement about Germany's stance. Christian Schulz, an economist at Berenberg Bank, told reporters: "Unfortunately, we are in the paradoxical situation where we are pinning all our hopes on a new catastrophe for Berlin finally to move."
The exercises marked the first anniversary of North Korea’s artillery attack on the South Korean island of Yeonpyeong that killed two marines and two civilians.
The North’s military warned in a statement on Thursday that “a similar sea of fire” may engulf Seoul’s presidential Blue House if South Korean forces ever fire a single shot into North Korea’s territory. The warning was carried by North Korean state media.
Pyongyang blamed Seoul for provoking the attack last year, saying it struck after warning the South not to carry out live-fire drills in waters that both Koreas claim as their territory.
South Korea’s drills this week involved aircraft, rocket launchers and artillery guns and took place off Baengnyeong Island, another front-line territory near the disputed maritime border. Officials said they were meant to send a strong message to North Korean rivals stationed within sight just miles (kilometres) away. No live-fire activities took place.
The North Korean military threat comes despite recent signs that animosities between the rival Koreas are easing, with diplomats seeking to resume North Korean nuclear disarmament talks.
South Korean President Lee Myung-bak said that he was sorry North Korea has not yet apologised for the shelling, according to his office. He also said he expects Pyongyang to apologise if North Korea wants to improve relations between the two Koreas, which remain technically at war because their 1950s conflict ended with a ceasefire, not a peace treaty.
Israeli security forces officials said Wednesday that they believe Turkey is nearing a military intervention in Syria, in order to create a secure buffer zone for opposition activists.
Thus far, Ankara has given shelter to some 20,000 refugees who escaped the deadly crackdown by Syrian President Bashar Assad's security forces, and also housed Syrian opposition groups.
A protester facings riot police at Khalidia, near Homs, Syria, November 4, 2011.
Photo by: Reuters
In recent days, however, Israeli officials said that according to an updated assessment of the situation, Turkey is expected to set up secure buffer zones on its border with Syria that would allow armed opposition groups to organize against the Syrian regime from bases that would be protected by the Turkish army.
Turkish Prime Minister Recep Tayyip Erdogan has recently hardened his stance against Assad and suggested for the first time the possibility of foreign intervention in Syria.
Wide protests against Assad's regime have been ongoing across Syria, but in recent weeks the focal point of the armed resistance by army defectors was in the three northern cities close to Turkey's border – Idlib, Homs, and Hama.
According to various reports, there is an area in Idlib where the Syrian army lost control and has the potential to become an independent, rebel-controlled area, such as the Libyan city of Benghazi, which was seized by the rebels early in the revolution and became the temporary base for the opposition movement.
(Reuters) - Britain's banks are drawing up contingency plans in case there is a disorderly break-up of the euro zone or exit of some countries from the single currency as the sovereign debt crisis rages on, a top UK regulator said on Thursday.
Andrew Bailey, deputy head of the Prudential Business Unit at the UK's Financial Services Authority (FSA), said UK banks do not have large exposures to the euro zone, but must plan for the worst.
"We cannot be, and are not, complacent on this front," Bailey said at a conference. "As you would expect, as supervisors we are very keen to see the banks plan for any disorderly consequence of the euro area crisis.
"Good risk management means planning for unlikely but severe scenarios and this means that we must not ignore the prospect of a disorderly departure of some countries from the euro zone.
"I offer no view on whether it will happen, but it must be within the realm of contingency planning," he said.
Bailey, who was Chief Cashier at the Bank of England, moved to the FSA as part of preparations for a shake-up of UK financial supervision from 2013.
He will be deputy head of the new Prudential Regulation Authority which will be a subsidiary of the Bank.
Bailey has already held talks with Britain's banks, saying lenders needed little prompting, but the lack of a mechanism for a euro zone country to exit the currency made things more complicated.
"We have been talking to them already and we will be talking to them again and asking questions," Bailey added.
"There is no roadmap out there that says this is how it happens," Bailey later told reporters.
There is already rigorous testing of systems going on, including for a possible euro zone break-up, as part of an ongoing risk management process that has stepped up considerably in recent years, bankers told Reuters last week.
Banks are constantly testing their capital, liquidity and operations, such as payments systems, for risks and as the euro zone break-up threat has risen, that feeds into the checks.
Bank of England monetary policy committee member David Miles, said the euro zone crisis was already having a substantial impact on Britain by pushing up funding costs for banks and companies. He echoed Bailey's view that UK lenders were in a relatively strong position.
"But nonetheless they get sucked into some of the funding difficulties and that's already happened over the last four or five months," Miles told the Yorkshire Post newspaper on Thursday.
Scott Roger, a senior economist at the International Monetary Fund, said there was "phenomenal" scope for contagion risk across financial markets but there are few signs that regulators are coordinating even as the euro zone crisis deepens.
"National regulators still have a national champions view approach to banking," he told a Thomson Reuters IFR conference.
NOT JUST BANKS
A number of British firms, including budget airline easyJet and the world's biggest caterer Compass Group have said they have discussed or put in place contingency plans to deal with any collapse in the euro but many are reluctant to give details, perhaps reflecting the fact that there is little many of them can do.
Their best insurance policies are natural hedges in the form of the broadest possible customer base and exposure to the biggest possible basket of different currencies -- not something a company can change in a hurry.
"One of the great strengths of Compass is that we don't have an over-dependency on just one or two clients, we have 40,000 clients across the world," Chief Executive Richard Cousins told reporters earlier this week.
James Hickman, managing director at foreign exchange firm Caxton FX, said he strongly believed that countries would start to drop out of the euro zone, with Greece looking like a good first bet.
"Over the past few years, we have invested heavily in infrastructure, which enables us to adapt swiftly to any changes. For example, if Greece were to drop out of the euro today, we could very quickly add the drachma to our list of tradeable currencies," he told Reuters. "No-one can provide a definitive answer about what is going to happen to the euro and that's why we need to be prepared for any given situation."
Bailey said the resilience of UK banks had improved substantially since the 2007-2009 near meltdown of the global financial system. "Today, UK banks are not front-and-centre of the problem," Bailey said.
The current phase of the crisis has not singled out UK banks as they do not have large direct exposures to the vulnerable euro zone countries.
UK banks were also forced to build up liquidity buffers ahead of the new Basel III global bank rules that take effect from 2013.
Bailey signalled flexibility on their use in the current stressed times for funding markets as policymakers want banks to continue lending to an already stumbling economy.
"These buffers should be used in times like the present... But they will need to be rebuilt," Bailey said.
He welcomed moves by banks to ditch non-core assets as it sent an important signal to investors, regulators and the public that lenders were committed to structural changes.
"Actions speak louder than words here. My best guess is that we will see a sharp reduction in the scale of investment banking activity undertaken in the banking sector," Bailey said.
One of his key worries was "disorderly" deleveraging seen at some banks in continental Europe as they race to meet temporary, higher capital buffers in a bid by the EU to shore up confidence in the sector.
"The UK banks are not experiencing the worst sort of deleveraging," Bailey said.
The Irish government has suddenly complicated the picture by requesting debt relief from as a reward for upholding the integrity of the EU financial system after the Lehman crisis, though there is no explicit linkage between the two issues.
"We carried an undue burden for protecting the European banking system from contagion," said finance minister Michael Noonan.
"We are looking at ways to reduce the debt. We would like to see our European colleagues address this in a positive manner. Wherever there is a reckless borrower, there is also a reckless lender," he said, alluding to German, French, British and Dutch banks.
Mr Noonan hinted that Dublin is asking for some of interested relief on a €31bn EU promissory noted linked to the Anglo Irish fiasco, among other matters.
Mr Noonan said Ireland's public mood has turned very sour.
"We have indicated to Europe's authorities that it will be difficult to get the Irish public to pass a referendum on treaty change," he said.
The EU's new fiscal rules would be legally binding and "justiciable" before the European Court, he said. This raises the likelihood that Ireland's top court would insist on a referendum.
The Irish voted `No' to both the Nice and Lisbon Treaties, before being pressured into repeat ballots, and would certainly some form of quid pro quo in this case.
Ireland took on the bulk of the debt from its oversized banking system in 2008, resisting a chorus of calls for the country to follow Iceland's example and walk away from private bank liabilities. Had Ireland done so, it might have set off a catastrophic chain reaction across Britain and Europe.
The fateful move has saddled the taxpayers with colossal losses from Anglo Irish and other banks, and will push public debt to near 118pc of GDP by 2014. There is a widespread resentment in Ireland that taxpayers were sacrificed for the greater cause of Europe without receiving any acknowledgement from the EU's creditor states.
Ireland was ordered to pay a penal surcharge of 300 basis points on the orginal EU loan package, which Mr Noonan described as a "piece of foolishness" that has since been abandoned. "Bank shareholders were wiped out already so they had their sharp lesson in moral hazard."
Ireland has imposed haircuts on the junior debt tranches of rescued banks. Mr Noonan said this may now be extended to Bank of Ireland debt to help cover €350m of fresh capital it needs by next month. The state holds 15pc of the bank's equity.
Mr Noonan said Ireland is sheltered from the storm blowing through the eurozone since it does not need market funding until 2013, but the crisis cannot be allowed to drag on. "Some way will have to be found to create a firewall. The role of the ECB is a matter of debate. There may be legal difficulties in it operating in the same way as the Federal Reserve.Whether the ECB has a role in working with the IMF or EFSF (bail-out fund) is under discussion," he said.
Ireland has no "detailed contingency plans" for a eurozone break-up. "Obviously, we have thought about it, but it's a very remote possibility," he said.
Mr Noonan said the country will stay the course with unbending austerity, even though nominal gross national product (GNP) has already contracted by 22pc. Public wages have fallen 12pc on average under Ireland's "internal devaluation" policy to regain competitiveness within EMU. There are likely to be further wage cuts in the December budget.
"We have to face reality. There is no painless way, no soft option: we're going to cut spending drastically, but with social cohesion. We don't want situation we see in Greece with people on streets and the foundations of state under threa. We're not going that route."
Moody’s Investors Service on Wednesday warned that its top credit rating for the United States could be in jeopardy if lawmakers backtrack on $1.2 trillion in deficit cuts planned over 10 years.
The ratings firm said the failure of a U.S. congressional committee to reach an agreement on deficit reduction did not affect the Aaa rating, but any pullback from agreed automatic cuts to take effect starting in 2013 could prompt it to take action.
“While a change in the composition of the spending cuts would not be a major rating consideration, a reduction in the total amount that would increase the projected increase in federal debt over the coming decade could have negative rating implications,” Moody’s said in a statement.
Investors have raised concerns that Congress might try and undo the $1.2 trillion in automatic spending cuts — split evenly between domestic and military programs — that are to be triggered following the failure of the 12-member congressional “super committee” to reach a deal.
Republicans are already scrambling to shield the military from $600 billion in cuts, though President Barack Obama has vowed to veto any effort to undo those cuts.
The United States already suffered a blow to its top AAA credit rating in early August, when Standard & Poor’s cut its rating to AA-plus on concerns over the government’s budget deficit and rising debt burden.
On Monday, S&P said the super committee’s failure did not affect its current view on the rating.
The 12-member super committee, split evenly between Democrats and Republicans, abandoned its effort to reach a deal on Monday, with both sides blaming the other for the impasse.
Steven Hess, Moody’s lead analyst for the United States in New York, said the committee’s failure was not a surprise and said the critical factor for Moody’s is the total amount of deficit cuts.
Moody’s is basing its view of the current rating on the expectation that the full $2.1 trillion in deficit reduction will be carried out.
“We had been expecting there would be deficit reduction of that amount one way or the other,” Hess told Reuters in a phone interview.
Moody’s had placed a negative outlook on its rating on the United States on Aug. 2, setting a general time frame of 18 months to two years in which it could decide whether to cut the rating.
Competitor Fitch, after affirming its AAA rating with a positive outlook on Monday, said the failure of the super committee “would likely result in a negative rating action — most likely a revision of the rating outlook to negative.”
Less likely would be a one-notch downgrade, Fitch said, adding that a decision would come before the end of the month.
Moody’s Hess said the committee could have come up with a bigger deficit reduction package, which would have been positive for the United States’ credit-worthiness, “but we didn’t necessarily expect that.”
“Some members of Congress appear to favor changing the mix of these spending cuts to lessen the impact on defense spending,” Moody’s said in its statement.
Hess said the composition of the spending cuts was not a major consideration.
“Well, not in a big way. A thorough analysis could indicate that it would have a marginal effect on the rate of economic growth over time depending on the composition of government spending. But we we think that would be marginal and not something that would really affect the rating,” he said.
Italy has been forced to pay record interest rates in a 10bn euro ($13bn; £9bn) auction of treasury bills.
The rate of interest for the new debts due to be repaid in six months was 6.504%, compared with 3.535% in the last comparable sale on 26 October.
The rate for two-year borrowing was 7.814%, up from 4.628% last time.
The Bank of Italy stressed that demand for the bonds had been high, with demand for the debts outstripping supply by 50%.
"The pricing is awful," said Padhraic Garvey, rate strategist at ING.
"The object of the exercise this morning was to get the job done and they've done that, but that's about the only positive thing to say."
The FTSE MIB in Milan dropped 1% following the auction, to take it down 1.9% on the day, underperforming the rest of Europe, where the London, Paris and Frankfurt's benchmark indexes were all down by about 0.5% on the day.
The Italian government's implied cost of borrowing, based on the price at which its debts are traded on financial markets, has risen steadily over the last few weeks to levels seen as unsustainable in the long-term.
However, it is only when the government raises new money at debt auctions, such as those held on Friday, that it is forced to actually pay the higher rates on its debts.
Italy plans to sell another 8bn euros at an auction on Tuesday.'Slow disintegration'
A debt security, or more simply, an IOU. The bond states when a loan must be repaid and what interest the borrower (issuer) must pay to the holder. They can be issued by companies, banks or governments to raise money. Banks and investors buy and trade bonds.
Wednesday, November 23, 2011
With fiscal time bombs ticking in both Europe and the United States, the pertinent question for now seems to be which will explode first. For much of the past few months it looked as if Europe was set to blow. But Angela Merkel’s refusal to support a Federal Reserve style bailout of European sovereigns and her recent statement the she had no Hank Paulson style fiscal bazooka in her handbag, has lowered the heat. In contrast, the utter failure of the Congressional Super Committee in the United States to come up with any shred of success in addressing America’s fiscal problems has sparked a renewed realization that America’s fuse is dangerously short.
Chancellor Merkel has been emphatic that European politicians not be given a monetary crutch similar to the one relied on by their American counterparts. Her laudable goal, much derided on the editorial pages of the New York Times, is to defuse Europe’s debt bomb with substantive budget reforms, and as a result to make the euro “the strongest currency in the world.” Much has been made of the poorly received auction today of German Government bonds, with some saying the lack of demand (which pushed yields on 10-year German Bonds past 2% --hardly indicative of panic selling) is evidence of investor unease with Merkel’s economic policies. I would argue the opposite: that many investors still think that Merkel is bluffing and that eventually Germany will print and stimulate like everyone else. It is likely for this reason that yields on German debt have increased modestly.
In contrast, the U.S. is crystal clear in its intention to ignore its debt problems. With the failure of the Super Committee this week it actually became official. American politicians will not, under any circumstances willingly confront our underlying debt crisis. While the outcome of the Super Committee shouldn’t have come as a great surprise, the sheer dysfunction displayed should serve as a wakeup call for those who still harbor any desperate illusions. Some members of Congress, such as John McCain, have even come out against the $1.2 trillion in automatic spending cuts that would go into effect in January 2013. Expect more politicians of both parties to cravenly follow suit.
Over the next decade, the U.S. government expects to spend more than $40 trillion. Even if the $1.2 trillion in automatic cuts are allowed to go through, the amount totals just 3% of the expected outlays. In a masterstroke of hypocritical accounting, $216 billion of these proposed “cuts” merely represent the expected reductions in interest payments that would result from $984 billion of actual cuts. These cuts won’t make a noticeable dent in our projected deficits, which if history can be any guide, will likely rise by much more as economic reality proves far gloomier than government statisticians predict. Finally, the cuts are not cuts in the ordinary sense of the word, where spending is actually reduced. They are cuts in the baseline, which means spending merely increases less than what was previously budgeted.
In the mean time, the prospect of sovereign default in Europe is driving “safe” haven demand for the dollar. So contrary to the political blame game, Europe’s problems are actually providing a temporary boost to America’s bubble economy. However, a resolution to the crisis in Europe could reverse those flows. And given the discipline emanating from Berlin, a real solution is not out of the question. If confidence can be restored there, each episodic flight to safety may be less focused on the U.S. dollar. Instead, risk-averse investors may prefer a basket of other, higher-yielding, more fiscally sustainable currencies.
The irony is that Europe is actually being criticized for its failure to follow America’s lead. This misplaced criticism is based on the mistaken belief that our approach worked. It did not. Sure, it may have delayed the explosion, but only by assuring a much larger one in the future. In the mean time, many have mistaken the delay for success.
However, if Merkel’s hard line works, and real cuts follow, Europe will be praised for blazing a different trail. As a result the euro could rally and the dollar sink. Commodity prices will rise, putting even more upward pressure on consumer prices and interest rates in the United States.
Any significant reversal of the current upward dollar trend could provide a long awaited catalyst for nations holding large dollar reserves to diversify into other currencies. My guess is that Merkel understands the great advantage the U.S. has enjoyed as the issuer of the world’s reserve currency. I believe she covets that prize for Europe, and based on her strategy, it is clearly within her reach.
There is an old saving that one often does not appreciate what one has until it’s lost. The nearly criminal foolishness now on display in Washington may finally force the rest of the world to cancel our reserve currency privileges. The loss may give Americans a profound appreciation of this concept.
MOSCOW (AP) – Russia threatened on Wednesday to deploy missiles to target the U.S.missile shield in Europe if Washington fails to assuage Moscow's concerns about its plans, a harsh warning that reflected deep cracks in U.S.-Russian ties despite President Barack Obama's efforts to "reset" relations with the Kremlin.
President Dmitry Medvedev said he still hopes for a deal with the U.S. on missile defense, but he strongly accused Washington and its NATO allies of ignoring Russia's worries. He said Russia will have to take military countermeasures if the U.S. continues to build the shield without legal guarantees that it will not be aimed against Russia.
The U.S. has repeatedly assured Russia that its proposed missile defense system wouldn't be directed against Russia's nuclear forces, and it did that again Wednesday.
"I do think it's worth reiterating that the European missile defense system that we've been working very hard on with our allies and with Russia over the last few years is not aimed at Russia," said Capt. John Kirby, a Pentagon spokesman. "It is … designed to help deter and defeat the ballistic missile threat to Europe and to our allies from Iran."
White House spokesman Tommy Vietor said the United States will continue to seek Moscow's cooperation, but it must realize "that the missile defense systems planned for deployment in Europe do not and cannot threaten Russia's strategic deterrent."
But Medvedev said Moscow will not be satisfied by simple declarations and wants a binding agreement. He said, "When we propose to put in on paper in the form of precise and clear legal obligations, we hear a strong refusal."
Medvedev warned that Russia will station missiles in its westernmost Kaliningrad region and other areas, if the U.S. continues its plans without offering firm and specific pledges that the shield isn't directed at its nuclear forces. He didn't say whether the missiles would carry conventional or nuclear warheads.
In Brussels, NATO Secretary-General Anders Fogh Rasmussen said he was "very disappointed" with Russia's threat to deploy missiles near alliance nations, adding that "would be reminiscent of the past and … inconsistent with the strategic relations NATO and Russia have agreed they seek."
"Cooperation, not confrontation, is the way ahead," Rasmussen said in a statement.
The U.S. missile defense dispute has long tarnished ties between Moscow and Washington. The Obama administration has repeatedly said the shield is needed to fend off a potential threat from Iran, but Russia fears that it could erode the deterrent potential of its nuclear forces.
"If our partners tackle the issue of taking our legitimate security interests into account in an honest and responsible way, I'm sure we will be able to come to an agreement," Medvedev said. "But if they propose that we 'cooperate,' or, to say it honestly, work against our own interests, we won't be able to reach common ground."
Moscow has agreed to consider a proposal NATO made last fall to cooperate on the missile shield, but the talks have been deadlocked over how the system should be operated. Russia has insisted that it should be run jointly, which NATO has rejected.
Medvedev also warned that Moscow may opt out of the New START arms control deal with the United States and halt other arms control talks, if the U.S. proceeds with the missile shield without meeting Russia's demand. The Americans had hoped that the START treaty would stimulate progress in further ambitious arms control efforts, but such talks have stalled because of tension over the missile plan.
While the New START doesn't prevent the U.S. from building new missile defense systems, Russia has said it could withdraw from the treaty if it feels threatened by such a system in future.
Medvedev reaffirmed that warning Wednesday, saying that Russia may opt out of the treaty because of an "inalienable link between strategic offensive and defensive weapons."
The New START has been a key achievement of Obama's policy of improving relations with Moscow, which had suffered badly under the George W. Bush administration.
"It's impossible to do a reset using old software, it's necessary to develop a new one," Medvedev's envoy to NATO, Dmitry Rogozin, said at a news conference.
The U.S. plan calls for placing land- and sea-based radars and interceptors in European locations, including Romania and Poland, over the next decade and upgrading them over time.
Medvedev said that Russia will carefully watch the development of the U.S. shield and take countermeasures if Washington continues to ignore Russia's concerns. He warned that Moscow would deploy short-range Iskander missiles in Kaliningrad, a Baltic Searegion bordering Poland, and place weapons in other areas in Russia's west and south to target U.S. missile defense sites. Medvedev said Russia would put a new early warning radar in Kaliningrad.
He said that as part of its response Russia would also equip its intercontinental nuclear missiles with systems that would allow them to penetrate prospective missile defenses and would develop ways to knock down the missile shield's control and information facilities.
Igor Korotchenko, a Moscow-based military expert, was quoted by the state RIA Novostinews agency as saying that the latter would mean targeting missile defense radars and command structures with missiles and bombers. "That will make the entire system useless," he said.
Medvedev and other Russian leaders have made similar threats in the past, and the latest statement appears to be aimed at the domestic audience ahead of Dec. 4 parliamentary elections.
Medvedev, who is set to step down to allow Prime Minister Vladimir Putin to reclaim the presidency in March's election, leads the ruling United Russia party list in the parliamentary vote. A stern warning to the U.S. and NATO issued by Medvedev seems to be directed at rallying nationalist votes in the polls.
Rogozin, Russia's NATO envoy, said the Kremlin won't follow the example of Soviet President Mikhail Gorbachev and take unwritten promises from the West.
"The current political leadership can't act like Gorbachev, and it wants written obligations secured by ratification documents," Rogozin said.
Medvedev's statement was intended to encourage the U.S. and NATO to take Russia seriously at the missile defense talks, Rogozin said. He added that the Russian negotiators were annoyed by the U.S. "openly lying" about its missile defense plans.
"We won't allow them to treat us like fools," he said. "Nuclear deterrent forces aren't a joke."