US economy could handle short fall over 'cliff'

The economic threat that's kept many Americans on edge for months is nearing reality — unless the White House and Republicans cut a budget deal by New Year's Day.
Huge tax increases. Deep cuts in domestic and defense programs. The likelihood of sinking stock prices, reduced consumer spending and corporate layoffs. The risk of a recession within months.
Still, the start of 2013 may turn out to be far less bleak than feared. For one thing, the two sides may strike a short-term agreement before New Year's that postpones spending cuts until spring. President Barack Obama and members of Congress return to Washington Thursday.
Even if New Year's passed with no deal, businesses and consumers would not likely panic as long as some agreement seemed imminent. The $671 billion in tax increases and spending cuts could be retroactively repealed.
And the impact of the tax increases would be felt only gradually. Most people would receive slightly less money in each paycheck.
"The simple conclusion that going off the cliff necessarily means a recession next year is wrong," says Lewis Alexander, an economist at Nomura Securities. "It will ultimately depend on how long the policies are in place."
It's always possible that negotiations between President Obama and Republican congressional leaders will collapse in acrimony. The prospect of permanent tax increases and spending cuts could cause many consumers and businesses to delay spending, hiring or expanding.
Without any agreement at all for months, the fiscal cliff would cause the U.S. economy to shrink 0.5 percent in the first half of 2013 and fall into recession, the Congressional Budget Office estimates.
But most economists expect a deal, if not by New Year's then soon after. Businesses and consumers will likely remain calm as long as negotiators seem to be moving toward an agreement.
"The atmosphere is more important than whether the talks spill" into next year, said Paul Ashworth, an economist at Capital Economics.
Here's why many are optimistic that a brief fall over the cliff wouldn't derail the economic recovery:
— Though the fiscal cliff would boost taxes by $586 billion for all of 2013, the tax hit for most people would be modest at first. The expiration of Social Security and income tax cuts would be spread throughout 2013. For taxpayers with incomes of $40,000 to $65,000, paychecks would shrink an average of about $1,500 next year. That would be a significant bite over the full year, but the initial hit would be just $130 in January, according to the nonpartisan Tax Policy Center.
— About a third of the tax increases wouldn't touch most Americans. Some would hit businesses. Others, such as higher taxes on investment income and estates, and the expiration of middle-income tax credits, wouldn't come due until Americans filed their 2013 taxes in 2014.
— The Internal Revenue Service has delayed any increases in tax withholding that would otherwise kick in. Without a deal, the top income tax rate for single people with taxable income between about $36,000 and $88,000 would rise from 25 percent to 28 percent. But that won't start to reduce Americans' paychecks in early January, even if no deal is reached by then.
— About $85 billion in spending cuts to defense and domestic programs would take weeks or longer to take effect. That means government agencies wouldn't cut jobs right away.
If a short-term agreement is struck, some taxes would probably still go up. These would include a 2 percentage point cut in Social Security taxes that's been in place for two years. Its expiration would cost the typical household about $1,000 a year. With income gains sluggish, that could dampen consumer spending.
A temporary deal that delays some hard decisions could reduce business and consumer confidence. It would also mean:
— Extended unemployment benefits would end for 2 million people. The federal government's program pays for about 32 weeks of extra benefits, on average, on top of the 26 weeks most states provide. Weekly unemployment checks average about $320 nationwide.
— The stock market would probably drop, though maybe not by much. Many Wall Street analysts expect a partial deal of some kind. "There is starting to become a little bit of an acceptance that we fall off the fiscal cliff," said J.J. Kinahan, a strategist for TD Ameritrade.
— The expiration of the Social Security tax cut and the end of emergency unemployment benefits would likely shave 0.7 percentage point off economic growth next year, the CBO estimates. The economy is now growing at about a 2 percent annual pace.
If no deal at all was reached by January and budget talks dragged on, many businesses might put off investment or hiring. That's why most economists say it would be crucial to reach a deal within roughly the first two months of 2013.
In addition, many more people would be affected if something called the alternative minimum tax isn't fixed.
The financially painful AMT was designed to prevent rich people from exploiting loopholes and deductions to avoid any income tax. But the AMT wasn't indexed for inflation, so it has increasingly threatened middle-income taxpayers. Congress has acted each year for a decade to prevent the AMT from hitting many more people.
If it isn't fixed again, roughly 33 million taxpayers, including married couples with income as low as $45,000 — down from $74,450 in 2011— could face the AMT. Previously, only 5 million taxpayers had to pay it. Taxpayers subject to the AMT must calculate their tax under both the regular system and the AMT and pay the larger amount. Without a fix, a middle-income household would pay an average of $1,231 more, according to the Tax Policy Center.
The IRS has said it assumes Congress and the White House will fix the AMT in a deal to avoid the cliff. If they don't, the IRS will need weeks to reprogram computers and make other adjustments. In the meantime, about 100 million taxpayers couldn't file tax returns early next year because they couldn't determine whether they owe the AMT. Refunds would be delayed.
The gravest scenario would be if the budget talks collapsed and the tax increases and spending cuts appeared to be permanent.
In that case, Macroeconomic Advisors warns that the Dow could plunge up to 2,000 points within days. Businesses would turn gloomier in anticipation of Americans paying higher taxes and spending less.
The economy would shrink at an annual rate of 0.6 percent in the first three months of 2013, estimates Joel Prakken, an economist at Macroeconomic Advisors. That compares with an estimated 1.9 percent growth rate if a deal is reached. CBO forecasts that the unemployment rate would rise to 9.1 percent from the current 7.7 percent.
Last week, Obama and House Speaker John Boehner narrowed their differences on income tax increases and spending cuts. But with the two sides deadlocked, Boehner scheduled a vote on a bill to prevent taxes from rising on those earning less than $1 million a year. Opposition from anti-tax conservatives, and Democrats, forced him to cancel the vote.
The gridlock caused stocks to fall Friday. The Dow Jones industrial average dropped 121 points.
Obama called for a vote on a stripped-down agreement that would raise taxes only on the wealthiest 2 percent of Americans and extend emergency unemployment benefits. Automatic spending cuts would be postponed.
Whatever the outcome, some trends could offset part of the economic damage. The average retail price for gasoline has dropped 15 percent this fall, for example. Lower gas prices give consumers more money to spend elsewhere.
And if the crisis is resolved, as many expect, the boost to business and consumer confidence would encourage more hiring and spending.
"We could end up with a much more robust recovery than anybody's envisioned" if a deal is reached, said David Cote, CEO of Honeywell International.
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Egypt's contentious Islamist constitution becomes law

 President Mohamed Mursi admitted on Wednesday that Egypt's economy faces serious problems after he enacted a new, bitterly contested constitution that is supposed to help end political unrest and allow him to focus on the financial crisis.
The president said the economy also had great opportunities to grow, but earlier the Egyptian pound tumbled to its weakest level in almost eight years as ever more people rushed to buy dollars and withdraw their savings from banks.
Mursi, catapulted into power by his Islamist allies this year, believes that adopting the constitution quickly and holding elections to a permanent new parliament soon will help to end the long period of turmoil that has wrecked the economy.
The presidency announced on Wednesday that Mursi had formally approved the constitution, which was drafted by his Islamist allies, the previous evening, shortly after results showed that Egyptians had backed it in a referendum.
Keen to be seen as tough but fair, Mursi said it was time for all political forces to put aside their differences and start working together to bring economic stability.
"I will make all efforts, together with you, to push forward the economy which faces huge challenges and has great opportunities to grow," Mursi said in his first address to the nation since the adoption of the constitution.
The text won about 64 percent in a two-stage referendum, paving the way for a new parliamentary vote in about two months.
The main opposition group, which has until now boycotted all rounds of national unity talks led by Mursi's office, said it had not changed its position.
"The ongoing talks are farcical and theatrical," Hussein Abdel Ghani, an opposition spokesman, told reporters. He called on Egyptians to demonstrate against the new constitution on January 25, the second anniversary of Egypt's revolution.
He added that the opposition would stick to its policy of peaceful protest against Mursi's government, which he said sought to use religion as a tool to create an oppressive state.
ANOTHER ISLAMIST VICTORY
The referendum result marked yet another electoral victory for the Islamists since veteran autocrat Hosni Mubarak was toppled in 2011, following parliamentary elections last year and the presidential vote that brought Mursi to power this year.
The charter states that the principles of sharia, Islamic law, are the main source of legislation and that Islamic authorities will be consulted on sharia - a source of concern to the Christian minority and others.
Mursi's government, which has accused opponents of damaging the economy by prolonging the political upheaval, now faces the tough task of building a broad consensus as it prepares to impose hugely unpopular austerity measures.
In his speech, Mursi said he would introduce incentives to make Egypt - once a darling of emerging market investors - an attractive place for business once again, and he would consider making changes in the cabinet as part of his plan.
He also appeared keen to seem tolerant of those who voted "no" in this month's referendum.
"This is their right," he said. "Those who said 'no' and those who said 'yes', I thank you both because we do not want to return to the era of one opinion or fake majorities."
CRISIS ATMOSPHERE
The atmosphere of crisis deepened this week after the Standard & Poor's agency downgraded Egypt's long-term credit rating and warned of a possible further cut. The government has imposed currency restrictions to reduce capital flight.
In Cairo's bustling center, people appeared nervous, openly expressing their frustration with economic instability as they went about their daily business.
"The country's going to the pits. Everything is a mess," Hamdy Hussein, a 61-year-old building janitor, said angrily. "It's worse than ever. Mubarak was better than now. People were living and there was security."
Ashraf Mohamed Kamal, 30, added: "The economic situation will be a mess in the next few years. It already is. People will get hungrier. People are now begging more."
The pound traded as low as 6.1775 against the dollar on Wednesday, close to its all-time low of 6.26 hit on October 14, 2004, on concerns that the government might devalue or tighten restrictions on currency movements.
"All customers are rushing to buy dollars after the downgrading," said a dealer at a Cairo-based bank. "We'll have to wait to see how the market will operate with the U.S. dollar, because as you know there is a rush at the moment."
The government is now in talks with business figures, trade unions and other groups to persuade them of the need for tax increases to resolve the crisis. Mursi has committed to such austerity measures to receive a $4.8 billion loan from the International Monetary Fund.
However, Al-Mal newspaper quoted Planning Minister Ashraf al-Araby as saying the government would not implement the tax increases until it had completed the dialogue with different parts of society.
Mursi's government argues the constitution offers enough protection to all groups, and that many Egyptians are fed up with street protests that have prevented a return to normality.
The charter gives Egypt's upper house of parliament, which is dominated by Islamists, full legislative powers until the vote for a new lower house is held.
Mursi is also due to address the upper house on Saturday in a speech likely to be dominated by economic policy.
Sharpening people's concerns, the authorities imposed currency controls on Tuesday to prevent capital flight. Leaving or entering Egypt with more than $10,000 in cash is now banned.
Adding to the government's long list of worries, Communications Minister Hany Mahmoud has resigned citing his "inability to adapt to the government's working culture".
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Washington stirs for "fiscal cliff" talks as Obama heads home

 Efforts to prevent the U.S. economy from going over a "fiscal cliff" stirred back to life on Wednesday with less than a week to go before potentially disastrous tax hikes and spending cuts kick in at the New Year.
In a sign that there may be a way through deadlock in Congress, Republican House of Representatives Speaker John Boehner urged the Democrat-controlled Senate to act to pull back from the cliff and offered to at least consider any bill the upper chamber produced.
President Barack Obama will try to revive budget crisis talks - which stalled last week - when he returns to Washington on Thursday after cutting short his Christmas holiday in Hawaii.
But the White House and Republicans are still far apart, as hopes for legislation to prevent the economy from tumbling off the fiscal cliff switch to the Senate.
Democrats control a majority in that chamber but still need some support from Republicans across the aisle for a likely attempt to raise taxes on the wealthy.
A senior administration official told reporters traveling with Obama in Hawaii that senior Republican leaders in Congress, Senator Mitch McConnell and Boehner, should step up to head off the looming tax and spending hit.
"It's up to the Senate Minority Leader not to block a vote, and it's up the House Republican leader, the Speaker of the House ... to allow a vote," the official said.
Months of congressional gridlock on how reduce the deficit and rein in the nation's $16 trillion federal debt have begun to affect ordinary Americans.
Shoppers might have spent less this holiday season for fear of looming income tax increases and reports of lackluster retail holiday sales added to the urgency for a deal. U.S. stocks fell on Wednesday, dragged lower by shares of retail companies.
TREASURY BUYING TIME
To avoid defaulting on the national debt if the budget crisis spins out of control, the Treasury Department announced measures essentially designed to buy time to allow Congress to resolve its differences and raise the debt borrowing limit.
Obama flies back from Hawaii overnight and is due in the White House on Thursday morning.
Starbucks Chief Executive Howard Schultz is urging workers in the company's roughly 120 Washington-area coffee shops to write "come together" on customers' cups on Thursday and Friday to tell politicians to end the crisis.
"We're paying attention, we're greatly disappointed in what's going on and we deserve better," Schultz told Reuters.
Boehner and his House Republican leadership team said in a statement that "the Senate must act first."
That puts the ball in the court of the Democrats in the Senate, which is likely to base any legislation on a bill it passed earlier this year to continue tax breaks for households with incomes below $250,000.
A spokesman for Senate Majority Leader Harry Reid issued a strongly worded statement calling on Republicans to "drop their knee-jerk obstruction."
"The Senate bill could pass tomorrow if House Republicans would simply let it come to the floor," the spokesman said.
A Senate bill would likely contain an extension of expiring unemployment benefits for those who have been out of work for extended periods.
With the 435 members scattered throughout the country because the House is in recess, House Republican leaders scheduled a conference call for Thursday with members to possibly discuss bringing the chamber back into session to deal with the fiscal cliff.
The budget fight is not just about taxes, however.
The country faces $109 billion in across-the-board spending cuts starting in January unless a deal is reached to either replace or delay them. Democrats want to switch the spending cuts to tax increases for the most part.
House Republicans have passed a bill to stop the military portion of the spending cuts and place the entire burden on domestic activities, including some social safety net programs.
But the main focus is on how to stop tax hikes on January 1.
"This is the (emergency) scenario that we have long believed would rise in probability the closer we go to December 31, which essentially calls for extending all the rates for those individuals making under $200K and households under $250K and does not address the debt ceiling or the deficit," analyst Chris Krueger of Guggenheim Securities wrote in a research note.
Republican Senator Kay Bailey Hutchison of Texas, who is retiring at year's end, told MSNBC that $250,000 "is too low of a threshold" for raising income taxes.
RAISING TAX THRESHOLD
She said that in conversations she has had with some Senate Democrats, "they are saying maybe more in the $400,000 to $500,000 category."
Obama himself recently offered to raise the threshold to $400,000, before negotiations with Boehner broke off.
Boehner and other Republican leaders said in a statement that if the Senate sends the House new fiscal cliff legislation, "The House will then consider whether to accept the bills ... or to send them back to the Senate with additional amendments.
"The House will take this action on whatever the Senate can pass, but the Senate first must act."
But even if a handful of Senate Republicans support Democrats on a measure to avoid the worst of the fiscal cliff, time is short. When the Senate returns on Thursday it is due to work on a disaster aid bill to help New York and New Jersey recover from Superstorm Sandy and other measures.
All 191 House Democrats might have to team up with at least 26 Republicans to get a majority if the bill included tax hikes on the wealthiest Americans, as Obama is demanding.
Some of those votes could conceivably come from among the 34 Republican members who are either retiring or were defeated in the November elections and no longer have to worry about the political fallout.
An alternative is for Congress to let income taxes go up on everyone as scheduled. Then, during the first week of January, lawmakers would strike a quick deal to reduce them except on people in the highest brackets.
They could also pass a measure putting off the $109 billion in automatic spending cuts that most lawmakers want to avoid.
Once the clock ticks past midnight on December 31, no member of Congress would have to vote for a tax increase on anyone - taxes would have risen automatically - and the only votes would be to decrease tax rates for most Americans back to their 2012 levels.
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Asian markets rise amid optimism over Japan

 Japanese stocks surged to their highest level this year as Asian markets rose Thursday on optimism a new Japanese government will stimulate its sluggish economy.
Oil gained in Asian trading to stay above $90 a barrel as markets in Hong Kong and Australia reopened after a two-day Christmas break.
Tokyo's benchmark Nikkei 225 index rose 1.3 percent to 10,368.5. That added to Wednesday's 1.5 percent gain and took the Nikkei to a 22 percent increase for the year. Hong Kong's Hang Seng gained 0.6 percent to 22,677.7, while Shanghai climbed 0.2 percent to 2,223.95.
Incoming Japanese Prime Minister Shinzo Abe has called for more public works spending to reinvigorate the economy. He wants the Bank of Japan to raise its inflation target from 1 to 2 percent to drag the country out of two decades of deflation, or steadily declining prices that have deadened economic activity.
To help exporters, Abe also has urged the central bank to take steps to dampen Japan's yen. A strong currency has hurt big exporters such as Toyota by making Japanese products more expensive overseas.
"The message from Japan is clear at the moment, the incoming government will do everything in its power to weaken the yen and stimulate the economy," Australia's IG Markets said in a report.
Elsewhere in Asia, Taiwan's Taiex gained 0.2 percent to 7,648.92 and Sydney's S&P ASX 200 added 0.2 percent to 4,645.3.
Singapore, Malaysia and the Philippines also rose. South Korea's Kospi was the only major decliner, shedding 0.1 percent to 1,979.39.
On Wednesday, U.S. stocks fell for a third session as trading resumed after the Christmas break. Disappointing holiday sales weighed heavy on retail companies and investors worried about the impending "fiscal cliff" — automatic tax and spending cuts due to take effect if the White House and Congress fail to agree on a budget deal. Economists worry that could push the economy into recession.
The Dow Jones industrial average slipped 24.49 points to 13,114.59. The Standard & Poor's 500 index fell 6.83 to 1,419.83 and the Nasdaq composite lost 22.44 to 2,990.16.
Benchmark oil for February delivery rose 9 cents to $90.89 in electronic trading on the New York Mercantile Exchange. The contract closed down 5 cents to $88.61 a barrel on the Nymex on Monday.
In currencies, the euro rose to $1.3230. The dollar gained to 85.68 yen.
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Japan's Abe set for second term, to tap allies for cabinet

 Shinzo Abe will be voted in as prime minister by parliament's lower house on Wednesday, giving the hawkish lawmaker a second chance at Japan's top job as the country battles deflation and confronts a rising China.
Abe, 58, has promised aggressive monetary easing by the Bank of Japan and big fiscal spending by the debt-laden government to slay deflation and weaken the yen to make Japanese exports more competitive.
The grandson of a former prime minister, Abe has staged a stunning comeback five years after abruptly resigning as premier in the wake of a one-year term troubled partly by scandals in his cabinet and public outrage over lost pension records.
His Liberal Democratic Party (LDP) surged back to power in this month's election.
"I want to learn from the experience of my previous administration, including the setbacks, and aim for a stable government," Abe told reporters as he entered parliament, where he will be voted in later in the day as Japan's seventh prime minister in six years.
Abe looks set to pick a slate of close allies leavened by some LDP rivals to fend off the criticism of cronyism that dogged his first administration.
Japanese media have said Abe will name former prime minister Taro Aso, 72, as finance minister, ex-trade and industry minister Akira Amari as minister in charge of a new economic revival headquarters and policy veteran Toshimitsu Motegi as trade minister. Motegi will also be tasked with formulating energy policy in the aftermath of the Fukushima nuclear disaster last year.
Loyal Abe backer Yoshihide Suga is expected to become chief cabinet secretary, a key post combining the job of top government spokesman with responsibility for coordinating among ministries.
Others who share Abe's agenda to revise the pacifist constitution and rewrite Japan's wartime history with a less apologetic tone have also been floated for posts.
"These are really LDP right-wingers and close friends of Abe," said Sophia University professor Koichi Nakano. "It really doesn't look very fresh at all."
CHINA TIES, JULY ELECTION
The yen has weakened about 9.8 percent against the dollar since Abe was elected LDP leader in September. On Wednesday, it hit a 20-month low of 85.38 yen against the greenback on expectations of aggressive monetary policy easing.
Abe has threatened to revise a law guaranteeing the Bank of Japan's (BOJ) independence if it refuses to set a 2 percent inflation target.
BOJ minutes released on Wednesday showed the central bank was already pondering policy options in November, concerned about looming risks to the economy. The BOJ stood pat at its November rate review meeting but eased this month in response to intensifying pressure from Abe.
Abe also promised during the election campaign to take a tough stance in territorial rows with China and South Korea over separate chains of tiny islands, while placing priority on strengthening Japan's alliance with the United States.
Japanese media said Abe would appoint two low-profile officials to the foreign and defense portfolios.
Itsunori Onodera, 52, who was senior vice foreign minister in Abe's first cabinet, will become defense minister while Fumio Kishida, 55, a former state minister for issues related to Okinawa island - host to the bulk of U.S. forces in Japan - will be appointed to the top diplomatic post, the reports said.
Abe, who hails from a wealthy political family, made his first overseas visit to China to repair chilly ties when he took office in 2006, but has said his first trip this time will be to the United States.
He may, however, put contentious issues that could upset key trade partner China and fellow-U.S. ally South Korea on the backburner to concentrate on boosting the economy, now in its fourth recession since 2000, ahead of an election for parliament's upper house in July.
The LDP and its small ally, the New Komeito party, won a two-thirds majority in the 480-seat lower house in the December 16 election. That allows the lower house to enact bills rejected by the upper house, where the LDP-led block lacks a majority.
But the process is cumbersome, so the LDP is keen to win a majority in the upper house to end the parliamentary deadlock that has plagued successive governments since 2007.
"It's the economy, the economy, the economy," an LDP source close to Abe told Reuters. The new government plans to submit an extra budget for the fiscal year to March 31 in late January.
Financial markets expect a budget worth about 10 trillion yen ($117.93 billion), but the source said no more than half of that would be spent on public works projects, a traditional staple of LDP economic stimulus packages.
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U.S. moves to sell advanced spy drones to South Korea

 The Obama administration formally proposed a controversial sale of advanced spy drones to help South Korea bear more of its defense from any attack by the heavily armed North.
Seoul has requested a possible $1.2 billion sale of four Northrop Grumman Corp RQ-4 "Global Hawk" remotely piloted aircraft with enhanced surveillance capabilities, the Pentagon's Defense Security Cooperation Agency said in a statement dated on Monday and distributed on Tuesday.
South Korea needs such systems to assume top responsibility for intelligence-gathering from the U.S.-led Combined Forces Command as scheduled in 2015, the security agency said in releasing a notice to U.S. lawmakers.
"The proposed sale of the RQ-4 will maintain adequate intelligence, surveillance, and reconnaissance capabilities and will ensure the alliance is able to monitor and deter regional threats in 2015 and beyond," the notice said.
The United States has agreed with Seoul to turn over the wartime command of Korean troops later this decade. Current arrangements grew from the U.S. role in the 1950-1953 Korean War that repelled a North Korean takeover of the South.
Seoul has shown interest in the high-altitude, long-endurance Global Hawk platform for at least four years. The system, akin to Lockheed Martin Corp's U-2 spy plane, may be optimized to scan large areas for stationary and moving targets by day or night and despite cloud cover.
It transmits imagery and other data from 60,000 feet at near real-time speed, using electro-optical, infrared and radar-imaging sensors built by Raytheon Co.
The possible sale has been held up by discussions involving price, aircraft configuration and a go-slow on release of such technology subject to a voluntary 34-nation arms control pact.
The Defense Department began informally consulting Congress on the possible Global Hawk sale in the summer of 2011, only to withdraw it pending further work on the make-up of the proposed export to Seoul amid lawmakers' arms-control concerns.
The formal notification to Congress came less than two weeks after a North Korean space launch of a satellite atop a multi-stage rocket, a first for the reclusive state, widely seen as advancing its ballistic missile program.
A White House statement denounced the December 12 launch as a "highly provocative act" that would bear consequences for violations of United Nations resolutions. The North is banned from testing missile or nuclear technology under international sanctions imposed after its 2006 and 2009 nuclear weapons tests.
In October 2008, then-U.S. Defense Secretary Robert Gates told reporters that the United States was "very sympathetic" to South Korea's interest in Global Hawk. But he cited issues that had to be overcome because of the so-called Missile Technology Control Regime, or MTCR.
The pact, established in 1987, has been credited with slowing the spread of ballistic missiles and other unmanned delivery systems that potentially could be used for chemical, biological and nuclear attacks.
Pact members, including the United States, agree to curb their exports of systems capable of carrying a 500-kilogram (1,102-pound) payload at least 300 kilometers (186 miles). The Global Hawk falls under a strong presumption against export under MTCR guidelines.
The notification to Congress did not mention that a U.S. government waiver for such an export would be required.
Arms-control advocates fear that this could fuel instability and stir regional arms-race dynamics as well as provide diplomatic cover for an expansion of such exports by Russia, China and others.
The Obama administration agreed earlier this year to let South Korea, a treaty ally, stretch the range of its ballistic missile systems to cover all of North Korea, going beyond the voluntary pact's 300 km (186 miles).
The congressional notification is required by U.S. law and does not mean that a deal has been concluded.
If a sale takes place, it would be for the third generation of Global Hawk drones known as Block 30, the security agency's notice to Congress said.
The Pentagon, in its fiscal 2013 budget request, proposed mothballing its own Block 30 Global Hawks and ending plans to buy more of that generation. Doing so would have no effect on the administration's plans to acquire other versions of the long-range drone.
South Korea's possible Global Hawk purchase would mark the system's first sale in the Asia-Pacific region. It has already been sold to the North Atlantic Treaty Organization (NATO).
Australia, Japan and Singapore each have shown interest in buying Global Hawk systems, Northrop Grumman officials have said. Company representatives had no comment on the Christmas holiday on the proposed sale to Seoul.
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Pope's Christmas message focuses on Mideast, China

 In his Christmas message to the world Tuesday, Pope Benedict XVI called for an end to the slaughter in Syria and for more meaningful negotiations between Israelis and Palestinians, while encouraging more religious freedom under China's new leaders.
Delivering the traditional speech from the central balcony of St. Peter's Basilica, Benedict also encouraged Arab spring nations, especially Egypt, to build just and respectful societies.
The pope prayed that China's new leadership may "esteem the contribution of the religions, in respect for each other" to help build a "fraternal society for the benefit of that noble people."
It was a clear reference to the Chinese government's often harsh treatment of Catholics loyal to the pontiff instead of to the state-sanctioned church. Earlier this month, the Vatican refused to accept the decision by Chinese authorities to revoke the title of a Shanghai bishop, who had been appointed in a rare show of consensus between the Holy See and China.
As the 85-year-old pontiff, bundled up in an ermine-trimmed red cape, gingerly stepped foot on the balcony, the pilgrims, tourists and Romans below backing St. Peter's Square erupted in cheers.
Less than 12 hours earlier, Benedict had led a two-hour long Christmas Eve ceremony in the basilica. He sounded hoarse and looked weary as he read his Christmas message and then holiday greetings in 65 languages.
In his "Urbi et Orbi" speech, which traditionally reviews world events and global challenges, Benedict prayed that "peace spring up for the people of Syria, deeply wounded and divided by a conflict that does not spare even the defenseless and reaps innocent victims."
He called for easier access to help refugees and for "dialogue in the pursuit of a political solution to the conflict."
Benedict prayed that God "grant Israelis and Palestinians courage to end long years of conflict and division, and to embark resolutely on the path to negotiation."
Israel, backed by the United States, opposed the Palestinian statehood bid, saying it was a ploy to bypass negotiations, something the Palestinians deny. Talks stalled four years ago.
Senior Palestinian official Saeb Erekat said that in a meeting with the pope last week, Palestinian President Mahmoud Abbas "emphasized our total readiness to resume negotiations." The Palestinians have not dropped their demand that Israel first stop settlement activities before returning to the negotiating table.
Hours earlier, in the ancient Bethlehem church built over the site where tradition holds Jesus was born, candles illuminated the sacred site and the joyous sound of prayer filled its overflowing halls.
Overcast skies and a cold wind in the Holy Land didn't dampen the spirits of worshippers in the biblical West Bank town. Bells pealed and long lines formed inside the fourth-century Church of the Nativity complex as Christian faithful waited to see the grotto that is Jesus' traditional birthplace.
Duncan Hardock, 24, a writer from MacLean, Virginia, traveled to Bethlehem from the republic of Georgia, where he had been teaching English. After passing through the separation barrier Israel built to ward off West Bank attackers, he walked to Bethlehem's Manger Square where the church stands.
"I feel we got to see both sides of Bethlehem in a really short period of time," Hardock said. "On our walk from the wall, we got to see the lonesome, closed side of Bethlehem ... But the moment we got into town, we're suddenly in the middle of the party."
Bethlehem lies 10 kilometers (6 miles) south of Jerusalem. Entry to the city is controlled by Israel, which occupied the West Bank in 1967.
For those who couldn't fit into the cavernous Bethlehem church, a loudspeaker outside broadcast the Christmas day service to hundreds of faithful in the square.
Their Palestinian hosts, who welcome this holiday as the high point of their city's year, were especially joyous this season, proud of the United Nations' recognition of an independent state of Palestine just last month.
"From this holy place, I invite politicians and men of good will to work with determination for peace and reconciliation that encompasses Palestine and Israel in the midst of all the suffering in the Middle East," said the top Roman Catholic cleric in the Holy Land, Latin Patriarch Fouad Twal in his annual address.
Back at the Vatican, Benedict offered encouragement to countries after the Arab spring of democracy protests. He had a special word for Egypt, "blessed by the childhood of Jesus."
Without citing the tumultuous politics and clashes in the region, he urged the North African region to build societies "founded on justice and respect for the dignity of every person."
Benedict prayed for the return of peace in Mali and harmony in Nigeria, where, he recalled "savage acts of terrorism continue to reap victims, particularly among Christians."
The Vatican for decades has been worried about the well-being of its flock in China, who are loyal to the pope in defiance of the communist's government support of an officially sponsored church, and relations between Beijing and the Holy See are often tense.
Speaking about China's newly installed regime leaders, Benedict expressed hope that "they will esteem the contribution of the religions, in respect for each other, in such a way that they can help to build a fraternal society for the benefit of that noble people and of the whole world."
Acknowledging Latin America's predominant Christian population, he urged government leaders to carry out commitments to development and to fighting organized crime.
In Britain, the royal family was attending Christmas Day church services at St. Mary Magdelene Church on Queen Elizabeth II's sprawling Sandringham estate, though there were a few notable absences. Prince William is spending the holiday with his pregnant wife Kate and his in-laws in the southern England village of Bucklebury, while Prince Harry is serving with British troops in Afghanistan.
Later Tuesday, the queen delivered her traditional, prerecorded Christmas message, which for the first time was broadcast in 3D.
At Canterbury cathedral, Anglican leader Rowan Williams delivered his final Christmas day sermon as archbishop of Canterbury. He acknowledged how the church's General Synod's vote against allowing women to become bishops had cost credibility and said the faithful felt a "real sense of loss" over the decision.
In the U.S., the Rev. Jesse Jackson brought his message of anti-violence and gun control to a Chicago jail, using his traditional Christmas Day sermon at the facility to challenge inmates to help get guns off the streets.
"We've all been grieving about the violence in Newtown, Connecticut, the last few days," he told reporters after addressing inmates, referring to the Dec. 14 school shooting that killed 26 children and adults. "Most of those here today ... have either shot somebody or been shot. We're recruiting them to help us stop the flow of guns."
In Newtown, well-wishers from around the U.S. showed up on Christmas morning to hang ornaments on a series of memorial Christmas trees while police officers from around Connecticut took extra shifts to direct traffic and patrol the town to give local police a day off. In a 24-hour vigil, volunteers watched over 26 candles that had been lit at midnight in honor of those slain at the Sandy Hook Elementary School.
At a town hall memorial, Faith Leonard waved to people driving by and handed out Christmas cookies, children's gifts and hugs to anyone who needed it.
"I guess my thought was if I could be here helping out maybe one person would be able to spend more time with their family or grieve in the way they needed to," said Leonard, who drove to Newtown from Gilbert, Arizona, to volunteer on Christmas morning.
At St. Rose of Lima Roman Catholic Church, which eight of the child victims of the massacre attended, the Rev. Robert Weiss told parishioners that "today is the day we begin everything all over again."
"We know Christmas in a way we never ever thought we would know it," he said. "We need a little Christmas and we've been given it."
In a New York City neighborhood ravaged by Superstorm Sandy in late October, some holiday traditions had to go by the wayside, but Christmas was celebrated with a special sense of gratitude.
Midmorning and noon Masses were packed Tuesday at St. Francis De Sales Church in the Rockaways; the church only recently got heat restored after Sandy flooded its basement. The bells and organ still don't work, so St. Francis De Sales is making do with a keyboard for now.
"But nobody is feeling morose or down. They're just rebuilding their lives, keeping the faith and going forward," choir member Ed Quinn said. "It's not the best of circumstances, that's for sure. But we're making the best of it.
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