LAST 2 WEEKS SHOOK MARKETS

OIL spill 1st in story 1, Global markets in story 2 And a hot spot in climate change in story 3.

May 20, 2006, 11:12PM2,000 Gallons of Oil Spilled Near Oahu, © 2006 The Associated Press

HONOLULU — An oil tanker spilled up to 2,000 gallons of crude oil into the Pacific Ocean on Saturday morning, an official said.The Coast Guard and the state Health Department categorized it as a minimal spill, said Nathan Hokama, spokesman for Tesoro Corp., which owns the tanker. There were no immediate reports of harm to wildlife.The spill occurred about 1.5 miles off the coast of Oahu when a hose line pumping oil from the tanker to a floating buoy disconnected, Hokama said.

The only thing we know right now is that one of the couplings in the hose separated, which is what it's supposed to do whenever there's a strain on the hose," he said. Crews from the Clean Islands Council and the Marine Spill Response Corporation helped with cleanup. The light crude oil may have dissipated quickly because of strong sunshine and choppy waters, Hokama said. Any potential fines would be assessed based on the results of an investigation, he said.

STORY 2

WELL THE GLOBAL MARKETS NEVER COLLAPSED THIS TIME BUT THEY ARE ON EARTHAKE (SHAKY) GROUNDS. ONE OF THESE TIMES IT WILL BE THE COLLAPSE THE BIBLE SAYS WILL HAPPEN IN THE FUTURE.

Ten days that shook the world's markets US interest rate fears sparked a torrid fortnight, with £45bn wiped off London share prices. What will happen next, asks Heather Stewart Sunday May 21, 2006 The Observer

From Stockholm to Tokyo, New York to Istanbul, market mayhem swept across the world last week, unleashing violent movements on stock markets and foreign exchanges everywhere, and hammering down the price of commodities such as copper and gold. In London, the FTSE 100 suffered its worst day for more than three years on Wednesday, before ending the week at 5,672, more than 4 per cent down in five days' trading. After a febrile fortnight, analysts are asking themselves if the turmoil is over - or whether the sell-off marked the end of the three-year bull market and the dawn of a much more volatile era.

Stephen Lewis, of bankers Insinger de Beaufort, says it's too early to write off the risk that the events of the past few days could be the trigger for a full-blown financial crisis. 'Volatility rises, to the extent that it has in equity and commodity markets in recent days, when emotions take over; when actions in the markets are forced; when survival is at stake. In such circumstances, there can be no reliable forecasts of how far markets will move,' he warned. The worldwide wobble started with the dollar. A warning from G7 finance ministers last month about imbalances in the global economy, and a hint from Federal Reserve chairman Ben Bernanke that he might halt the rise in interest rates, brought the greenback bears out of hiding, and triggered a frenzy of selling.

But over the past few tumultuous days alarm has spread far beyond the currency markets. 'The equity markets were standing rather naively on the sidelines, and suddenly they've woken up,' says David Bloom, currency strategist at HSBC, who has long predicted a dollar shake-out. 'Markets have been looking very vulnerable,' said Julian Jessop, international economist at Capital Economics. 'There have been some bubbles developing, particularly in commodities. All investors are waking up to an alarming new world. After five years in which credit has been plentiful as central banks kept the cash taps on, the cost of borrowing has gradually begun to grind upwards. In the US, the Federal Reserve has raised interest rates 16 times, to 5 per cent, from 1 per cent two years ago. The European Central Bank has also raised borrowing costs, and even Japan, the home of the zero interest rate for many years, has responded to a stronger economy by promising to start tightening monetary policy.

In this new climate, with money rapidly becoming more expensive, investors will be less keen to take enormous bets using borrowed cash. The unwinding of some of these risky positions was responsible for some of last week's upheaval. Everyone and his dog has leveraged up to the eyeballs buying everything they can get their hands on,' said Charles Dumas, of Lombard Street Research. 'Now liquidity's drying up because interest rates are high; bond yields are high; everyone's finding their funding drying up. One extreme example of this is what analysts call the 'yen carry trade': investors have been taking advantage of zero interest rates in Japan, borrowing the money to take bets in other markets. With rates in Japan on the way up, they have been hurriedly extricating themselves: and that has hit risky but high-yielding assets, such as emerging market bonds. Turkey took a pounding last week, for example, as nervous investors pulled their cash back home.

We think that there's been a very big shake-out in some of the asset classes where people had become very extended, especially emerging markets and commodities,' said Peter Oppenheimer, European head of portfolio strategy at Goldman Sachs. As if this 'liquidity drain,' as Lewis calls it, wasn't enough to spook the markets, it is happening at a time when the Federal Reserve, the world's most important central bank, is in the hands of a new boy - former Princeton academic Bernanke. He has to win the confidence of the markets at the same time as deciding on the right time to stop increasing US interest rates. If he pushes borrowing costs too high, the US economy could be plunged into recession; if he stops too soon, the markets will fear that inflation is about to get out of control.

He's between a rock and a hard place,' said Dresdner currency analyst Sonja Marten. 'It's a very tricky situation. There is going to be that risk of a hard landing, and that's what the markets are not sure about. Goldman Sachs analysts call this the 'Bernanke bind' and, at the margins, it could increase the anxiety in the markets over the months ahead. 'They're going to pressure Bernanke, which could be bad,' says Dumas. Through the fog of market panic last week, analysts said it was important not to forget the underlying economic causes of the upheaval. For several years now, economists have been watching with growing alarm as the US spent more than it earned, running up a record current account deficit with the rest of the world - worth almost 7 per cent of GDP last year.

Funding all that surplus spending has been easy, because foreign investors - notably governments in Asia and the Middle East - have been happy to gobble up American assets, including US Treasury bonds. But, just like an overdraft, the current account deficit can't go on growing indefinitely: something has to give. Most experts have believed for some time that a devaluation in the dollar would be the best way of helping to bring America's income and expenditure back into line. It should make US goods cheaper, helping American exporters while slowing down imports, which will become more expensive for Americans to buy. The weakening in the dollar over the past couple of weeks could be seen as the first step towards this 'rebalancing'.

All this might sound like the concern of academic number-crunchers. But the US current account deficit has a more homely analogue in the finances of the small-town American household. Buoyed by low interest rates and a property boom, consumers have, quite simply, been spending more than they earn. The savings ratio - the proportion of the average worker's take-home pay that is squirrelled away for a rainy day - has slipped below zero. With interest rates rising, and signs emerging that the frothy property market is on the turn, American homeowners may respond by acting to put their finances back in order. That could mean a downturn, or at worse a recession, in the US economy. If the housing market in the US slows sharply, then that will drag down the economy as a whole,' says Jessop. And when America sneezes, the rest of the world catches a cold: European Union politicians have already started to sound the alarm about the impact of a stronger euro on exporters, for example, and China would be hit hard if US demand for its products plummeted.

For the UK, too, if the rise in sterling against the dollar is sustained, the economic consequences could be painful, particularly when combined with an American slowdown. At the beginning of last week, economists were betting on an early rise in interest rates; but the Bank could find the stronger pound does the same job. This economic story will play out over months, not at the breakneck speed of the financial markets, and it is hard to predict how its ramifications will ripple across the world. 'There's no new trend established yet,' said HSBC's Bloom. 'It's an unsettled time.' But Bernanke, whose hands are on the world's most important economic lever, will have to hope he isn't forced to win the confidence of the markets the way his predecessor, Alan Greenspan, did - by stepping in to stop the stock market crash of 1987 turning into a global financial crisis.

STORY 3

Natural ReactionHotspot for climate changeAnne Zammit

EXPERTS on tropical glaciers have been racing with climate change to reach one of the loneliest places on the planet before it melts. Seldom visited by local tribes, the highlands of New Guinea are shielded from watchful satellites by constant cloud cover. Critical information on how the climate works is locked inside these glaciers at the heart of the El Niño region where Pacific ocean temperatures are warmer than usual.

The glaciers around Mount Jaya have retreated 300 metres over the past three decades, displaying the highest rate of global warming for the region. New species, such as a tree kangaroo, which have only just been discovered on this vast Asian island, are under threat from the rise in temperature. Habitats in the higher altitudes are heating up more quickly than the lowlands.

Another shock surprise this year has been the dramatic slowing of vital Atlantic Ocean currents. If the trend is to continue, scientists fear that it might plunge Europe into winter. A climate change index has been developed to rank regions according to the severity of climate change expected by the end of this century. The Mediterranean can expect less rainfall overall but more variability in summer rain, making both droughts and flash floods more likely. Also high on the list of climate change extremes is north eastern Europe which looks set to see more snow.
Climate change is no longer perceived as predominantly an environmental issue, but is beginning to impact directly on people's lives. The carbon-based economy has been described as an "uncontrolled experiment" with the global climate, with serious risks for ecosystems, business and human health. It was noted at a UN climate meeting in New York held earlier this month that climate impacts will affect not only the environment but also social and economic systems. Agricultural production and food security, fisheries, coastal zone management and public health are all threatened.

We may not be preparing ourselves well enough for the risk of abrupt and runaway climate change. Damages from rising seas, extreme weather and ecosystem collapse are already becoming apparent. We can pay the price in terms of renewable energy, energy efficiency and emission reduction investments now... or we can pay later, perhaps with our lives.Rapid and more frequent climatic changes are now becoming increasingly apparent to most countries and the next five to 20 years are expected to show more examples of adverse impacts while current investments to mitigate the causes are negligible.

The EU has decided to meet its requirements to offset climate change under the Kyoto Protocol as a whole, rather than as individual signatories, with each member state given a different emissions target by the EU Commission. The targeted cut in greenhouse gas emissions by at least five per cent below 1990 levels must be met between 2008 and 2012. Emissions trading has been introduced to give some flexibility while keeping total emissions within the overall capped level. Individual installations may emit more than their allocation on condition that they can find another trader that has emitted less than allowed and is willing to sell their unused allowance. A draft of the National Allocation Plan for Malta for 2008-2012 is open for public comment on the MEPA Website until May 29.

Costing the changes

An estimate that it would take $325 billion for the United States to meet the Kyoto Protocol targets on cutting emissions led the Bush administration to claim that the benefits did not justify its costs. As The Washington Post of May 9 has pointed out, the cost of the Iraq war, now in excess of $300 billion, is close to what it would cost the US to implement the Kyoto Protocol. This amount is exactly what the World Bank estimates it would cost to meet the needs of people in developing countries through more efficient and cleaner sources of energy.

The European Environment Agency calculates that action to combat climate change will deliver considerable benefits. Europe would save €10 billion a year on air pollution control and see 20,000 fewer premature deaths with a drop in damage to ecosystems. The price for conventional energy sources has been increasing and will do so further, but the price for renewable energy will decrease due to the development of technologies and economies of scale.
Surprisingly, funding for EU research projects in renewable energy and energy efficiency have dropped. The inter-parliamentary European Forum for Renewable Energy Sources has urged that the research budget for renewables in the upcoming FP-7 research programme must be significantly increased.

It may be some time before renewable energy sources are able to deliver the large amounts of energy required for bulk energy for most countries. The National Commission for Sustainable Development which met earlier this month augured that appropriate policies and incentives combined with more resources for research and development could shorten this time.