Now Italy?...the worst single day in Mediterranean markets since the launch of monetary union.

They seemed so confident only yesterday

Contagion strikes Italy as Ireland bail-out fails to calm markets

The EU-IMF rescue for Ireland has failed to restore to confidence in the eurozone debt markets, leading instead to a dramatic surge in bond yields across half the currency bloc.

Telegraph

By Ambrose Evans-Pritchard, International Business Editor 8:15PM GMT 29 Nov 2010

Spreads on Italian and Belgian bonds jumped to a post-EMU high as the sell-off moved beyond the battered trio of Ireland, Portugal, and Spain, raising concerns that the crisis could start to turn systemic. It was the worst single day in Mediterranean markets since the launch of monetary union.

The euro fell sharply to a two-month low of €1.3064 against the dollar, while bourses slid across the world. The FTSE 100 fell almost 118 points to 5,550, while the Dow was off 120 points in early trading.

"The crisis is intensifying and worsening," said Nick Matthews, a credit expert at RBS. "Bond purchases by the European Central Bank are the only anti-contagion weapon left. It needs to act much more aggressively."

Investor reaction comes as a bitter blow to eurozone leaders, who expected the €85bn (£72bn) package for Ireland agreed over the weekend to calm "irrational markets".

While the Irish rescue removed the immediate threat of "haircuts" for senior bondholders of Irish banks, it leaves open the risk of burden-sharing from 2013 on all EMU sovereign bonds and bank debt on a "case-by-case" basis. Traders said bond funds have been dumping Club Med bonds frantically to comply with their "value-at-risk" models before closing books for the year.

Yields on 10-year Italian bonds jumped 21 points to 4.61pc, threatening to shift the crisis to a new level. Italy's public debt is over €2 trillion, the world's third-largest after the US and Japan.

"The EU rescue fund cannot handle Spain, let alone Italy," said Charles Dumas, from Lombard Street Research. "We may be nearing the point where Germany has to decide whether it is willing take on a burden six times the size of East Germany, or let some countries go."

Italy distanced itself from trouble in the rest of southern Europe early in the financial crisis, benefiting from rock-solid banks, low private debt, and the iron fist of finance minister Giulio Tremonti. But the crisis of competitiveness never went away, and the country has faced a political turmoil for weeks.

If Portugal and Spain have to follow Ireland in tapping the EU's €440bn bail-out fund – as widely feared after Spanish yields touched 5.4pc – this will put extra strains on Italy as one of a reduced core of creditor states. The rescue mechanism has had the unintended effect of spreading contagion to Italy, and perhaps beyond. French lenders have $476bn of exposure to Italian debt, according to the Bank for International Settlements.

In Dublin, Fine Gael, Labour and Sinn Fein have all vowed to vote against the austerity budget in early December, raising doubts over whether the government can deliver on its promises to the EU.

Echoing the national mood, Sinn Fein leader Gerry Adams said it was "disgraceful" that the Irish people should be reduced to debt servitude to foreign creditors of reckless banks. "The costs of this deal to ordinary people will result in hugely damaging cuts," he said.

One poll suggested a majority of Irish voters favour default on Ireland's bank debt. Popular fury raises the "political risk" that a new government elected next year will turn its back on the deal.

Premier Brian Cowen said there was no other option. "We are not an irresponsible country, " he said, adding that Brussels had squashed any idea of haircuts on senior debt. Irish ministers say privately that Ireland is being forced to hold the line to prevent a pan-European bank run.

There is bitterness over the EU-IMF loan rate of 5.8pc, which may be too high to allow Ireland to claw its way out of a debt trap. Interest payments will reach a quarter of total revenues by 2014. Moody's says the average trigger for default in recent history worldwide has been 22pc. "The interest bill is enormous. The whole process lacks feasibility," said Stephen Lewis, from Monument Securities.


Olli Rehn, the European economics commissioner, said Ireland is in better shape than it looks, recording the EU's strongest growth in industrial output in September as the IT and drug industries boost exports.

"Ireland's real economy has not gone away. It is flexible, open, has strong fundamentals, and has the capacity to rebound relatively rapidly. The Irish are smart, resilient, stubborn people, and they will overcome this challenge," he said.

The Dreyfuss Initiative

It is good to hear from Richard Dreyfuss, a liberal idealist with some common sense, intellectual honesty and someone with whom you could hold a dialogue interesting to conservatives and liberals alike.

I would be curious to hear if Dreyfuss is in love with the Constitution as written or as evolved by the courts.
________________________

Our promises, oaths must return to value
Published Friday, November 26, 2010 Island Packet

Promises, promises. In the time of our Founding Fathers, one's oath was so important they wrote it into the U.S. Constitution. In Article II, Section 1 and Article VI, we read that the president, senators and representatives, as well as members of the several state legislatures, and all executive and judicial officers, both of the United States and of the several states, are bound by oath or affirmation, to support, preserve, protect and defend the Constitution of the United States.

Actor Richard Dreyfuss, commenting on his role in "The Lightkeepers," recently opined: "We live in an era where an oath doesn't mean much ... there was a time when an oath meant everything."

Today, we live under a plague of uncertainty. A promise or oath is now for the courts to decide. This begs the question, where are the promise keepers? Whom can we trust to keep their word?

As a grandparent, I look back at promises made and promises broken.

It took me years to learn the value of keeping my word and the value of not making promises I couldn't keep. Three times I've sworn my allegiance to the Constitution. Thousands of times, I've pledged my allegiance to the flag and our republic. To me these are not empty words spoken with hand over heart in compliance with the crowd. In the last line of the Declaration of Independence, our Founding Fathers pledged their lives, fortunes and sacred honor. What politician today would do the same?

-Edmund Johnson, Lady's Island

Read more of the comments at the bottom of the article: here

Afghan Police Trainee Kills Six More Americans

From the BBC

'Afghan policeman' kills six Nato troops

Attackers in Afghan police uniform have targeted Nato troops and Afghan security forces before

A gunman in an Afghan police uniform has killed six service members in eastern Afghanistan, Nato forces say.

The man turned his weapon on the troops during a training mission, said Nato. He was also killed in the incident in Nangarhar province.

Local officials said they believed the incident was not premeditated, but had arisen out of "a misunderstanding".

Nato has not revealed the nationalities of the dead soldiers, but local sources said they were American.

"An individual in an Afghan border police uniform turned his weapon against International Security Assistance Forces (Isaf) during a training mission today, killing six service members in eastern Afghanistan," Monday's statement said.

"The individual who fired on the Isaf forces was also killed in the incident. A joint Afghan and Isaf team is investigating this incident."

Taliban insurgents have dressed as police to carry out attacks before now.

Only at the weekend, two suicide bombers in police uniform killed 12 police officers in south-eastern Paktika province.

Five British soldiers were shot dead in November last year in Helmand province, by an Afghan policeman, possibly a militant infiltrator, who then escaped.


Isaf is training and mentoring Afghanistan's security forces, but there have also been several incidents of Afghan soldiers firing on foreign troops.

Nato said earlier this month it was investigating Taliban claims that an Afghan soldier had shot dead foreign troops in the south of the country.

In July a renegade Afghan soldier shot and killed three British army Gurkhas at a base in Helmand province.

A week earlier an Afghan soldier killed two American contractors inside a military base in northern Afghanistan.

Nato's exit strategy for Afghanistan involves progressively handing over to the local security forces.

But the BBC's Paul Wood in Kabul says this latest incident will raise questions again about the loyalty and reliability of those forces and the extent to which they could have been infiltrated.

Is There Anything New in Wikileaks? Two Views.

Wikileaks is embarrassing – but not serious
By Benedict Brogan Politics Last updated: November 28th, 2010 Telegraph

The Wikileaks story is great fun. The embarrassment of others always is. But however much the Guardian, the New York Times and Julian Assange assure us that this represents a shattering blow to every assumption we hold about foreign relations, the fact remains that it’s a collection of little substance that will do nothing to reshape geo-politics. The Saudis would like someone to whack Iran? No kidding. Afghanistan is run by crooks? Really? Hillary Clinton would like to know a lot more about the diplomats she is negotiating against? You surprise me. The Russian government may have links to organised crime? Pass the smelling salts, Petunia. The Americans are secretly whacking al-Qaeda operatives in Yemen? What, you thought the Yemenis were doing it? Muammar Qaddafi has a full time, pneumatic Ukrainian ‘nurse’? Nice one. Diplomats are terrified of Pakistan’s nukes? Me too. And so on, ad infinite boredom. Perhaps something better will pop up, but nothing I’ve read since last night’s surprises.

So the news value of this story is the embarrassment it’s causing. And embarrassment can in some cases be devastating. Countries with no tradition of openness or internet-led subversion will find it mystifying that the American government has allowed this to happen. It may at the margins damage relationships. And of course it will do nothing for the credibility of the Obama administration. Those concerned are issuing indignant statements condemning Wikileaks and its oddball boss. This rather reinforces the case of those who say Wikileaks is simply not serious. Effective diplomacy involves all the transgressions Wikileaks is exposing. Embarrassment is just the consequence of exposure. Perhaps the more sophisticated response is to stand firm, to assume a degree of worldiness from those involved in the world of diplomacy (who will for example enjoy seeing the US Secretary of State squirming about her UN spying operation, but only because theirs hasn’t been exposed as well), and to accept that occasional embarrassment is an occupational hazard in a 21st century marked by vast quantities of information circulating in all too accessible digital form.

The Korean crisis and US carrier diplomacy

By Nick ChildsDefence and security correspondent, BBC News

Continue reading the main story

The nuclear-powered aircraft carrier USS George Washington and its escorts are heading for the waters off the Korean peninsula, in the aftermath of the flare-up between North and South Korea. This is very much gunboat diplomacy 21st Century-style.

Indeed, the George Washington has already been deployed there this year, following the rise in tensions after the sinking in March of the South Korean warship Cheonan - widely blamed on the North.

Then, as now, it was to send a series of messages - supposedly of reassurance to the South, and deterrence to the North.

It is a move that the United States has made many times in response to crises during the Cold War and since.

In many ways, the US fleet of aircraft carriers has been as much a diplomatic instrument as a military tool. The US Navy proudly boasts that in virtually every crisis, the first question every US president asks is: "Where is the nearest carrier?"

The USS George Washington has experience in the waters off the Korean peninsula

For example, the United States deployed the nuclear-powered carrier USS Enterprise to the Bay of Bengal as a show of strength during the Indo-Pakistani war in 1971.

Similarly, a US carrier was sent to the waters off Libya in 1981 in a stand-off, and two US fighters actually shot down two Libyan combat planes.

In 1996, at a time of tension with Beijing over Taiwan, President Bill Clinton despatched two aircraft carriers to the region.

And throughout the 1990s, during various flare-ups with the Iraqi leader, Saddam Hussein, Washington signalled its seriousness by how many carriers it dispatched to the Gulf - on occasions, as many as three.

Carrier envy

No other country has a carrier force like the Americans have.

And whenever you go aboard a US carrier, there is almost always a moment when you'll be talking to the captain on the bridge.

Continue reading the main story

North Korea: Timeline 2010

26 March: South Korean warship, Cheonan, sinks, killing 46 sailors

20 May: Panel says a North Korean torpedo sank the ship; Pyongyang denies involvement

July-September: South Korea and US hold military exercises; US places more sanctions on Pyongyang

29 September: North holds rare party congress seen as part of father-to-son succession move

29 October: Troops from North and South Korea exchange fire across the land border

12 November: North Korea shows US scientist new - undeclared - uranium enrichment facility

He'll expansively wave a hand in the direction of the huge flight deck and make some remark about it being four acres of sovereign US territory that can be parked off any shore to send any message that Washington wants to send.

For that reason, emerging powers like India and China are thinking seriously about building up carrier forces of their own.

But will Pyongyang get whatever message Washington is sending in that direction?

It did not seem to the last time the George Washington was deployed.

And will it be enough to reassure Seoul?

There are other sensitivities as well. Beijing has already complained about this deployment, as it did the last one, which then led to a change of plan about where exactly the George Washington operated.

In a time of growing strategic competition between the United States and a rising China, the US carrier force in the Pacific is an important symbol.

It is a signal of US determination to maintain a presence.

At the same time, there is a heated debate over the significance of China's moves to develop a ballistic missile designed specifically to target carriers.

It also explains why there was consternation in Washington when a Chinese submarine unexpectedly surfaced close to a US carrier strike group on exercise south of Japan in 2007.

Spirit of Hemingway found dead of apparently self-inflicted gun shot wound.

The Nato-led mission in Afghanistan has now lasted as long as the Soviet army's doomed occupation during the 1980s

Every bank safe deposit box in Germany is filled with Silver and Gold

There does not seem to be to an ending to the banking and debt crisis contagion in Europe.

On Friday, the gap in yields between German and Spanish 10-year government bonds hit a record high of 2.63%. This, before there is a firm agreement on the Irish problem. Spain’s budget deficit is 11.1%

The yield premium to buy Italy’s 10-year debt over German bunds reached a euro-era record 1.9% on Nov. 12, yet Italy is in itself doing a better job than either Ireland or Spain. Ireland’s deficit of 14.3% in 2009 was almost three times Italy’s deficit of 5.3%.

Keep in mind that European rules dictated spending deficits of under 3%.

Greece is still a problem and the Bundesbank chief Axel Weber claimed the EU had set aside enough money to cover the borrowing needs of the euro zone's worst debtors -- Greece, Ireland, Portugal and Spain -- but could muster more if needed.

Oh, really? Where is all that money going to come from? Germany?

___________________________________


EU rescue costs start to threaten Germany itself

The escalating debt crisis on the eurozone periphery is starting to contaminate the creditworthiness of Germany and the core states of monetary union.


By Ambrose Evans-Pritchard 6:00AM GMT 26 Nov 2010
Telegraph

Credit default swaps (CDS) measuring risk on German, French and Dutch bonds have surged over recent days, rising significantly above the levels of non-EMU states in Scandinavia.

"Germany cannot keep paying for bail-outs without going bankrupt itself," said Professor Wilhelm Hankel, of Frankfurt University. "This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings."

The refrain was picked up this week by German finance minister Wolfgang Schäuble. "We're not swimming in money, we're drowning in debts," he told the Bundestag.

While Germany's public and private debt is not extreme, it is very high for a country on the cusp of an acute ageing crisis. Adjusted for demographics, Germany is already one of the most indebted nations in the world.

Reports that EU officials are hatching plans to double the size of EU's €440bn (£373bn) rescue mechanism have inevitably caused outrage in Germany. Brussels has denied the claims, but the story has refused to die precisely because markets know the European Financial Stability Facility (EFSF) cannot cope with the all too possible event of a triple bail-out for Ireland, Portugal and Spain.

EU leaders hoped this moment would never come when they launched their "shock and awe" fund last May. The pledge alone was supposed to be enough. But EU proposals in late October for creditor "haircuts" have set off capital flight, or a "buyers' strike" in the words of Klaus Regling, head of the EFSF.

Those at the coal-face of the bond markets are certain Portugal will need a rescue. Spain is in danger as yields on 10-year bonds punch to a post-EMU record of 5.2pc.

Axel Weber, Bundesbank chief, seemed to concede this week that Portugal and Spain would need bail-outs when he said that EMU governments may have to put up more money to bolster the fund. "€750bn should be enough. If not, we could increase it. The governments will do what is necessary," he said.

Whether governments will, in fact, write a fresh cheque is open to question. Chancellor Angela Merkel would risk popular fury if she had to raise fresh funds for eurozone debtors at a time of welfare cuts in Germany. She faces a string of regional elections where her Christian Democrats are struggling.

Mr Weber rowed back on Thursday saying that a "worst-case scenario" of triple bail-outs would require a €140bn top-up for the fund. This assurance is unlikely to soothe investors already wondering how Italy could avoid contagion in such circumstances.

"Italy is in a lot of pain," said Stefano di Domizio, from Lombard Street Research. "Bond yields have been going up 10 basis points a day and spreads are now the highest since the launch of EMU. We're talking about €2 trillion of debt so Rome has to tap the market often, and that is the problem."

The great question is at what point Germany concludes that it cannot bear the mounting burden any longer. "I am worried that Germany's authorities are slowly losing sight of the European common good," said Jean-Claude Juncker, chair of Eurogroup finance ministers.

Europe's fate may be decided soon by the German constitutional court as it rules on a clutch of cases challenging the legality of the Greek bail-out, the EFSF machinery, and ECB bond purchases.

"There has been a clear violation of the law and no judge can ignore that," said Prof Hankel, a co-author of one of the complaints. "I am convinced the court will forbid future payments."

If he is right – we may learn in February – the EU debt crisis will take a dramatic new turn.

Turkey Hunt

HAPPY THANKSGIVING ALL

How Communism Led to Thanksgiving

Hat tip : End of Innocence Blog

This article appeared at the End of Innocence blog written by Jim:

SATURDAY, APRIL 17, 2010

Communism vs. Free Markets at Plymouth Rock and Jamestown

I just learned from an article entitled Our Forefather’s Failure (at LibertyUnbound.com) that the colonies at Plymouth Rock and Jamestown tried both free market and communist systems – long before Karl Marx was born.

The Pilgrims landed at Plymouth Rock in December 1620, and in spite of help from the Native Americans, half of them died the first year. The second year, more of them died.

The Pilgrims simply weren’t producing enough food, so their first solution was to institute beatings for those who did not work hard enough. This had little effect on productivity, and it increased discontent.

The colonists astutely observed that their system tended to retard productivity while breeding confusion and discontent. We know this because they wrote about it in their journals. Clearly, their initial system was incompatible with human nature.

By the spring of 1623 the Pilgrims feared they would not survive another winter, so in desperation, they adopted a radically different system, and it saved their lives. Productivity increased, and in 1623, they held their first Thanksgiving.

You should be very eager to know which system failed them initially, and which radically different system saved them.

According to their original governing document, the Mayflower Compact, they shared everything produced by any one of them – from each according to his ability – to each according to his need. The result was that only a small percentage of them worked hard, and the rest were freeloaders to varying degrees.

Then, in the spring of 1623, the surviving colonists decided to let each person keep the fruits of his labor, and the colony’s total output increased so much that they were never hungry again.

Communism was killing the colonists at Plymouth Rock, and by switching to a free market system, they became more productive and saved themselves – in a single growing season.

The transition from communism to free markets still lacked full property rights however. Whereas, each individual owned the fruits of his labor, he did not own the land he worked, and thus he did not own any improvements he made to that land.

In 1623, the colonists were still growing food on parcels of land that were reassigned by random lots each year, which they astutely observed was a disincentive for each farmer to make permanent improvements to his parcel of land because in the following year, someone else would inherit the fruits of any labor he devoted to improvements. Therefore, in 1624, they adopted full property rights where everyone owned the land he worked, and the result was another productivity boost. Whereas, the first step toward property rights and the free market increased productivity enough to feed everyone, the move to full property rights produced enough extra food to export and trade for furs and other goods.

The article goes on to explain the similar experience in Jamestown:

Jamestown, the first permanent English colony in America, established in Virginia in 1607, had an experience similar to the Pilgrims at Plymouth. Early years of starvation were followed by converting to a system of property rights and a free market, which brought abundance. Under collectivism, less than half of every shipload of settlers survived the first 12 months at Jamestown. Most of the work was done by only one-fifth of the men, to whom the socialist system gave the same rations as to the others. During the winter of 1609–10, called “The Starving Time,” the population fell from 500 to 60.

But when Jamestown converted to a free market, there was “plenty of food, which every man by his own industry may easily and doth procure,” wrote the colony secretary Ralph Hamor in 1614. Under the previous system, he said, “we reaped not so much corn from the labors of thirty men as three men have done for themselves now.”

The article didn’t mention the Roanoke colony, which just disappeared without a trace, but I now have good reason to suspect they were killed by communism.

Although both my first hand experience and observations as well as my research and analysis have long since led me to conclude that the free market is superior to communism, I would have believed that communism could have worked in the case of the first American colonies. I would have thought that the homogeneity of each colony (same race, nationality, and religion) would have removed any resentment caused by the fear within each faction that other factions were freeloading. Also, consider that the consequences of failure meant starvation, that manydid starve, and that slackers were beaten. Given the unusual incentives and unusual lack of one big disincentive, I would have thought that even communism could have worked, and yet communism was a catastrophic systemic failure in the first American colonies.

Consider that the colonists at Plymouth Rock had no historical precedent on which to evaluate communism vs. the free market, and yet when communism failed them, they invented and adopted a complete free market system with full property rights in just two years.

Now consider that the President of the United States has 400 years of additional historical precedent as well as a Harvard education, and yet he still doesn’t understand how the free market is superior to communism. He still thinks that spreading the wealth around is good for everybody. He still thinks the government can make everybody free from want.

Those colonists at Plymouth Rock, who seem so much more in touch with reality than the President of the United States, remind me of small town Americans today. Of course, the President says that small town Americans today are basically racists who cling to their guns and religion.

China July-September surplus totaled $102.3 billion, double last year.

What is a current account surplus?

An imbalance in a nation's balance of payments current account in which payments received by the country for selling domestic exports are greater than payments made by the country for purchasing imports. In other words, imports (of goods and services) by the domestic economy are less than exports (of goods and services). This is generally a desireable situation for a domestic economy. However, in the wacky world of international economics, a current account surplus is often balanced by a capital account deficit, which is generally considered an undesireable situation. If, however, the capital account does not balance out the current account, then a current account surplus contributes to a balance of payments surplus.

Economic Glossary

China's current-account surplus widened in the third-quarter to slightly more than double its year-earlier level

By Michael Kitchen
LOS ANGELES (MarketWatch) -- China's current-account surplus widened in the third-quarter to slightly more than double its year-earlier level, the country's foreign-exchange regulator reportedly said in a statement Thursday. The July-September surplus totaled $102.3 billion, up 103% from the third quarter of 2009, according to several reports citing the State Administration of Foreign Exchange statement. The stated surplus represented 7.2% of gross domestic product, according to Dow Jones Newswires, and compared to the second-quarter surplus of $72.9 billion, which marked a 35% year-on-year rise.

North Korea is the Responsibility of China, Japan and South Korea

Let's face it, there would be no North Korean belligerence or threat of nuclear weapons without the role played by China in the region. Without Chinese economic support, Kim Jong-il would have disappeared years ago.

Without the criminal gang-related state of North Korea, there would be little reason or justification for US presence in the region. The South Koreans would have had us leave twenty years ago.

China allowed this sore to fester and at a minimum is guilty of benign neglect. North Korea is a problem for China, South Korea and Japan. Between the three of them they are holding $1.8 trillion in US debt. If they want us to solve the problem it is at least worth half of that, call it an even trillion. If they don't like the price, let them fix it themselves.

South Korea Puts Fighter Planes on Alert

N. Korea fires on S. Korea, killing 2 and injuring more than a dozen

By the CNN Wire Staff

November 23, 2010 5:34 a.m. EST

South Korea holds emergency talks

STORY HIGHLIGHTS

• Two South Korean marines are killed, defense officials say
• 15 other soldiers are wounded, five seriously
• The South's president urges calm
• Ministers meet in a bunker under the presidential residence

Seoul, South Korea (CNN) -- North Korea fired artillery toward its tense western sea border with South Korea on Tuesday, killing two South Korean marines, the South's Defense Ministry said.

Fifteen other South Korean soldiers were wounded, five of them seriously, defense officials said. Three civilians were injured in the attack.

About 100 rounds of artillery hit an inhabited South Korean island in the Yellow Sea after the North started firing about 2:30 p.m. local time, the Yonhap news agency said. Yonhap initially reported that 200 rounds had hit. The Defense Ministry said it could not confirm the number of rounds.

South Korea's military responded with more than 80 rounds of artillery and deployed fighter jets to counter the fire, defense officials said. Firing between the two sides lasted for about an hour.

The South Korean army also raised its alert condition, Yonhap said.

Sharp tensions on the Korean Peninsula

Report: N. Korea fires on S. Korea

RELATED TOPICS

• North Korea
• South Korea

Images of plumes of smoke were quickly broadcast on Yonhap television from the island of Yeonpyeong, with some homes on fire. It was not immediately clear how much damage the artillery had done. The island has a large military garrison.

The island has a total of about 1,300 residents, a fisherman who lives on the island told Yonhap.

Some residents started fleeing for the South Korean mainland, which is about 145 kilometers [90 miles] away. Other residents were seeking shelter at schools.

The South Korean government immediately called an emergency meeting of its security ministers, meeting in a bunker under the presidential residence in Seoul.

South Korean President Lee Myung-bak ordered his ministers to take measures against an escalation of the situation, presidential spokeswoman Kim Hee-jung said, according to Yonhap.

"Take a stern response and carefully manage the situation from further escalating," the president said.

The United States quickly offered support.

"We are in close and continuing contact with our Korean allies," the White House said in a news release. "The United States strongly condemns this attack and calls on North Korea to halt its belligerent action and to fully abide by the terms of the Armistice Agreement."

"The United States is firmly committed to the defense of our ally, the Republic of Korea, and to the maintenance of regional peace and stability."

The North Korean fire came as the South's military conducted routine drills in waters off the island, which is about 10 kilometers (6 miles) from the North.

South Korea's annual Hoguk military exercises were to last nine days and include as many as 70,000 South Korean military personnel, according to the Stratfor global intelligence company.

The Yellow Sea has been a longstanding flashpoint between the two Koreas, but Tuesday's attack was an escalation in violence.

"Our navy was conducting a maritime exercise near the western sea border today. North Korea has sent a letter of protest over the drill. We're examining a possible link between the protest and the artillery attack," presidential spokeswoman Kim said, according to Yonhap.

"Marines were training in that area, including firing artillery, in the morning. But they were aiming south and southwest, not east or north," said a representative for the Joint Chiefs of Staff. "North Korea sent a telephone message at 8:20 a.m. to cease the drill. We did not stop the drill."

Yeonpyeong island is part of a small archipelago about 80 kilometers [49 miles] west of the South Korean port of Inchon, which serves Seoul, and is close to the tense Northern Limit Line, the maritime border between the two Koreas in the Yellow Sea.

A South Korean warship, the Cheonan was sunk in the area in March with the loss of 46 lives in a suspected North Korean torpedo attack.

North Korean artillery is extremely difficult to hit, because it is dug into coastal cliffs. Though the North has tested its artillery -- and tested anti-shipping missiles -- it has not fired artillery into South Korean territory in recent years.

One of North Korea's most potent threats is the hundreds of artillery barrels dug in along its demilitarized zone with South Korea and ranged on Seoul.

Yonhap television was covering the attack nonstop in South Korea, forgoing other news Tuesday. Meanwhile, state television in North Korea did not mention the attack.

The reason for the attack was unclear, but North Korea watchers had theories.

"I think they are very frustrated with Washington's response to their uranium program and think they think that Washington has almost given up on negotiations with North Korea," said Choi Jin-wook, senior researcher at the Korea Institute of National Unification.

"I think they realize they can't expect anything from Washington or Seoul for several months, so I think they made the provocation."

"I definitely think this is centrally directed form Pyongang this cant be done without orders from, Pyongyang," he added.

Over the weekend, news broke that North Korea had showed off its uranium-enrichment facilities to a visiting U.S. scientist. Washington responded with aplomb, saying that the North's nuclear moves had been clear all along.

The United States also said it would not dismiss restarting six-party talks aimed at denuclearizing the North, but that Washington would not return to negotiations unless North Korea showed good faith.

North Korea is desperately reaching for bargaining chips, experts say.

"They want food. They are starving to death. They are trying to make Seoul and Washington move. Otherwise, they are in big trouble," Choi Jin-wook of the Korea Institute for National Unification said before Tuesday's artillery attack. "And this is a transition period for the North Korean leadership; they need to provide gifts to the elite, but they don't have the resources."

Sanctions have been progressively placed on North Korea in response to a succession of nuclear and missile tests and the sinking of the South Korean warship in March.

Meanwhile, with national leader Kim Jong Il apparently in ailing health, his son Kim Jong Un is being raised to prominence in the isolated state, in what pundits see as a succession process.

Journalist Andrew Salmon contributed to this report.