Disaster aid account faces shortfall (AP)

WASHINGTON – The government's main disaster aid account is running woefully short of money as the Obama administration confronts damages from Hurricane Irene that could run into billions of dollars.

With less than $800 million in its disaster aid coffers, the Federal Emergency Management Agency has been forced to freeze rebuilding projects from disasters dating to Hurricane Katrina to conserve money for emergency needs in the wake of Irene. Lawmakers from states ravaged by tornadoes this spring, like Missouri and Alabama, are especially furious.

The shortfalls in FEMA's disaster aid account have been obvious to lawmakers on Capitol Hill for months — and privately acknowledged to them by FEMA — but the White House has opted against asking for more money, riling many lawmakers.

"Despite the fact that the need ... is well known," Reps. Robert Aderholt, R-Ala., and David Price, D-N.C., wrote the administration last month, "it unfortunately appears that no action is being taken by the administration." The lawmakers chair the panel responsible for FEMA's budget.

FEMA now admits the disaster aid shortfall could approach $5 billion for the upcoming budget year, and that's before accounting for Irene.

As a result, funds to help states and local governments rebuild from this year's tornadoes, as well as past disasters like hurricanes Katrina and Rita and the massive Tennessee floods of last spring, have been frozen. Instead, FEMA is only paying for the "immediate needs" of disaster-stricken communities, which include debris removal, food, water and emergency shelter.

"Going into September being the peak part of hurricane season, and with Irene, we didn't want to get to the point where we would not have the funds to continue to support the previous impacted survivors as well as respond to the next disaster," FEMA Administrator Craig Fugate told reporters at the White House on Monday.

Republicans controlling the House and the Democratic-controlled Senate may be headed toward a battle over whether to cut spending elsewhere in the budget to pay for tornado and hurricane aid.

A top leader in the tea party-driven House says that chamber will find those offsetting spending cuts. The Senate, however, is likely to take advantage of a little-noticed provision in the recently passed debt limit and budget deal that permits Congress to pass several billion dollars in additional FEMA disaster aid without budget cuts elsewhere.

"We will find the money if there is a need for additional money," House Majority Leader Eric Cantor, R-Va., told Fox News on Monday. "But those monies are not unlimited, and we have said we have to offset that."

But Sen. Dick Durbin, D-Ill., who presided over a recent hearing on disaster costs, says the number and cost of disasters have grown dramatically over the past few years.

"If (Cantor) believes that we can nip and tuck at the rest of the federal budget and somehow take care of disasters, he's totally out of touch with reality," the No. 2 Senate Democrat said Tuesday.

Earlier this year, the administration requested $1.8 billion for FEMA's disaster relief fund, despite pent-up demands for much more. Appropriations for last year totaled four times that amount.

FEMA estimates that the request still left the disaster fund short by $2 billion to $4.8 billion for the upcoming fiscal year. Those are figures the agency provided to Congress this spring — before Irene or the tornadoes that destroyed huge swaths of Joplin, Mo., or beat up the South.

With recovery operations from Irene still in the early stages, FEMA spokesman Rachel Racusen said it is too early to know whether that projected shortfall has increased or by how much.

"It's just too soon to know what any uninsured losses will be," Racusen said.

"Even though the president himself said that we are going to do everything we can to help these communities rebuild, the rhetoric has not matched reality, and the Disaster Relief Fund is running out of money," Aderholt said.

The likely vehicle for replenishing the disaster account is the homeland security spending bill for the budget year beginning Oct. 1. The House passed the measure in early June, but the Senate has yet to act.

A House-Senate collision over disaster aid would risk further delays in replenishing dangerously low FEMA disaster accounts.

"It's too early to tell what the damage assessment will be and what next steps may need to be taken," said Meg Reilly, a spokeswoman for the White House budget office.

It's hardly the first time that longer-term rebuilding projects like schools and sewer systems have been frozen out to make sure there's money to provide disaster victims with immediate help with food, water and shelter. But it's frustrating to communities like Nashville, Tenn., which is rebuilding from last year's historic floods.

The Obama White House is just the latest administration to lowball disaster relief requests. Over the past two decades, Congress has approved $130 billion for FEMA's disaster account. But the bulk of that money, $110 billion, has been provided as emergency funding in addition to the annual budget.

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Associated Press writer Alicia Caldwell contributed to this story.

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Britain, Japan warn of disaster if no U.S. debt deal (Reuters)

LONDON/TOKYO (Reuters) – British and Japanese officials warned Sunday of disastrous consequences for the global economy if last-minute talks among lawmakers in Washington failed to agree on raising the U.S. borrowing limit and averting a debt default.

Governments across the world fear that because of the key role of the U.S. dollar in global banking and trading systems, there could be severe instability when Asian financial markets reopen Monday if a U.S. debt deal is not in sight by then.

In Washington, Senate Minority Leader Mitch McConnell, the top Senate Republican who is playing a key role in the debt talks, said "we're very close" to a $3 trillion deal that would raise the debt ceiling while cutting the U.S. budget deficit.

But a senior White House official warned that an agreement was "not there yet."

"If they get this one wrong and there's a default -- we don't expect that, we think that they will sort this out -- but if that were to happen, it has consequences for every family and every business in this country and all across the world," said Danny Alexander, Chief Secretary to the British Treasury.

"I think in the end the politicians on Capitol Hill can see that the precipice they are looking over is one that they are going to step back from," Alexander told BBC television.

"But it is something that would have a big effect on the global financial system and on the global economy, where the United States is one of our major trading partners, that could have really big implications for the United Kingdom."

In Tokyo, sources familiar with Japan's international and monetary affairs said they were increasingly concerned that markets might be too optimistic about prospects for a lasting solution to the crisis.

Japanese officials still hope Washington can strike a deal and if that proves impossible, will give priority to interest payments to international holders of U.S. Treasury debt to limit the immediate market impact, the sources said.

But Tokyo's concern is that if the crisis drags on without a clear and long-term solution, markets may be thrown into turmoil in the same way that they suffered when U.S. investment bank Lehman Brothers collapsed in September 2008.

"If there is a default, the impact on global markets will be huge," said one of the sources, who declined to be named because of the sensitivity of the matter.

Another Japanese source said, "Nobody thought Washington would let Lehman collapse. But look what happened."

U.S. lawmakers have set themselves a Tuesday deadline to reach agreement and the U.S. Treasury has said it will run out of borrowing room on that day, although analysts think the government may have enough cash to keep servicing its debt and paying its bills through the middle of this month.

CHINA

Britain is the third largest foreign holder of U.S. Treasury debt and Japan is the second largest. China is the biggest with well over $1 trillion invested in U.S. Treasuries; about two-thirds of its $3.2 trillion of foreign exchange reserves are estimated to be held in dollar assets.

Saturday the official People's Daily newspaper, the mouthpiece of the Chinese Communist Party, castigated the U.S. handling of the debt crisis in an editorial as "irresponsible" and "immoral."

It said the U.S. democratic system was to blame for the "farce," claiming that "not a single representative has considered the world, and even U.S. national interests are being banished from the mind."

Friday a senior economic policymaker in the euro zone, who declined to be named, told Reuters he was optimistic Washington would solve the problem but expressed surprise and anger that U.S. politicians were "playing chicken" with an issue of such importance for the global economy.

Euro zone leaders are struggling to control sovereign debt crises in several countries in their region, and the U.S. debt problem is making this more difficult by adding to upward pressure on the yields of government bonds in those weak states.

If there is no U.S. debt deal by Monday morning, central banks around the world are expected to stand ready to provide emergency supplies of money to commercial banks in case the banks become too nervous to lend to each other.

Japan's first defense will be to ensure that Japanese financial institutions have a sufficient supply of dollars, the sources in Tokyo indicated.

The Bank of Japan believes Japanese commercial banks have sufficient dollar cushions but will use its dollar swap arrangement with other central banks to prevent a dollar squeeze in case of market turmoil.

In late June, the U.S. Federal Reserve agreed to extend liquidity swap arrangements with other major central banks until August 1, 2012.

The Japanese central bank is also prepared to flood markets with yen through its open market operations in case interbank borrowing costs spike, BOJ officials say.

In Europe, there were minor signs of strain in the money markets last week with some banks becoming unable to take out longer-term dollar loans, but the effect was small since banks still expected Washington would reach a deal.

The European Central Bank already offers unlimited euro loans to banks in some of its money market operations as part of its response to past crises, and it could use that policy to cope with any market problems this week.

A spokesman for the Swiss central bank said, "The Swiss National Bank is ready to react appropriately at any time to market disruptions."

(Writing by Andrew Torchia; Editing by David Cowell)

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