Analysis: Is student loan, education bubble next? (AP)

First the dot.coms popped, then mortgages. Are student loans and higher education the next bubble, the latest investment craze inflating on borrowed money and misplaced faith it can never go bad?

Some experts have raised the possibility. Last summer, Moody's Analytics pronounced fears of an education spending bubble "not without merit." Last spring, investor and PayPal founder Peter Thiel called attention to his claims of an education bubble by awarding two dozen young entrepreneurs $100,000 each NOT to attend college.

Recent weeks have seen another spate of "bubble" headlines — student loan defaults up, tuition rising another 8.3 percent this year and finally, out Thursday, a new report estimating that average student debt for borrowers from the college class of 2010 has passed $25,000. And all that on top of a multi-year slump in the job-market for new college graduates.

So do those who warn of a bubble have a case?

The hard part, of course, is that a bubble is never apparent until it bursts. But the short answer is this: There are worrisome trends. A degree is an asset whose value can change over time. Borrowing to pay for it is risky, and borrowing is way up. The stakes are high. You can usually walk away from a house. Not so a student loan, which can't even be discharged in bankruptcy.

But there are also important differences between a potential "student loan bubble" and an "education bubble." Furthermore, many economists think the whole concept of a bubble is a misleading way to think about what's happening, and may actually distract from the real problems. College affordability is a serious issue, but it's a different one. Borrowing for college and borrowing for, say, a house, are fundamentally different in important ways.

To be sure, there are some classic bubble warning signs:

_Everybody wants in. The idea that higher education is the only way to get ahead has become widely held. College enrollment has surged one-third in a decade. With rising demand, college tuition and fees have more than doubled over that time, outstripping inflation in every other major sector of the economy — energy, health care and housing, even when housing was bubbling itself.

_Those bills are paid with borrowed money. The volume of outstanding student loans is rising rapidly and now exceeds credit card debt, though recent reports of it crossing $1 trillion may be premature. Moody's Analytics puts the number at around $750 billion. But while credit card debt is declining, student loan debt keeps going up.

_Just like housing, many student loans were made with little or no research into whether borrowers were fit. Federal Stafford loans are basically automatic for college students, and government backing for other types of loans gave other student lenders little reason to be picky.

_Defaults on federal student loans jumped from 7 percent to 8.8 percent in the most recent fiscal year. That measures just recent borrowers who were already behind within two years of their first payments coming due.

Those numbers are all alarming. But putting them in context requires thinking separately about the ideas of a "student loan bubble" and an "education bubble."

First, one thing that's important about the possible student loan bubble is that it poses much less of a threat than housing debt did to drag down the entire economy. Yes, many individual borrowers may find themselves in trouble. But total student loans probably amount to less than 10 percent of outstanding mortgages. Every single student loan could default and it still probably wouldn't match total mortgage defaults during the recent downturn. More importantly, unlike mortgages, Wall Street isn't knee-deep in securities comprised of bundled student loans, as it was with mortgages. (It also helps that it's also harder to speculate in student loans; an investor can flip a house, but not a brain.)

The other big difference with student loans is the dominant role the federal government has assumed in the market in the last few years: it accounts for roughly 85 percent of student debt.

That matters for several reasons.

First, the government is answerable to voters and not shareholders, so it's more likely than private investors to take steps such as those announced by President Barack Obama to try to relieve student debt burdens.

Second, notes Mark Kantrowitz of the website Finaid.org, it's important to remember what actually causes a bubble to burst. It's not simply a run-up in prices. What bursts the bubble is a liquidity crisis, when borrowers suddenly can't get the money they need. Even during the depths of the 2008 financial crisis, when private student loans dried up, the government's dominant role kept student loans flowing.

That doesn't guarantee the bubble won't slowly and painfully deflate over time. But it insures against the chaos of a "crash" where suddenly students can't get loans at all — a scenario that could shut down untold numbers of colleges whose students rely on financial aid.

None of that, however, changes the fundamental risk for individual student borrowers: they could borrow heavily to pay for a college education and find the return much less than expected.

It's here, looking at the debate from an individual borrower's point of view as opposed to the entire economy, that the debate over the term "bubble" gets tricky. Can an education lose value?

Certainly a college degree can.

A key measure is the wage premium for bachelor's degree recipients over those with just high school diploma, and there are various ways to measure it. All show the wage premium is substantial, though after rising steadily for years it appears to have slipped some lately. Wages for the median bachelor's degree recipient are roughly $55,292, compared to $34,813 for those with only high school, according to the latest data from Georgetown University's Center on Education and the Workforce.

That reflects a premium that has fallen from roughly 67 percent a few years ago to 59 percent (the latest Bureau of Labor Statistics data put the 2010 premium at 65 percent for weekly wages). Still, all told, estimates for the lifetime earnings advantage of a college degree range from a conservative $500,000 to more than $1 million, according to the Census Bureau. Even with recent price increases, for the average student loan borrower that remains a very high return on investment.

It's true the unemployment rate for new college graduates is more than 10 percent. But unemployment for college graduates overall is 4.2 percent, compared to 9.7 percent for those with a high school degree.

Could college prices rise so much, and the premium fall so far, that a degree is no longer worth it? Of course, for some degrees. But in a modern economy, it's difficult to imagine that happening across the board. Here's where a degree is truly unlike other assets — most should correlate at least somewhat with skills that are useful in the world. Particular degrees may prove bad bets, but to imagine the premium on education itself dropping off a cliff is to imagine a world where things have gone so wrong that job skills no longer matter.

Or, as Kent Smetters, an economist at the University of Pennsylvania's Wharton School, puts it: "In that case, nobody's worried about paying back their loans. Everyone's heading for bunkers in Idaho and canned goods and that kind of stuff."

Here's the rub: Nobody earns a generic "college degree." Degrees are earned from different schools, with different reputations, and in different majors with much different payoffs. What counts most, says Georgetown's Anthony Carnevale, are the courses you take and your major. Roughly 30 percent of associate's degree recipients earn more than people with bachelor's degrees. A graduate with a mere certificate in engineering will earn roughly 20 percent more than the average bachelor's recipient.

That suggests there isn't one big bubble, but many smaller but significant ones stretching across different sectors — certain liberal arts grads, artists, lawyers who borrow six figures for law school and can't find a job, and students at for-profit colleges. The signs of a bubble at for-profits are unmistakable: Enrollment has tripled in a decade, roughly 96 percent of graduates have loans and borrowing is substantially higher than at other types of institutions. Default rates recently jumped to 15 percent.

But what's most important is the huge numbers who never earn a degree at all. At community colleges and for-profit schools, roughly one in five aiming for a bachelor's degree fail to secure it. Even at four-year public universities, the failure rate within six years is almost half. Anyone who borrows a large amount of money and then fails to complete a degree is in a world of hurt — quite possibly worse off than if they'd never even tried to go to college in the first place.

View the original article here

Analysis: Mortgage probe may open new path for housing relief (Reuters)

(Reuters) – A controversial weapon could be deployed soon in the U.S. fight against the housing crisis as states and top banks near a deal in their dispute over mortgage abuses -- cutting the mortgage debt owed by homeowners.

Five major banks could be required to commit roughly $15 billion to reduce principal balances for struggling homeowners and modify loans in other ways under a proposed deal to settle allegations linked to the "robo-signing" scandal.

That amount would be part of broader sanctions that could total $25 billion, small change for the giants of Wall Street but potentially sowing the seed for a new approach to tackling the housing crisis.

Settlement talks continue with the banks, state attorneys general and some federal agencies over foreclosure shortcuts and other abuses. A deal could be struck within a month, according to people familiar with the matter.

Much of the exact language has yet to be hashed out but it could provide for the first broad use of principal writedowns, something economists and housing advocates say is a drastic but needed step to help set right the housing market.

Investors and the government-controlled mortgage finance giants Fannie Mae and Freddie Mac -- which own around half of all U.S. mortgages -- have long resisted the idea.

There are concerns it could encourage some borrowers to stop paying in order to qualify for a reduction in their overall mortgage.

Fannie and Freddie's regulator has been wary of allowing principal reductions, doing so would lower the value of the assets held by the taxpayer-supported firms.

More broadly, public anger over the possibility of bailouts for homeowners who got out of their depth in debt is seen as one of the origins of the conservative Tea Party movement.

Given the political sensitivity, the Obama administration has so far trodden carefully to help homeowners. It wants to let more borrowers refinance to lower interest rates and stretch out the terms of loans to reduce monthly payments.

Some officials at the Federal Reserve say the central bank should buy more mortgage debt to bring down borrowing rates.

But those efforts do little to address the underlying problem, that many borrowers owe more than their homes are worth.

Under a potential settlement, the five banks -- Bank of America, JPMorgan Chase, Citigroup, Wells Fargo, and Ally Financial -- would have to meet dollar targets to reduce principal for underwater borrowers.

"I think it will be a step in the right direction," said Ira Rheingold, executive director of the National Association of Consumer Advocates. "The AGs hope this could work as a pilot program, and show how principal reduction could work."

To be sure, the reductions will have limited impact. The deal is unlikely to touch mortgages held by Fannie and Freddie. And according to a back-of-the-envelope calculation, $15 billion in reduction at $50,000 per borrower could reach around 300,000 borrowers, a fraction of the 11 million underwater homeowners.

But a deal may prompt banks to expand the limited principal reduction programs that they have so far directed toward only the riskiest loans in their portfolios.

The settlement could lay the groundwork for a broader program, if Fannie and Freddie are swayed to test it out themselves as an alternative to the costly process of foreclosing on struggling borrowers.

"Fifteen billion (dollars) is a drop in the bucket, but here might well be the very opportunity to conduct an experiment," said Ken H. Johnson, a professor at Florida International University's business school.

PRIOR EFFORTS

One model could be the 2008 settlement between Countrywide, the mortgage lender bought by Bank of America in that year, and state attorneys general. It provided a framework for loan modifications that became the basis for the administration's Home Affordable Modification Program which has so far had only a modest impact.

That deal set up the now widely used "waterfall" approach to trying to lower a borrower's monthly payment through a series of steps that include reducing the interest rate, extending the term of the loan and deferring some principal.

The states are hopeful a settlement on foreclosure abuses could have a similar ripple effect.

Not all states are satisfied with Bank of America's compliance with the 2008 settlement, presaging some concerns that could arise in any new settlement. Nevada and Arizona sued the bank saying it did not honor its obligations and engaged in "deceptive" practices in dealing with distressed borrowers.

Shum Preston, a spokesman for the California attorney general, also said that his office continues to receive complaints from Countrywide borrowers.

But Massachusetts, which last year extracted an additional commitment from Bank of America to reduce around $3 billion in principal on some of its riskiest loans across the country, said the bank had been complying with the settlement.

A spokesman for the attorney general's office in the state, Brad Puffer, said around 2,600 residents have received loan modifications under the settlement, saving some $125 million in mortgage payments, including both principal reductions and other types of modifications.

Bank of America said it had extended 49,000 offers to reduce principal for underwater borrowers nationwide, forgiving almost $3 billion in principal payments, since the agreement.

That settlement, and a similar one by Wells Fargo, were directed at the riskiest loans, leaving largely untouched more traditional mortgages that still deep underwater due to cratering home prices.

Wells says it has provided $4 billion in principal reduction as part of 96,000 modifications completed since the Wachovia acquisition. In addition, since 2010, Wells has participated in a HAMP principal reduction program.

"We're never been here before so we can't look to past experience," said Johnson, the business school professor, "with the added complexity of what foreclosures do to market pricing, some form of principal reduction may be the answer."

(Reporting by Aruna Viswanatha in Washington D.C. and Rick Rothacker in Charlotte, North Carolina; Editing by Tim Dobbyn)

View the original article here

Analysis: Bernanke's shrinking gift to Wall Street (Reuters)

NEW YORK (Reuters) – Wall Street could make $100 million from the Federal Reserve's next bond market maneuver, but that is considerably less than the gains from prior Fed actions.

Because the central bank is not contemplating steps that would increase the money supply, the benefit to investment banks like Goldman Sachs Group Inc, Morgan Stanley and JPMorgan Chase & Co will likely be more muted. (Graphic: http://r.reuters.com/bez63s)

The Fed is considering intervening in the bond market to lower long-term interest rates in a move known as "Operation Twist." According to Rick Spear, who advises Wall Street banks on strategy at consulting firm Novantas, the effort could boost Wall Street trading revenue by $100 million through the Fed's direct purchases, as well as a "ripple effect" from other bond investors' activity.

That is piddling compared with the $23 billion of quarterly trading revenue that global banks averaged from 2000 through 2010, according to Oppenheimer Research, and compared with the $1 billion of extra revenue that Spear estimates Wall Street received from the second round of quantitative easing.

For the first two rounds of quantitative easing, the Fed was expanding the money supply by buying billions of dollars of bonds. The purchases translated to new money sloshing around the bond markets, which supported overall trading activity beyond the Fed's purchases.

Both rounds of quantitative easing coincided with relatively strong trading profit for Wall Street, with the biggest benefit coming from the first round, when the Fed was buying a wider array of products.

For Operation Twist, the Fed would be selling shorter-term Treasury notes on its books and using the proceeds to buy longer-term debt, which would decrease long-term yields. Cheaper long-term borrowing rates could potentially spur more borrowing in the economy.

But without new money, the benefit to banks could be limited to profits from trading with the Fed, traders said. Given that buying and selling Treasuries is a low-margin business, even big trades from the U.S. central bank would not help much.

"No one's upset with the short-term impact because it's giving some stimulus to trading activity," Spear said. "But banks don't make that much money from Treasury bond trading."

The Fed tried Operation Twist in the 1960s -- the name refers to twisting the relationship between short- and long-term rates, and to the dance craze of the era. Economists debate how much the original effort helped the economy, with many experts saying there was little boon at all.

Unpacking the final impact on banks for any Operation Twist is difficult, because there are so many moving parts.

Lower long-term yields could cut into banks' future interest income, which is already under pressure.

But lower long-term yields would also lift bond values, resulting in paper gains in trading portfolios for investment banking businesses. Given that many traders have been positioning for Operation Twist in recent weeks, gains on portfolios could be experienced in the third quarter.

If Operation Twist proved successful, some say Wall Street could benefit greatly: more loans, more deals, more securitization, more risk appetite among clients.

But that's a big "if."

"Stimulus is needed from both the fiscal and monetary side," said Terry Belton, global head of fixed income strategy at JPMorgan Chase. "The tools the Fed has available are limited. I think it's one of the better tools they have available at this point, but the effect will be small."

(Reporting by Lauren Tara LaCapra, additional reporting by Mike Tarsala, Editing by Dan Wilchins and Gerald E. McCormick)

View the original article here

Analysis: Time running out for Obama to pull Reagan recovery (Reuters)

View the original article here

Analysis: Europe puts its head in sand over growth crisis (Reuters)

By Alan Wheatley, Global Economics Correspondent Alan Wheatley, Global Economics Correspondent – Mon?Sep?5, 4:19?am?ET

LONDON (Reuters) – Japanization is shorthand for slouching toward that country's noxious mix of low growth and high debt. Euro zone governments will find it tough to keep the ugly new word out of their lexicon.

Concern is mounting over a deterioration in Europe's long-term growth prospects that, unaddressed, will make it even harder to tackle the banking and debt problems underlying the current life-or-death struggle over the euro.

The financial crisis that has been rocking the global economy since 2008 has permanently reduced trend growth across the industrial world. The Organization for Economic Cooperation and Development in Paris reckons the potential output of its 34 member countries has dropped by about 2.5 percent.

"A lot of countries are going to take a permanent hit to their trend rate of growth. This is not an ordinary recession and so we're not going to see countries bouncing back to pre-crisis rates of growth," said Philip Whyte, a senior research fellow at the Center for European Reform, a London think-tank.

As firms have gone bust, capacity has been lost for good. With demand subdued, profitable companies are not replacing old plants.

And as high unemployment persists, skills atrophy. This weakens productivity and shuts people out of the job market for longer and longer periods -- a danger stressed by Federal Reserve Chairman Ben Bernanke at the U.S. central bank's Jackson Hole symposium last month.

Apart from sapping animal spirits and forcing governments to raise taxes or cut spending, diminished growth closes off one route for lowering the high sovereign debt to gross domestic product ratios that have locked Greece, Ireland and Portugal out of the bond markets and are unnerving investors in Italian and Spanish debt.

Against this background, and with the scope for fiscal and monetary stimulus all but exhausted, politicians might be expected to grasp the nettle and push through reforms to improve the supply side of the economy -- policies such as making it easier to hire and fire, promoting greater competition and investing more in training.

Far from it. Pier Carlo Padoan, the OECD's chief economist, says he is less optimistic about the prospects for deep-seated change than he was at the start of the year.

"I see that measures are being announced. I would like to see them being implemented," Padoan said.

With policy ammunition running desperately short, he said it was time for governments to overcome their squeamishness about confronting vested interests opposed to change. "This is a luxury that many countries cannot afford any more. The situation does not allow it."

SOUTHERN DISCOMFORT

The vicious circle of rising debt and falling growth is made worse by the fact that those countries drowning in debt on the periphery of the euro zone are also the ones that have dragged their feet on freeing up their product and labor markets or modernizing their education systems.

"They're going through some truly horrible times. I'm very worried about the whole southern European fringe, not just on an 18-month to 2-year view but looking out a decade or longer," said Whyte with the Center for European Reform.

Germany, by contrast, derided a decade ago as the sick man of Europe, is being held up as a model, at least when it comes to jobs.

"The remarkable resilience of the German labor market in the last few years, where wage moderation and flexible time accounting shielded the economy from excessive job destruction, illustrates admirably the promise of well-structured reforms," Jean-Claude Trichet, president of the European Central Bank, said approvingly in Jackson Hole.

How much are countries missing out by not pressing the reform button?

Padoan says Europe's trend growth has fallen in recent years to an average of just 1.5 percent a year, but he says some members of the 17-nation euro zone could almost double that rate with a supply-side jolt.

Italy needs to liberalize its service sector, open up professions to new entrants and improve energy efficiency, Padoan said. Greece needs to do all that and overhaul its labor market and competition policy at the same time.

POOR ADVERT FOR FREE MARKETS

Germany, too, could grow faster still if it liberalized services, which would trigger increased investment.

These policy prescriptions are well worn. Leaders of the European Union enshrined them and a host of other reform goals in the 2000 Lisbon Agenda, which they promptly ignored. The pledges have since been repackaged as the Europe 2020 Strategy, but Whyte says the havoc wrought by the near-collapse of the international financial system will make politicians more wary than ever of the social disruption that reforms entail.

"The Great Financial Crisis hasn't been a great advert for free-market capitalism," said Whyte. His research outfit publishes a booklet this week exploring how Europe could take off by embracing innovation. But in this area, too, Whyte fears the political climate means policy is likely to be increasingly hijacked by incumbent firms hostile to competition from start-ups.

Europe is not doomed to go down Japan's path of economic stagnation. Its potential growth rate is low but stronger than Japan's -- estimated by the Bank of Japan at just 0.5 percent a year because of a fast-shrinking working-age population.

But the specter of a renewed recession is a reminder for governments that, even if they can spirit away the euro zone's currency and debt woes, they have still to find the elixir for growth.

"I'm not saying politicians will implement reform, but they should," Padoan said. "Some politicians resist reform because they are captive to interest groups. Well, the price for those governments in terms of sustainable growth will be very high."

(Reporting by Alan Wheatley; Editing by Ruth Pitchford)

View the original article here

Analysis: Pension funds in new crisis as deficit hole grows (Reuters)

LONDON (Reuters) – Pension funds in developed economies are facing a new crisis as falling equities and tumbling bond yields widen their deficits, threatening the incomes and retirement dates of future retirees.

At the heart of their problems is a steady move by pension plans in the United States, euro zone, Japan and the UK to cut exposure to risk after the financial crisis.

But this "de-risking" may end up depressing their long-term returns from stock market investment and challenge the conventional wisdom that shares generate higher returns than bonds.

With weaker holdings and increased liabilities, companies will find it more difficult to fund existing pension schemes. They may cut new business investments as they use more cash to pay pensions.

For future pensioners, it means they will potentially face a lower retirement income and a longer working life -- or both.

This year has been a nightmare for many in the industry -- which controls $35 trillion, or a third of global financial assets -- and funding deficits are posting double-digit rises.

"We had a credit crisis and government bond crisis, and the third one we have is the pension crisis. This is the one where everything is going wrong and there's no obvious way out," said Kevin Wesbroom, UK head of global risk services at consultancy Aon Hewitt.

The sharp retreat in stocks through the summer has hurt them again by weakening their asset positions and threatening to erode stock market recoveries seen since the equity collapse surrounding the 2007-2009 credit crisis.

Even lower bond yields are proving to be a new headache.

"The real killer is liabilities are going up because in the flight to quality everyone gets out of equities and runs for cover in safe assets like government bonds, and yields are falling," said Wesbroom.

Many defined benefit(DB) pension plans -- where benefits are pre-determined -- pay a fixed stream of income to retirees.

The low-yielding environment makes it harder for the funds to meet these bond-like liabilities, forcing them to accumulate even more fixed income instruments to try to meet their obligations, creating a vicious circle.

FALLING YIELDS

Recent data on pension deficits highlight the plight of many pension funds.

In the United States, funding deficits of the 100 largest DB plans rose $68 billion to $254 billion in July, according to the Milliman Pension Fund Index. July marked the 10th largest deficit rise in the index's 11 year history.

Even if these companies were to achieve an optimistic annual return of as much as 8 percent and keep the current benchmark yield of 5.12 percent, their funding status is not estimated to improve beyond 93 percent by end-2013 from the current 83 percent.

Aon Hewitt estimates deficits of DB pension plans for FTSE 350 companies as of end-August rose 20 billion pounds from July to a 2011 high of 58 billion pounds. Their funding ratio stands at 89.8 percent, down from 94.1 percent three years ago.

The drop in the funding ratio is driven by a rally in the fixed income market. In Europe, the double-A rated corporate bond yield -- one of the benchmark rates used by regulators -- fell 300 basis points in the last three years to 3.55 percent, according to Barclays Capital.

The widely used rule of thumb is that a 50 basis points fall in the discount rate roughly results in a 10 percent increase in liabilities.

"Things look substantially worse now than they were during the credit crisis," said Pat Race, senior partner at investment consultancy Mercer.

In reaction to the past few years of an equity decline and volatility, many pension funds are indeed planning to buy more bonds, a move highlighted by Mercer's survey of over 1,000 European DB pension funds in May.

"Trustees do want to de-risk but financial directors have irrational desire to have equities. They are too wedded to equity markets," Race said.

"You still have massive uncertainties with a potential for another dip into recession. I don't see any reversion to days when equities are dominant part of DB plans."

JP Morgan's data shows pension funds and insurance companies in the United States, euro zone, Japan and UK bought $173 billion of bonds in the first quarter, boosting their bond buying for the third quarter in a row.

At the same time, they cut equity buying for a fifth quarter in a row, selling $22 billion of stocks in Q1.

In Europe, pension funds slashed their weightings for equities to an average of 31.6 percent in 2011 from 43.8 percent in 2006, while fixed income holdings rose to 54 percent from 47.8 percent in the same period, according to Mercer.

EQUITY PREMIUM PUZZLE

Growing pension funds deficits on corporate balance sheets may make it more difficult for companies to access credit and discourage firms which are already hoarding cash from spending cash to expand business.

For wider financial markets, the giant industry's gradual move away from stocks could hit equity risk premium -- excess return of equities over risk-free securities which compensates investors for taking on the relatively higher risk.

This may reinvigorate an academic debate where some economic analysis suggests the equity risk premium should be small, in most cases less than half a percentage point, as opposed to the widely-used range of 4-6 percent.

Indeed, 10-year U.S. Treasuries gave higher total returns in the past 10 years on a rolling basis than world stocks. http://link.reuters.com/nyv53s

"The puzzle... is that for the past 20 years, there has been no net equity risk premium. With the recent sell-off in risk and the rally in bonds, I think there might have been a net premium on bonds," Stephen Jen, managing partner at SLJ Macro Partners, said in a note to clients.

"This has turned financial theory on its head, and managers of pension funds and sovereign wealth funds need to think about this very carefully."

(Editing by Anna Willard)

View the original article here

Analysis: Damages ruling may be pivotal in BP case (Reuters)

NEW YORK (Reuters) – A key court ruling in the Gulf of Mexico oil spill litigation could change the landscape in the massive case -- encouraging more plaintiffs to sue, or spurring the parties to make a deal to resolve what could be a long string of trials over damages.

Last week, the judge overseeing a group of spill-related lawsuits against BP Plc and its business partners ruled that claims for punitive damages -- not just compensatory damages -- could be brought by fishermen and other plaintiffs alleging harm to physical property. If a jury ultimately awards these plaintiffs punitive damages, defendants could be forced to pay out big.

The ruling gives some potential plaintiffs more of an incentive to sue because of the possibility of higher damage awards, experts say. Some people have been on the fence about suing or seeking payouts from BP's $20 billion victims' compensation fund, which offers settlements as an alternative to litigation.

Also, the possibility of massive settlements to resolve the plaintiffs' claims involving BP and other corporate defendants may now be more likely.

That is because tossing punitive damages into the legal mix tends to scare defendants. Punitive damages are awards that are often multiples of the amounts that plaintiffs are reimbursed for their losses. They are intended to punish defendants and prevent others from engaging in similar conduct.

The prospect of punitive damages of any size is a "potent inducement to settle," said David Logan, dean of Roger Williams University School of Law in Bristol, Rhode Island.

Such claims can strengthen plaintiffs' bargaining position in settlement negotiations by presenting an added risk for defendants, said Howard Erichson, an expert in complex litigation and a professor of law at Fordham University.

Neither BP nor the plaintiffs' attorneys would comment on the possibility of a settlement before a liability trial is scheduled to begin in February 2012.

PINNING BLAME

The February trial will decide who is to blame for the largest-ever U.S. offshore oil spill. If there are claims outstanding by the time that proceeding is done, multiple smaller trials will be scheduled to determine specific dollar amounts for damages.

The punitive damages ruling was handed down by Judge Carl Barbier of U.S. District Court in New Orleans, who will preside over the February trial.

In an emailed statement on Thursday, BP representative Daren Beaudo said: "The court's decision builds on the earlier dismissal of several other types of plaintiffs' claims. The court agreed with BP on several key issues, including dismissing plaintiffs' state law claims, limiting availability of attorneys' fees, and significantly narrowing the group of plaintiffs who are eligible to try to prove punitive damages."

Co-defendants Transocean, Cameron, Anadarko and Halliburton declined to comment.

BP is sparring with its former business partners over the disaster. On Friday, Halliburton said it had moved to add fraud claims against BP in the federal multi-district litigation pending in New Orleans, and had also filed defamation and other claims against BP in Texas court. Halliburton handled cementing services on the blown-out Macondo well.

BP has been hit with unrelated legal woes in Russia, as special forces there raided its Moscow offices earlier this week in connection with legal action brought by minority shareholders in its Russian joint venture TNK-BP. BP said on Friday that the lawsuit was "absurd."

NO STRAIGHTFORWARD VICTORY

In the U.S. oil spill litigation, the punitive damages ruling had been one of the major issues pending before Judge Barbier.

While the ruling largely benefits plaintiffs, it is not a straightforward victory for them, legal experts said. Barbier dismissed all claims brought under state law in the ruling, as well as general maritime negligence claims against Anadarko and MOEX, a unit of Japan's Mitsui & Co Ltd.

Supreme Court decisions in the last decade could also serve to limit the size of punitive damages juries can award, said David Uhlmann, a professor of law at the University of Michigan. In the long-running Exxon Valdez case, the high court in 2008 ruled that punitive damages could not exceed the amount of compensatory damages awarded.

Also, it is not clear how much the ruling could translate into in dollar terms for the Gulf spill plaintiffs. Plaintiffs who say they suffered indirect losses -- as opposed to fishermen and those with property damage -- are not eligible for punitive damages. It is unknown how many of the 108,000 private claims before Barbier alleged such indirect losses, including restaurants and hotels claiming lost revenue as tourism fell.

Still, the prospect of winning punitive damages for clients could help plaintiffs' lawyers bring more claims from property owners and fishermen, said Byron Stier, a professor at Southwestern Law School in Los Angeles.

"The punitive damages green light is huge," Stier said. "That's the threat to BP, and that's what's animating the plaintiffs' lawyers."

Plaintiffs' lawyers are competing with the BP victims' compensation fund, known as the Gulf Coast Claims Facility.

Lead plaintiffs' lawyers in the litigation criticize the fund's offers to settle with BP and other defendants in exchange for giving up the right to sue. They say claimants may be better-served in court. Kenneth Feinberg, who administers the fund, has said litigation will take years and could prove less generous than the fund.

If punitive damages are not limited by the Exxon precedent, the potential upside for some plaintiffs who choose to go to court is massive.

But if that is not the case, suing might not be victims' best option, said Uhlmann, of the University of Michigan. Victims, he said, may do better turning to the settlement fund rather than "litigating for years and seeing most of the additional money paid to their attorneys under contingent fee arrangements."

The case is In re: Oil Spill, U.S. District Court, Eastern District of Louisiana, 2:10-md-02179.

(Reporting by Moira Herbst; Editing by Martha Graybow and Matthew Lewis)

View the original article here

Analysis: Economic leaders fear policy paralysis (Reuters)

JACKSON HOLE, Wyoming (Reuters) – The heads of the U.S. Federal Reserve, IMF and OECD stepped up pressure on political leaders on both sides of the Atlantic to shake off their inertia and tackle urgent economic problems.

If politicians ignore their pleas -- including a blunt call from International Monetary Fund chief Christine Lagarde to "act now" -- the slowdown in world growth and debt turmoil in Europe could morph into a deeper crisis, top monetary officials and economists warned at an annual retreat here.

"I hope they listen," said Bank of Israel Governor Stanley Fischer.

Alarm over political deadlock was as obvious a backdrop to the annual meeting of policymakers in the wilds of Wyoming as the thunderstorms that rolled over the nearby Grand Teton peaks and dumped rain on the Jackson Lake Lodge.

"The governance right now is not going through a very brilliant moment, I have to say, neither in Europe nor in the United States," Angel Gurria, who heads the multi-nation Organization for Economic Co-operation and Development, told Reuters.

"The signals that are coming out of the short-term discussions is, 'We can't even agree on about the time of the day, even if there's a big clock telling us what the time of the day is.'"

In the United States, the political impasse has thwarted moves to tame massive budget deficits which brought the nation to the edge of a debt default and cost the United States its coveted AAA credit rating from Standard & Poor's.

In Europe, leaders are fighting over who should pay for the sovereign debt crisis in the euro zone, which has a unified regime for monetary policy but whose member nations run their own budget policies.

PHONE CALLS, SPEECHES

Lagarde, whose appearance on Saturday was a late addition and reflected her sense of urgency, delivered a hard-hitting pitch against braking spending too fast as nations struggle to rein in long-term budget deficits.

She was far from alone.

The Fed has slashed U.S. interest rates to near zero and bought $2.3 trillion in long-term securities in an effort to kick-start the recovery. With monetary policy stretched to its limits, fiscal policy is now key, Fed Chairman Ben Bernanke suggested.

"Although the issue of fiscal sustainability must urgently be addressed, fiscal policymakers should not as a consequence disregard the fragility of the current economic recovery," he said on Friday.

"Fortunately the two goals of achieving fiscal sustainability -- which is the result of responsible policies set in place for the longer term -- and avoiding the creation of fiscal headwinds for the current recovery are not incompatible."

Bernanke said battling long-term joblessness in the United States must be a top priority, and he called on the U.S. government to put a floor under the sagging housing market, remarks that Lagarde echoed forcefully on Saturday.

Bernanke's speech was "the shot across the bow of the government saying, 'don't keep layering expectations on the Federal Reserve, guys, you have a job to do,'" Columbia Business School Dean Glenn Hubbard said in an interview with Reuters Insider.

"The Fed is simply saying, 'We are monitoring the situation very carefully but would encourage the government, both parties, to get their act together and pass a long-term fiscal strengthening package and then perhaps short-term stimulus.

The calls from the world's economic policy elite may give some political cover to President Barack Obama, who faces a tough re-election fight next year with the U.S. unemployment rate stuck above 9 percent.

Obama is preparing for a speech after the September 5 Labor Day holiday in which he is expected to lay out proposals to boost hiring. He is reaching out to other world leaders too.

On Saturday, Obama spoke with German Chancellor Angela Merkel, and the White House said the two leaders vowed to act to shore up a global recovery that now looks at risk.

A day earlier Obama had called Lagarde to talk about fiscal policy. They agreed that the world economy needs further steps to boost growth.

Obama's potential presidential challengers, including leading Republican candidate Mitt Romney, have repeatedly blamed Obama's policies for impeding growth.

The U.S. economy grew less than 1 percent in the first half of the year and has yet to return to its pre-recession size.

EUROPE'S BANKS FACE SCRUTINY

In Europe, the biggest threat is a spreading sovereign debt crisis, and richer euro zone nations, chief among them Germany, have shown a hesitancy in picking up the tab for nations on the debt-strapped periphery.

Stress tests last month exposed the degree to which European banks are exposed to Greek and other shaky government debt, and lenders are balking at extending credit.

Lagarde and European Central Bank President Jean-Claude Trichet both said strengthening bank balance sheets is crucial.

"Although there is clarity on required policies, the uncertainty created by the political stances in both Europe and the United States poses some serious risks," Cornell University Professor Eswar Prasad said.

"Getting the policy balance right is tricky in itself; this adds a layer of uncertainty that will make it that much harder," Prasad said.

(Writing by Ann Saphir; Editing by Braden Reddall)

View the original article here

Analysis: Glimmers of hope for deficit-cutting panel (Reuters)

WASHINGTON (Reuters) – Having said no to taxes for months, Republicans now are saying maybe, in the face of public disgust over a deadlock in the Congress, a near government default and a worsening global economic crisis.

Prompting some hope for a return to fiscal order are the statements and reputations of some of the six Republicans named this week to join with six Democrats on a special committee to end the standoff over the U.S. deficit.

In one of his first interviews after being named to the "Joint Select Committee on Deficit Reduction," Representative Dave Camp told Reuters, "I don't want to rule anything in or out" when the panel starts its work.

That's a far cry from what had been a Republican wall of opposition to any tax increases when President Barack Obama negotiated a $917 billion deficit-reduction down payment with Republicans that also was aimed at raising U.S. borrowing authority by August 2.

Public disgust with the long, bitter budget and debt limit fight that has consumed Washington all year could have played a role in the less confrontational tone.

A Reuters/Ipsos poll released this week found 49 percent of those polled had a negative view of Republicans in the wake of the debt limit deal, compared to 42 percent for Obama and 40 percent for Democrats broadly.

John Feehery of Quinn Gillespie Communications and a former Republican congressional staffer said lawmakers may now be more willing to reach a deal on additional deficit reductions given the public reaction to the debate over the debt ceiling.

"People are going back home (during the August recess) and they are finding the intense partisanship does not really work in the rest of the country," Feehery said.

Further evidence that the "super committee" is taking its responsibilities seriously: members are considering cutting short their August recess to start work, knowing a November 23 deadline allows little time to tackle major tax and budget questions that could lead to another $1.5 trillion in savings over the next decade.

Representative Chris Van Hollen, a Democratic member of the panel, told Reuters, "There's a good argument in favor of getting an early start." "There have been a number of conversations on both sides of the aisle" about it, he added.

HISTORY OF DEAL-MAKING

Feehery and other analysts feel the composition of the committee also bodes well for agreement.

"These are folks who are deal cutters," Feehery said of Camp, Republican Senator Rob Portman, a former White House budget director, and Representative Fred Upton. Upton worked on some major tax and spending agreements during a stint at the White House budget office under President Ronald Reagan.

Even conservative partisan Representative Jeb Hensarling may be ready to deal, analysts say. "In the right context I do not see him as a guy that would just stick himself in concrete," said Steve Bell, a former Senate Budget Committee aide who is now with the Bipartisan Policy Center.

These Republicans will be sitting across the table from some experienced Democratic deal-makers, notably Senators John Kerry, a former presidential candidate, and Max Baucus, who has deep experience in taxes and healthcare benefits, which will dominate the talks. Meanwhile, House Democrat Xavier Becerra, a liberal stalwart, has urged members to keep an open mind.

Becerra and fellow House Democrat James Clyburn could be instrumental in building support in the liberal wing of their party for any potential deal.

The group's work will be getting underway against the backdrop of global market turmoil, a European debt crisis and rising concerns the U.S. economy could reverse its recovery from the deepest recession since the Great Depression.

And later this month, the Congressional Budget Office is expected to release its latest economic outlook and quantify its impact on Washington's deep budget deficits, which have been hovering around $1.5 trillion annually.

All these factors put pressure on the panel to produce.

Also working in the committee's favor is that $1.5 trillion in savings over 10 years is not insurmountable in the context of a $3.7 trillion annual budget.

Negotiations earlier this year led by Vice President Joe Biden have identified many possible ways to pare deficits.

So, if Republicans were to go along with modest revenue increases, Democrats might find it easier to say yes to equally modest savings to the Medicare healthcare program for the elderly, some of which already have been suggested by Obama.

But even if the super committee settles on around $1.5 trillion in new savings, it likely will not be enough to satisfy global financial markets demanding a more ambitious result -- as much as double that amount -- accomplished through long-term reforms of government benefit programs and a broad revamp of the U.S. tax code.

(Editing by Todd Eastham)

View the original article here

Analysis: Perry may pose biggest threat to Romney (AP)

AMES, Iowa – The biggest rumblings in the Republican presidential campaign are coming from Austin, Texas — 1,000 miles from the leadoff caucus state where front-runner Mitt Romney and seven opponents squared off ahead of an important test vote this weekend.

Texas Gov. Rick Perry sent word that he would join the race, casting a shadow over the debate Thursday night and threatening to upend the race.

Back in Iowa, Romney emerged unscathed with his leader-of-the-pack status intact after two feisty hours; his two Minnesota rivals — Rep. Michele Bachmann and former Gov. Tim Pawlenty — sparred repeatedly as each sought advantage ahead of Saturday's Iowa straw poll.

Overall, the dynamics of the campaign did not change with a single debate. And they may not change when Saturday's straw poll results are announced.

But the race could well change in the coming days as Perry dives in.

The Texan may pose the biggest threat yet to Romney.

Conservatives who make up the core of the GOP primary base view Romney skeptically on cultural issues, and he hasn't been able to establish himself as the heavy favorite for the nomination even though he's spent months promoting his background as a businessman and claiming that he alone has the know-how to create jobs to pull the country out of a period of high unemployment, rampant foreclosures and tumultuous financial markets.

Democrats are already taking aim at Perry.

"His record will get scrutinized," David Axelrod, senior political adviser to President Barack Obama, said Friday. Axelrod suggested Perry was taking too much credit for Texas' relatively healthy economy and job creation.

"He's been the beneficiary down there of the boom in oil prices and increased military spending because of the wars," Axelrod said on CBS' "Early Show." "I don't think many people would attribute it to the leadership of the governor down there."

Perry could benefit from GOP suspicion about Romney.

The Republican establishment has a lackluster view of Romney's candidacy, leading deep-pocketed donors across the country to look for more candidates to draft into the race who could bridge the historical tension between the party's social and economic wings. They couldn't convince former Florida Gov. Jeb Bush to run. New Jersey Gov. Chris Christie repeatedly refused, too. And Indiana Gov. Mitch Daniels declined overtures as well.

Enter Perry.

He is credible on issues social conservatives care about and sent a strong message to evangelicals last weekend by hosting a national prayer rally in Houston that drew roughly 30,000 Christians. He also has overseen a period of job growth in his state, making Texas one of the few states in the country that have posted economic gains and giving him the opportunity to challenge Romney's pitch as the jobs candidate.

Iowa, with its strong base of evangelical voters, may be tailor-made for Perry. He was making his first trip to the state Sunday, a day after formally announcing his candidacy in South Carolina and New Hampshire — just as Iowa straw poll votes are being cast.

A caucus campaign by the Texan could force Romney to retool his strategy of downplaying the state — which he lost during his first run in 2008 after investing heavily — in favor of friendlier ground elsewhere.

"Perry hasn't shown up in the rodeo yet, but it looks like a Romney-Perry race," Republican strategist Jim Dyke said.

That may be a bit premature.

Perry is entering the race months after other candidates and Romney has a multimillion-dollar head start in fundraising.

Also, there still are at least five months before Iowa's precinct caucuses that kick off the winter-to-summer GOP nomination season, and there still are several unknowns, including whether former Alaska Gov. Sarah Palin ends up running. She was making a last-minute visit to the Iowa State Fair for Friday, reviving talk of a potential candidacy on the eve of the straw poll at Iowa State University. The straw poll could winnow the GOP field and indicate which candidate has the strongest get-out-the-vote operation.

This is turning out to be the most consequential week yet in the 2012 Republican presidential nomination fight — but not because of anything that happened at the debate.

Romney largely kept his criticism on Obama and the incumbent Democrat's handling of the economy, an issue that has blossomed anew as the GOP's top campaign concern in the wake of a tumultuous week on Wall Street and continuing high unemployment.

"I understand how the economy works," Romney said during the debate, noting the lessons of both successes and failures as a venture capital firm chief executive officer. "Our president doesn't understand how to lead or grow an economy."

He wouldn't bite when asked to comment on his rivals' economic positions.

And Romney's rivals gave him a pass on a potentially problematic comment he made earlier in the day at the Iowa State Fair when confronted by hecklers, who suggested corporations should pay more taxes. That prompted Romney to respond, "corporations are people."

Democrats quickly jumped on the exchange, though his GOP rivals did not.

Those who tried to knock him down a rung didn't even nick him.

Struggling to find traction, Pawlenty poked at Romney on several issues, including how much land he owns as well as his support for a Massachusetts health care bill similar to the national one Obama signed into law.

But Pawlenty ended up getting pulled into a family fight with Bachmann, who has outshone him in Iowa despite his 18 months of laying groundwork for a campaign.

"It's an undisputable fact that her record of accomplishment and results has been nonexistent," Pawlenty said, adding: "She's got a record of misstating and making false statements."

Bachmann, who has eclipsed Pawlenty since entering the race, quickly responded with a list of what she called Pawlenty's liberal policies when he was Minnesota's governor, including his support for legislation to curb industrial emissions and his backing of an individual health care mandate in Minnesota, both unpopular positions with GOP activists.

"You said the era of small government is over," she told Pawlenty. "That sounds a lot like Barack Obama if you ask me."

Former Utah Gov. Jon Huntsman — making his first debate appearance — also tried to claim the space as the economic-focused candidate by championing his state's job gains during his tenure and noting his time as an executive in his family's chemical company. But Obama's former ambassador to China also defended his work under the Democratic president as well as his support for civil unions — both issues that are problematic in a GOP primary campaign.

Lesser-known candidates tussled for position, including former Pennsylvania Sen. Rick Santorum, Texas Rep. Ron Paul, businessman Herman Cain and former House Speaker Newt Gingrich.

Perry was absent from the stage. But not for long.

___

Thomas Beaumont covers the Republican presidential race for The Associated Press.

View the original article here

Analysis: FAA showdown on spending presages larger fight (Reuters)

WASHINGTON (Reuters) – A deal in Congress to end a two-week standoff over U.S. aviation funding presaged a larger and more acrimonious fight over labor unions, financing air traffic modernization and other issues this fall.

The impasse over a surprising proposal to cut $16 million in government subsidies to airlines that provide service to rural communities was less about aviation and spending, and more about escalating partisan rancor and overhang from the political wildfire on raising the multitrillion-dollar U.S. debt limit.

Industry insiders, lawmakers and aviation officials all expect the divided climate in Washington to define final negotiations on a long-term legislative blueprint for FAA budgeting and aviation priorities, like modernizing the aging air traffic control system.

The previous multiyear congressional authorization for aviation programs expired in 2007, and lawmakers have struggled to negotiate a new one. Bills passed by the House and the Senate must be reconciled by a committee comprised of members from both houses.

But overshadowing negotiations, which have yet to start, is the FAA shutdown and its choppy political wake.

"If the Senate refuses to negotiate on the few remaining issues, they can be assured that every tool at our disposal will be utilized to ensure a long-term bill is signed into law," said Rep. John Mica, the chairman of the House Transportation Committee.

It was Mica's proposal on subsidy cuts that triggered the two-week impasse in Congress that held up legislation to fund full FAA operations through mid-September.

That standoff ended on Friday with the Senate swallowing Mica's bill, which included wiggle room for the Transportation Department to waive any reduction in rural airline flights for the time being.

LABOR LOOMS LARGE

Underlying the subsidy fight was a contentious proposal in the long-term aviation bill by the Republican-led House to roll back a federal rule pushed by Obama administration appointees making it easier to organize labor unions at airlines.

Democrats insist the measure was inserted at the behest of mostly non-union Delta Air Lines. Unions, an important constituent of Obama and Democrats, have failed multiple times to organize major work groups outside of pilots, who are represented by the Air Line Pilots Association.

"There is no agreement in Congress to make this change to workers' rights. Insisting it be included in the FAA bill will only cause more economic uncertainty," said Rep George Miller, the senior Democrat on the House Education and Workforce Committee.

All other major airlines are heavily unionized.

John Rockefeller, Mica's counterpart in the Senate as chairman of the Commerce Committee, has promised a showdown on the union issue as well, saying that conservative Republicans want to "undo worker protection" and "may again block progress" on FAA legislation.

Rockefeller accused Republicans of holding the "entire aviation system hostage" during the airline subsidy dispute that resulted in the temporary shutdown of FAA airport construction projects. Funding for those are expected to resume this week.

U.S. airlines, including Delta, United Airlines and American Airlines, and other businesses, such as aircraft manufacturers Boeing Co and Europe's Airbus, are eager for action on the long-term bill.

They do not favor everything in the legislation but strongly promote efforts to accelerate the transformation of U.S. air traffic control to a satellite-based navigation system. They anticipate that change will allow for dramatic advances in aircraft systems and design, more efficient use of air space, and fuel savings associated with flying more direct routes.

(Editing by Maureen Bavdek)

View the original article here

Analysis: Uncertainty surrounds Italy's deficit-cutting plan (Reuters)

ROME (Reuters) – Opaque pledges and a lack of detail on measures to speed up deficit reduction plans risk undermining Italy's hopes of winning a reprieve from financial markets that have pushed the country to the brink of crisis.

Desperate to stop market panic that has sent Italian bond yields soaring to 14-year highs, Italian Prime Minister Silvio Berlusconi hastily announced plans on Friday to speed up reforms and balance the budget by 2013, a year ahead of schedule.

Initial reaction from analysts and the European Union's top economic official was positive, but whether the pledges convince the European Central Bank to bolster Italy by buying its bonds, or calm market tensions, may hinge on the specifics of the plan.

So far, few seem to know what the plan will include. Indeed it is unclear if the government itself knows.

"The decision to bring forward the balancing of the budget is a positive step but we need a lot more detail," said Raj Badiani of IHS Global Insight, warning that the promised reforms are unlikely to happen overnight.

"The problem is Italy doesn't have time right now and the reforms they announced are easier said than done."

Economy Minister Giulio Tremonti said on Friday there would be no new austerity measures beyond those announced in a 48 billion euro package passed last month which contained cuts to local government funding, health charges and vague plans for a mix of welfare cuts and tax measures.

That programme was widely criticised for delaying the bulk of measures until after elections in 2013 and Tremonti said it would be accelerated but offered no specifics about a plan which in any case still had to be fleshed out in important areas.

ECB sources say the bank -- which is due to discuss later on Sunday whether to buy Italian bonds -- remains divided on the issue and even some of those who favor the move want Italy to do more to frontload its austerity measures.

Some proposals, like a fee for non-urgent medical visits and tests, quickly sparked a popular backlash and prompted talk of alternatives. Even without any such backtracking, the funding cuts make up only a relatively small portion of the plan.

For the bulk of the savings, the government will ask parliament to approve a so-called "delega fiscale" or "tax delegation law" and "delega assistenziale" or "welfare delegation law" -- something of a political blank cheque.

The laws allow parliament, which is delaying its summer break to continue sitting next week, to "delegate" to government the job of drawing up tax and welfare measures worth, in this case, up to about 20 billion euros, within a certain time.

Only after that, would the government nail down the measures and get them approved by parliament.

In a sign that nothing concrete has been finally settled, daily Corriere della Sera on Sunday said government experts had decided the welfare system could not contribute the additional funds needed and were now eyeing the pensions system.

LACK OF CREDIBILITY

Whether deficit reduction measures, even brought forward by a year, will do much to address Italy's major economic problem of declining productivity and weak growth is also questionable.

Italy already runs one of the lowest budget deficits in the euro zone at 3.9 percent of GDP this year, which together with its conservative banking system and high rate of private savings, has kept it largely clear of the euro zone debt crisis until last month.

Ratings agencies have been much more worried about the chronically weak growth which makes it impossible to catch up with and contain a steadily increasing public debt burden which now amounts to 120 percent of gross domestic product.

Successive governments have managed the debt successfully, running primary budget surpluses, excluding interest rate payments, to help pay debt servicing costs estimated in a UBS research note last week as running at 4 percent of GDP.

However as the UBS analysts wrote: "The recent turbulence is not about fundamentals. It looks more like a crisis of confidence."

Analysts fear that most of the cuts, or any tax hikes, will at any rate bite only after scheduled elections in 2013, doing little to restore investor confidence in Italy.

"The only real decision is that of bringing forward the balancing of the budget to 2013, but that doesn't seem very credible because 2013 will be an election year," said Tito Boeri, economics professor at Bocconi university in Milan.

"They should have brought it forward to 2012, when the impact of the measures announced so far is quite small."

Berlusconi's remaining pledges face the risk of not being implemented at all.

A decision to put the balanced budget principle into the constitution, for example, appears aimed at convincing markets that fiscal discipline will be binding from now on.

But Berlusconi has not said exactly what he means by the principle, although the government has previously spoken of a rule requiring budgets to be kept in balance unless new borrowing is required for investment spending.

The pledge is in any case likely to take at least a year due to the complicated parliamentary procedure needed for constitutional changes -- and even then, risks being ignored in practice when it is in the constitution.

Tremonti's promise of long-awaited reform to liberalise Italy's rigid and inefficient Labor market -- seen as vital to getting more young people back into secure, long-term employment -- has yet to be discussed with unions or employers.

Berlusconi last week promised a wide ranging reform pact with unions and employers covering areas ranging from cutting red tape to reducing the cost of government but any firm proposals will have to wait for September.

Rather unhelpfully for the government, Italy's biggest and most powerful union CGIL's first response to Berlusconi's pledges was to declare that any deal with his government was impossible and that his measures were "killing the country."

Analysts, predictably, remain sceptical.

"Implementation risks are mostly related to how the reform agenda (particularly Labor market reform) will eventually shape up -- no details have been provided on this front, therefore a judgment on the effectiveness of the reform agenda is premature at this stage," UniCredit economist Chiara Corsa said in a note.

(Additional reporting by Silvia Aloisi in Milan, editing by Mike Peacock)

View the original article here

Analysis: World economy wobbles as markets push policymakers (Reuters)

By Alan Wheatley, Global Economics Correspondent Alan Wheatley, Global Economics Correspondent – 2?hrs?42?mins?ago

LONDON (Reuters) – The message from this week's market rout is crystal-clear: investors have lost confidence in their politicians, who urgently need to do something dramatic to reduce risks to the global economy.

By some measures, the world economy is in better shape to withstand shocks than it was in the aftermath of the failure of investment bank Lehman Brothers nearly three years ago.

Corporate earnings are robust, banks have thicker capital cushions, big emerging markets are still expanding strongly and there has been no repeat of the global liquidity squeeze that sent the dollar soaring in late 2008.

Indeed, after this week's 8.5 percent slump in global equities, a rebound might not be far off. Wall Street initially rose on Friday after the U.S. economy created 117,000 jobs last month, more than expected, only to slide back into the red.

Any relief is likely to be short-lived until politicians get ahead of the markets and show they are tackling the root cause of the malaise -- excessive sovereign debt.

"People have just become spooked by a crass failure of political leadership," said George Magnus, senior economic adviser at UBS in London.

In Magnus's view, the first-half slowdown in U.S. growth -- an important contributor to the current loss of confidence -- was inevitable given how long it will take households to reduce their own debt mountain and rebuild savings.

But he said markets wanted an end to the "political dysfunction" all too evident in the protracted wrangling over the U.S. debt ceiling and the euro zone's inadequate response to the debt crisis gripping the periphery of the 17-member group.

"There are economic solutions to economic problems, but no politicians are stepping up to the plate," he said.

NO URGENCY

The Group of 20 leading economies and the Group of Seven rich nations impressed investors in late 2008 and 2009 by coordinating interest rate cuts and expanding fiscal policy to cushion the post-Lehman freefall in the global economy.

But now, deficit-spending is the perceived problem, not the solution, in both the United States and the euro zone, while interest rates are already close to zero. With little ammunition left in the armory, governments are displaying concern but not enough urgency for the likes of impatient investors.

"There is probably no consensus within the G7 on how to address this," said a source in Japan familiar with G7 negotiations. "Each country is too busy with their own problems to talk about cooperation."

Market mayhem leading to weaker growth in the rich world would naturally be negative for emerging economies.

Jun Ma, an economist with Deutsche Bank in Hong Kong, estimated that a downward revision of 1 percentage point to growth in the United States and the European Union would trim Chinese growth by 1 percentage point, too.

So what happens next?

In the United States, with budget policy now effectively off limits until after the November 2012 presidential election, some analysts believe the Federal Reserve will eventually embark on a third round of large-scale asset purchases, dubbed quantitative easing (QE), if unemployment remains too high for comfort.

The unemployment rate dipped to 9.1 percent from 9.2 in July, but that was because discouraged job-seekers gave up the hunt for work.

"With fiscal policy close to exhaustion and any remaining scope for flexibility apparently compromised by the recent bipartisan agreement on the debt ceiling, the responsibility for providing any additional support to the U.S. economy rests very much with the Fed," said Russell Jones, an economist with Westpac in Sydney.

In a note to clients, Jones said it was probably too early for the Fed to announce a full programme of QE at its policy-setting meeting next week.

But he said the central bank could reinforce its easy policy stance in the interim by taking steps to anchor long-term interest rates in order to spur investment and spending.

COMMON EURO ZONE BONDS TO COME?

As for the euro zone, heavy selling this week of Spanish and Italian bonds is raising pressure on European leaders to massively expand the bloc's emergency financial rescue fund.

Currently at 440 billion euros, it would need to be doubled or tripled to cover economies as big as Italy and Spain, whose cost of borrowing hit fresh euro lifetime highs on Friday. The two countries' 10-year bonds were yielding about 4 percentage points more than those of Germany, the euro zone benchmark.

Magnus at UBS said that, apart from expanding the fund, the issuance of common euro zone bonds was a minimum requirement if political leaders wanted to end the crisis once and for all.

European Economic and Monetary Affairs Commissioner Olli Rehn said on Friday officials would look at longer-term options, including the idea of euro zone bonds, and would present a report after the summer.

But big powers Germany and France have hitherto opposed such a radical step, arguing that it would sap fiscal discipline and raise their own borrowing costs, alienating voters.

But Philip Whyte, a senior research fellow at the Center for European Reform in London, said it was illusory to believe that Italy -- the latest target of uneasy investors -- could restore confidence by its own reform commitments alone.

"The fate of Italy - and, by extension, the euro zone - is likely to be determined as much as by decisions in Berlin and Brussels as by those in Rome. It is becoming harder to see how the polarization of yields within the euro zone can be reversed unless European leaders adopt a common Eurobond," he said in a note.

The political implications of such a development would be momentous. But it would not be the first time that muscular markets have forced policy makers to do their bidding.

"As Lenin once said, 'there are decades when nothing happens, and there are weeks when decades happen'. We fear that the current unraveling in Europe means that we might be in the latter category," GaveKal Dragonomics, a research outfit based in Hong Kong, said in a report.

(Additional reporting by Leika Kihara in Tokyo, editing by Mike Peacock)

View the original article here

Analysis: Recession II? Probably not, staffing execs say (Reuters)

NEW YORK (Reuters) – A sequel to the Great Recession in the United States just two years after the downturn is not likely because demand for temporary workers, a leading indicator of both upturns and downturns, remains steady, staffing industry executives say.

In the prior economic slowdown, demand for temps turned lower months before the recession officially began. That is not happening now. A second recession cannot be ruled out, but current evidence, including stronger-than-expected July jobs growth, suggests a slow, cautious recovery remains in place.

"If we were headed for a recession, we would see clients letting go of large numbers of temporary employees," said Tig Gilliam, who heads North American operations for Swiss-based Adecco SA, the world's largest staffing company.

"It's not happening," he said. "You don't see those signs that say we're headed for a double dip."

The U.S. economy added 117,000 jobs outside the farm sector last month and the unemployment rate dipped to 9.1 percent. More jobs were added in May and June than initially reported, the government said on Friday. [ID:nOAT004847]

Private sector jobs creation also exceeded estimates. New jobs in factories, construction and retail helped offset an expected decline in government-sector positions.

Friday's report helped ease some anxiety about the direction of the U.S. economy, which has dragged down stock prices in recent weeks. It follows disappointing economic data on demand for capital goods, the manufacturing and service sectors, and anemic GDP growth.

More than $1 trillion in stock market losses may further hurt consumer confidence, Gilliam said, as Americans are tempted to save more, slowing the recovery. Government job losses caused by budget cuts will remain a headwind.

Economic uncertainty supports demand for temps, but employers lack the confidence that could spur broader hiring.

"We still see clients hiring but the decision process is slower than it was in the first quarter," he said. "It looks like we'll just keep bouncing along here. We are still going to see selective hiring but not at a volume that is going to significantly turn around the consumer spending situation."

CAUTIOUS OPTIMISM

While layoff reports have continued to dominate the job-related news in the United States over the past few weeks -- with companies including drugmaker Merck & Co and liquidating bookstore chain Borders Group Inc announcing plans to cut thousands of jobs -- some companies have begun to talk about adding workers.

In the tech sector, for instance, Google Inc boosted its headcount by about 9 percent -- some 2,450 workers -- in the second quarter, though not all those jobs were added in the United States. Railroads have also been boosting their ranks, with both Union Pacific Corp and CSX Corp saying they plan to add workers this year in reaction to growing volume on their lines.

Manufacturers that cut staff during the downturn have also started to add back, with both General Electric Co and Caterpillar Inc adding U.S. hourly workers.

Johnson Controls' building efficiency unit has added 4,000 U.S. jobs this year, said Dave Myers, president of the business that retrofits buildings to cut their energy use. including New York's iconic Empire State Building.

"In our markets, we have a lot of confidence in continuing to grow. You're going to see a lot of industries with strong replacement (demand) and many will continue to invest, (like) healthcare." Myers said. "I'm an optimist."

'SOFT PATCH' OR RECESSION?

Staffing shares initially rallied on Friday's jobs data but, like the overall market, turned mixed. Shares of Manpower, the largest U.S.-listed staffing company and the world's No. 3, were down 2 percent at $42.41. TrueBlue Inc lost 0.9 percent. Kelly Services gained 1.2 percent, but Robert Half International lost 3.8 percent.

All the staffing shares are down 20 percent or more from their highs earlier this year.

"While the market seems to be pricing in a double dip, 'soft patches' such as these are fairly common during economic recoveries," BMO Capital Markets analyst Jeff Silber said in a note to clients.

In European trading, Randstad was flat, while Adecco was up 0.2 percent.

Shares of SFN Group Inc were flat. The company last month agreed to a takeover by Randstad of the Netherlands, the world's No. 2 staffing company, which will double its U.S. revenue with the deal.

The private sector has been steadily building jobs," said SFN CEO Roy Krause. "Clearly not enough to knock down unemployment, (but) growth is still growth, it's not a double-dip recession."

Krause said demand for temps in the manufacturing sector was "decent," and clients are looking for skilled technology professionals, accountants and engineers, in areas like food production and energy. The white-collar unemployment rate is about half of the national average, he added.

"Our business is still expanding -- admittedly slowly," Krause said. "You can't rule out (another recession), but there's no indication. You're not seeing temp jobs fall."

(Additional reporting by Scott Malone in Boston; Editing by Phil Berlowitz)

View the original article here

Analysis: World poorly placed to meet new economic crisis (Reuters)

LONDON/FRANKFURT (Reuters) – With financial markets in turmoil and economic growth slowing, policymakers around the world may once again be forced to cooperate to try to head off a crisis, as they did successfully in 2008-2009. But this time, they have fewer good options.

Central banks have less room to ease monetary policy than they did three years ago; cash-strapped governments cannot afford to boost spending as much; and political disarray in some countries may make concerted global policymaking harder.

"What can you do? On monetary policy, clearly no one agrees with anyone. On fiscal policy, everyone is blocked," said Deutsche Bank economist Gilles Moec.

By some measures, the global situation is not nearly as bad as it was in 2008. Banks have strengthened themselves since the collapse of Lehman Brothers and the world is still far from a recession; JPMorgan may have cut its forecast for 2012 U.S. growth this week but it still expects an expansion of 1 percent.

Global stocks have dropped nearly 10 percent in the last month but MSCI's world equity index is still 90 percent above its 2009 low.

"I know people are saying that this feels very much like 2008 but I don't think we are there. In 2008, you could point at the problem in the banking sector and there were failed banks," said Nomura economist Jens Sondergaard.

Still, the trends have clearly turned negative. National purchasing managers indexes around the world have dropped near or below the "boom or bust" threshold separating economic growth from contraction. This week's slide of British government bond yields to record lows underlines both investor nervousness and a grim growth outlook.

In some ways, the situation is more worrying than it was in 2008: There is widespread concern about the risk of a downgrade of the U.S. sovereign credit rating, and a bond market attack on Italy, the euro zone's third-biggest economy, has called into question the long-term viability of the zone. Valuations of U.S. and European bank shares are back around levels hit at the time of Lehman's collapse.

"The difference (between 2008 and now) is that this is not only a currency and banking crisis, you have now a currency, banking and sovereign crisis," said Sylvain Broyer, analyst at European financial firm Natixis.

The Swiss central bank's shock decision to cut interest rates on Wednesday to fight the rapid appreciation of the Swiss franc was seen by some analysts as a possible precursor to concerted efforts by central banks in the Group of 20 nations to stabilize markets.

Steen Jakobsen, chief economist at European investment bank Saxo Bank, said the G20 nations were likely for now to leave it up to their central banks, which can act relatively flexibly and quickly, to handle market turmoil.

But if the economic climate keeps worsening, perhaps with another 10 percent fall by global stocks, G20 governments may be pushed into making a concerted pledge of action to protect markets and growth, as they did at a London summit in April 2009, he said.

G20

By displaying solidarity among world leaders and promising $1.1 trillion for global lending institutions and trade financing, the London summit succeeded in reassuring investors enough to support a recovery in markets and economic growth.

Now, however, it may be harder for governments to show such solidarity. President Barack Obama has been weakened politically, and his economic policy options narrowed, by his battle to push up the U.S. debt ceiling.

Some big countries are further along in their election cycles, complicating decisions. Important elections are due in the United States, Germany and France over the next couple of years, as well as a leadership change in China.

"The maneuverability of governments is much less than it was in the last crisis. A lot of people want to be seen not to be caving in to pressure," Jakobsen said.

During the 2008-2009 crisis, the International Monetary Fund played a major role in coordinating the global response, but there are now signs of internal division, with powerful emerging economies criticizing the policies of Western governments.

Last month, Brazilian and Indian directors of the IMF warned the Fund's management against pouring more large sums of aid into the euro zone debt crisis, while official Chinese media have denounced U.S. politicians as globally irresponsible over the debt ceiling dispute.

These tensions may complicate G20 agreements on action in several areas:

- Joint currency intervention. This is the most likely initial form of G20 cooperation because well-tried mechanisms for it already exist; central banks could send a message that they want stability in markets by intervening massively to stop appreciation of the Swiss franc or Japanese yen.

But China and the rest of the world are still far from agreeing on a more fundamental problem in the global currency system -- the value of the Chinese yuan.

- Coordinated interest rate cuts. In October 2008, six Western central banks cut interest rates in a coordinated move, while China also eased policy.

Global central bankers may signal an easier policy bias when they meet in Jackson Hole in the United States on August 25-27. But coordinated rate cuts look unlikely in the foreseeable future because some central banks such as the U.S. Federal Reserve have very little room left to cut, and central banks are also at different stages in their monetary cycles. The European Central Bank began tightening this year, criticizing Fed policy as too loose; China may still be in tightening mode.

A weakening economy might eventually push the Fed and the Bank of England into printing more money through "quantitative easing." But this would almost certainly not be part of any coordinated G20 move; China and other emerging economies sharply criticized U.S. quantitative easing last year as destabilizing for markets.

- Expansionary fiscal policy. During the 2008-2009 crisis, the G20 did not resolve differences over fiscal policy; Germany resisted U.S. pressure to boost government spending more. But the London summit in 2009 still produced a pledge of "an unprecedented and concerted fiscal expansion" by G20 states, which cheered markets.

Such a pledge is extremely unlikely now, with the euro zone and the United States desperate to reassure investors that they can bring sovereign debt down to manageable levels.

Markets are hoping fiscally strong G20 members may spend more to help weak ones. Germany could change tack and support a major expansion of the euro zone's 440 billion euro bailout fund in order to provide a precautionary credit line to Italy. [ID:nLDE77017G] China might invest more of its $3.2 trillion foreign exchange reserves in euro zone sovereign debt.

Both these measures might be discussed by the G20 and could have a quick, dramatic effect on markets. But they would face some political opposition within the contributing governments, and would not necessarily change the long-term outlook for economies.

(Writing by Andrew Torchia)

View the original article here

Analysis: Kurds serve warning as U.S. withdrawal nears (Reuters)

KIRKUK, Iraq (Reuters) – When Iraq's northern Kurdish region sent a division of troops to surround Kirkuk in February, it may have been a signal of the delicate balancing act to come when U.S. forces leave the disputed oil city.

Officially, the 10,000 or so peshmerga fighters were there to protect Kirkukis from any violence associated with nationwide protests. But their presence sparked a furious diplomatic offensive by the United States to calm tensions between the central government in Baghdad and Arbil, the Kurdish capital.

The deployment may have been a trial balloon, analysts said, to test Prime Minister Nuri al-Maliki and to warn Baghdad and Washington that U.S. troops are needed as a buffer in the disputed northern territories claimed by both capitals.

"The Kurdish military maneuver in Kirkuk in February was both a message to the U.S. to keep its troops on the ground beyond 2011 - which is a Kurdish interest - and a way of testing the resolve of the Baghdad government," said Joost Hiltermann, an analyst with International Crisis Group.

It took a month to persuade semi-autonomous Kurdistan, comprised of three northern provinces, to withdraw the unit.

"It was a lot of diplomacy in saying 'look this isn't right. It's upsetting the area. It doesn't lead to stability,'" said Colonel Michael Pappal, commander of the U.S. Devil Brigade in Kirkuk. "It showed to me that a third party was necessary for that to happen."

Eight years after the United States ousted Saddam Hussein, Iraq is still building its police and army to battle a lethal Sunni Islamist insurgency and Shi'ite militias within, as well as defending against external threats.

As violence ebbs, Kirkuk and other disputed northern areas are considered potential flashpoints for future conflict in a country hobbled by ethnic, religious and political strife.

The late February incursion was no spur-of-the-moment decision and prompted a quick response from the Americans, who told Kurdish commanders their soldiers would not be allowed into Kirkuk, U.S. military officials said.

"You don't send a division across a border without a lot of planning and preparation ... it takes a while to put an army on the road and that's what they did," said Lieutenant Colonel Joe Holland, a U.S. commander in Kirkuk.

The unit was 12,000 strong, a Kurdish official told Reuters, while the U.S. military estimated it at 8,000-9,000. Sources said the Kurds had AK-47s, artillery and armored vehicles.

CLOSE TO BLOWS

Holland said it was the third time in 20 years the Kurds had moved into the Kirkuk area; the first in 1991 after the invasion of Kuwait and the second in 2003 when Saddam was ousted.

Maliki's government demanded the peshmerga withdraw and the Kurdistan Regional Government at first refused, escalating tensions. Iraqi and Kurdish troops have come close to blows in the past two years as Baghdad tightened its grip on Kirkuk.

Iraqi officials said the incursion was illegal. Officially, the city -- which by some estimates sits atop 4 percent of the world's oil reserves -- is secured by central government forces.

"The effect was a significant schism in the relationship between us and the Kurds," Holland said.

Kirkuk has suffered huge population upheavals in recent decades, from Saddam's "Arabization" campaigns to more recent moves by Kurds to reclaim parts of the city.

"They were sending a message to the central government, saying 'we can enter Kirkuk any time and you cannot stop us,'" a senior Iraqi Defense Ministry official told Reuters.

The official said the KRG would not invade Kirkuk after the U.S. leaves but would seek to displace Arabs. He said the Kurd population had soared from 150,000 to 350,000 since 2003.

The peshmerga, however, represent a formidable challenge to the Iraqi army. The Kurds have 100,000 troops, better weaponry and experienced leaders, the official said.

"After 2003, they captured the former Iraqi army tanks. About 4,000 tanks left by the former Iraqi army in the streets and cities disappeared, and our investigations indicate that the Kurds have most of them and Iran got the rest," he said.

The peshmerga deployment served notice that without the neutral buffer of U.S. forces, the Kurdish region might "feel compelled to use military muscle to defend its interests," said Wayne White, an analyst with the Middle East Institute.

"So, while a signal that the KRG will not tolerate any perceived trampling of its interests in Kirkuk, this deployment also was meant as a reminder to both Washington and Baghdad that greater consideration should be given to the prolongation of a more meaningful U.S. presence," he said.

But because Maliki, perhaps calculating that the Americans would pressure their Kurdish allies to withdraw, did not offer a serious challenge, the deployment was not an effective trial run for securing Kurdish control of Kirkuk, Hiltermann said.

"This will have to wait till the time when U.S. troops will no longer be there," he said. "At that point, all bets are off and tensions could easily escalate, intentionally or inadvertently, to a bigger conflict, at least as long as the dispute between Baghdad and Arbil remains unsettled."

(Additional reporting by Suadad al-Salhy; Editing by Jon Hemming)

View the original article here

Famed fossil isn't a bird after all, analysis says (AP)

NEW YORK – One of the world's most famous fossil creatures, widely considered the earliest known bird, is getting a rude present on the 150th birthday of its discovery: A new analysis suggests it isn't a bird at all.

Chinese scientists are proposing a change to the evolutionary family tree that boots Archaeopteryx off the "bird" branch and onto a closely related branch of birdlike dinosaurs.

Archaeopteryx (ahr-kee-AHP'-teh-rihx) was a crow-sized creature that lived about 150 million years ago. It had wings and feathers, but also quite un-birdlike traits like teeth and a bony tail. Discovered in 1861 in Germany, two years after Charles Darwin published "On the Origin of Species," it quickly became an icon for evolution and has remained popular since.

The Chinese scientists acknowledge they have only weak evidence to support their proposal, which hinges on including a newly recognized dinosaur.

Other experts say the change could easily be reversed by further discoveries. And while it might shake scientific understanding within the bird lineage, they said, it doesn't make much difference for some other evolutionary questions.

Archaeopteryx dwells in a section of the family tree that's been reshuffled repeatedly over the past 15 or 20 years and still remains murky. It contains the small, two-legged dinosaurs that took the first steps toward flight. Fossil discoveries have blurred the distinction between dinosaurlike birds and birdlike dinosaurs, with traits such as feathers and wishbones no longer seen as reliable guides.

"Birds have been so embedded within this group of small dinosaurs ... it's very difficult to tell who is who," said Lawrence Witmer of Ohio University, who studies early bird evolution but didn't participate in the new study.

The proposed reclassification of Archaeopteryx wouldn't change the idea that birds arose from this part of the tree, he said, but it could make scientists reevaluate what they think about evolution within the bird lineage itself.

"Much of what we've known about the early evolution of birds has in a sense been filtered through Archaeopteryx," Witmer said. "Archaeopteryx has been the touchstone... (Now) the centerpiece for many of those hypotheses may or may not be part of that lineage."

The new analysis is presented in Thursday's issue of the journal Nature by Xing Xu of the Chinese Academy of Sciences in Beijing, and colleagues. They compared 384 specific anatomical traits of 89 species to figure out how the animals were related. The result was a tree that grouped Archaeopteryx with deinonychosaurs, two-legged meat-eaters that are evolutionary cousins to birds.

But that result appeared only when the analysis included a previously unknown dinosaur that's similar to Archaeopteryx, which the researchers dubbed Xiaotingia zhengi. It was about the size of a chicken when it lived some 160 million years ago in the Liaoning province of China, home to many feathered dinosaurs and early birds.

Julia Clarke of the University of Texas at Austin, who did not participate in the study, said the reclassification appeared to be justified by the current data. But she emphasized the study dealt with a poorly understood section of the evolutionary tree, and that more fossil discoveries could very well shift Archaeopteryx back to the "bird" branch.

Anyway, moving it "a couple of branches" isn't a huge change, and whether it's considered a bird or not is mostly a semantic issue that doesn't greatly affect larger questions about the origin of flight, she said.

Luis Chiappe, an expert in early bird evolution at the Natural History Museum of Los Angeles County who wasn't part of the new study, said he doesn't think the evidence is very solid.

"I feel this needs to be reassessed by other people, and I'm sure it will be," he said.

___

Online:

Nature: http://www.nature.com/nature

___

Malcolm Ritter can be followed at http://www.twitter.com/malcolmritter

View the original article here

Analysis: Young startups demand steeper prices from VCs (Reuters)

SAN FRANCISCO (Reuters) – A year ago, Mike Maples's investment firm, Floodgate, was investing in young companies at a pace of two or three every quarter. Now, he's backed just one startup all year and puts a big chunk of the blame on spiraling price tags.

"Relative to the risk I have to take, I can't justify paying that high price," said Maples, who invested $25,000 in microblogging service Twitter five years ago and $500,000 in textbook-rental company Chegg four years ago, each of which has since exploded in value.

Backing a company at its early stages has become a lot pricier: valuations are often a third more to double what they would have been just a year ago, venture capitalists say.

That leaves funds that back companies early on with a stark choice: pay more, or risk missing out on the next Twitter or LinkedIn. This is changing how Silicon Valley operates in subtle but important ways, venture capitalists say.

One clear sign is the shifting definition of "early stage." Traditionally, that was angel, A or B rounds, which everyone understood to mean a company was generating no revenue, or very little. Companies expected just a few hundred thousand dollars at the angel stage, $1 million to $10 million at the series A round, and $10 million to $20 million in a series B round.

But now, with technological advances and rapid-fire reputation building due to sites like Facebook, companies can within months hit revenue and customer milestones that would have taken years before. They're demanding more cash to match.

NO DISCOUNT WITH GROUPON DEAL

Online-deals service Groupon, which received $30 million in B-round funding in late 2009, was an early example. That "was a growth round," said Peter Barris, managing general partner at New Enterprise Associates (NEA), which took part in that round after making a $4.8 million A-round investment the year before. "The business model was proven, and it was a matter at that point of getting more capital to expand in more cities."

An A round can now top $15 million and B rounds $40 million. Just this year, weather-insurance company WeatherBill raised $42 million in a B round; Flipboard, which puts social-media feeds into a magazine-style format, raised $50 million.

Also this year, mobile-gaming company TinyCo won an $18 million A round, and game developer Funzio landed $20 million.

Part of the issue, seasoned players say, is the increasing numbers of investors willing to get involved at the early stages, creating outsize demand. Barris's NEA, for example, has set up a fund specifically for seed-stage investments.

And increasingly, start-ups want terms that disfavor early-stage backers, said Redpoint partner Geoff Yang, especially at seed level. For example, many seed investments take the form of bridge loans, which are riskier for investors.

Yet the boom is largely limited to specific fields such as the Internet, mobile, and cloud computing, investors say. In other fields, valuations are often down. Venture investments in cleantech, for example, totaled $1.83 billion in the second quarter, the Cleantech Group research firm said on Wednesday. That's down 10 percent from the same time last year.

BURST OF COLOR

Perhaps the best-known example of a richly valued company is photo-sharing service Color, which raised $41 million from Sequoia Capital, Bain Capital and Silicon Valley Bank in its first funding round. So far, it has a negligible number of users.

Color illustrates the clout of companies with proven teams. Color founder Bill Nguyen also founded music service Lala -- sold to Apple two years ago for $80 million.

Another group of companies that investors say expect pricey valuations: any outfit that was part of Y Combinator, a Silicon Valley boot camp for start-ups. Graduates of the three-month program include success stories such as cloud-storage company Dropbox and accommodation-network Airbnb.

"Now you have companies that have not yet achieved those results, but expect to have the valuation of a company that has," Maples said. "You say, 'OK, that company is in crazyland.'"

In addition to the high cost, Maples said, too many startups have me-too business plans, such as wanting to become a Twitter for various sub-sectors of the population.

As for his one new investment of 2011? Maples participated in a $1.7 million round for SBR Health, a video service for doctors and patients.

(Reporting by Sarah McBride; Editing by Braden Reddall and Steve Orlofsky)

View the original article here