After two years of upward spiraling defaults, the problems with mortgages made to people with weak, or subprime, credit are showing the first, tentative signs of leveling off.

BUT WITH THE U.S. ECONOMY STRUGGLING, HOMEOWNERS WITH BETTER CREDIT ARE NOW FALLING BEHIND ON THEIR PAYMENTS IN GROWING NUMBERS. The percentage of mortgages in arrears in the category of loans one rung above subprime, so-called alternative-A, or alt-A, mortgages, quadrupled to 12 percent in April from a year earlier. Delinquencies among prime loans, which account for most of the $12 trillion market, doubled to 2.7 percent in that time.

DEFAULTS ARE LIKELY TO ACCELERATE because many homeowners' monthly payments are rising rapidly. The higher bills come as home prices continue to decline and banks are tightening their lending standards, making it harder for people to refinance loans or sell their homes. Of particular concern are alt-A loans, many of which were made to people with good credit scores without proof of their income or assets. "SUBPRIME WAS THE TIP OF THE ICEBERG," said Thomas Atteberry, president of First Pacific Advisors, a investment firm in Los Angeles that trades mortgage securities. "PRIME WILL BE FAR BIGGER IN ITS IMPACT."

Members of the Saudi ­Arabia-led oil exporters' cartel took home $645bn (£335bn, €430bn) between January and June, just below the record $671bn they earned last year, according to the US department of energy. At the current pace, Opec nations would earn about $1,245bn this year, a record. The recent 20 per cent drop in oil prices below $120 a barrel is unlikely to damp the earnings significantly, as higher output will offset the impact.

Industry estimates suggest that Opec production in July hit a record 32.6m b/d. The current oil price, at $116.53 a barrel, is still higher than the first half of the year's average: $111.1 a barrel. The flood of petrodollars has boosted Opec's overseas spending, with imports rising up to 40 per cent from last year's level.

Some government officials in the region have already started talking about slowing down government spending as a means of damping inflation, which has reached double-digit figures in many of the Gulf states and is causing increasing ­concern.

The closing of IndyMac in July, the third-biggest U.S. bank failure, may cost the fund up to $8 billion, in addition to an estimated $1.16 billion for seven closures through August 1. Premiums for deposit insurance will likely rise, FDIC Chairman Sheila Bair said in a July 30 interview. A decision on the increase is due by the fourth quarter. "It's going to be an expensive mess for the banking industry," said Bert Ely, president of Ely & Co Inc, a bank consulting firm based in Alexandria, Virginia. "Healthy banks are paying for the mistakes made by failed banks."

THE PACE OF BANK CLOSINGS IS ACCELERATING as financial firms have reported almost $495 billion in writedowns and credit losses since 2007. The FDIC's "problem" bank list grew by 18 percent in the first quarter from the fourth, to 90 banks with combined assets of $26.3 billion. A revised list is due this month. The insurance fund had $52.8 billion as of March 31.

Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, said he expects 300 US banks to fail in the next few years, mainly because of mounting losses from real estate-related loans.

There has been controversy in the region over a deal to expand a Muslim autonomous zone there. The tensions in North Cotabato province came a week after a formal deal on the expansion was blocked by the courts. The military said the violence would not halt voting in elections in the nearby autonomous region of Mindanao.

Voters there are choosing a new governor, vice governor and members of a regional legislative assembly. North Cotabato is not part of the vote, because it is not included in the five-province Autonomous Region of Muslim Mindanao, which was created in a 1996 peace accord between the government and Muslim rebels.

The rebels are said to be frustrated at the fresh obstacles towards agreeing to expand the Autonomous Region of Muslim Mindanao (ARMM). Regional tensions have grown since the plan was agreed, with Christians fearful of the greater powers that would be granted to rebels.

Hardly an hour has gone by in the last few days without some world leader or organization weighing in on the ongoing conflict in the Caucasus. US President George W. Bush said that Russia's use of force against Georgia was "disproportionate." US Vice President Dick Cheney warned Russia that further violence would severely harm Moscow's relationship with Washington.

NATO has likewise blasted Russia and the European Commission has asked for an immediate cessation of hostilities. German Chancellor Angela Merkel has called for a cease-fire and French Foreign Minister Bernard Kouchner is in the region to broker one. So far, though, the results have been difficult to see.

"EUROPE NEEDS GEORGIA AND UKRAINE IF IT WANTS TO REMAIN INDEPENDENT OF RUSSIA'S EVER MORE MONOPOLISTIC OIL AND GAS DELIVERIES. While the West blocks Iran and Armenia is pledged to Russia, there are no pipeline routes for the rich resources of the Caspian Sea other than via Georgia - or via Russia. OIL ONCE AGAIN PLAYS AN IMPORTANT ROLE IN THIS WAR."

New figures on German industrial and export orders released this week suggest the engine of THE EU ECONOMY HAS STARTED TO SPUTTER. Fears of recession also rose after government officials warned this week about bad news from an upcoming second-quarter report, saying the German economy may have shrunk by around one percent.

THE OVERALL PICTURE SHOWS A EUROPE IN THE DOLDRUMS. German factory orders were down by 2.9 percent in June from May, and orders from abroad for German goods plunged by 5.1 percent. Production at German factories rose by 0.2 percent in June - less than expected - encouraging talk of a Europe-wide recession. Germany accounts for about a third of euro-zone output.

"Demand from abroad is slowing more sharply than domestic demand, which is also on a downward trajectory," said the German Economics Ministry, in a statement. "As a result prospects for industrial production all in all have worsened." Technically there won't be any recession until Germany sees contraction in two consecutive quarters - the second and the third of this year. But a recession hasn't been seen in the eurozone at all since the euro made its debut in 1999.

The cancellations began Sunday evening and affected flights between Alaska and Denver, Los Angeles, San Francisco, Portland, Seattle and Vancouver, British Colombia, the airline said in a statement. The ash was created by the eruption of Kasatochi volcano in the Aleutian Islands on Thursday.

The airline also issued a travel advisory on its Web site that said volcanic ash cloud could affect Anchorage, Fairbanks and southeastern Alaska destinations. Alaska Airlines cancelled the flights after the National Weather Service issued a warning Sunday for an area in Southeast Alaska near the panhandle, spokeswoman Caroline Boren told the Anchorage Daily News.

The great leap is revealed in forecasts for the Financial Times by Global Insight, a US economics consultancy. According to the estimates, next year China will account for 17 per cent of manufacturing value-added output of $11,783bn and the US will make 16 per cent. Last year the US was still easily in the top slot and accounted for a fifth of the total. China was second with 13.2 per cent.

John Engler, president of the National Association of Manufacturers, a Washington-based trade group, played down the effect of the projections. It was "inevitable" that China would take over on account of its size, he said. "This should be a wholesome development for the US, for it promises both political stability for the world's largest country and continuing opportunities for the US to export to, and invest in, the world's fastest-growing economy."

THE EXPECTED CHANGE WILL END MORE THAN A 100 YEARS OF US DOMINANCE. It returns China to a position it occupied, according to economic historians, for some 1,800 years up to about 1840, when Britain became the world's biggest manufacturer after its Industrial Revolution.

US light, sweet crude was up 71 cents at $115.91 a barrel, while London's Brent crude gained 70 cents to $114.03 after prices had fallen on Friday. Georgia is not an oil producer but the country is a key transit point for crude and gas exports. Oil prices have fallen in recent weeks after hitting a record $147.27 in July. Georgia is not an oil producer but the country is a key transit point for crude and gas exports. Oil prices have fallen in recent weeks after hitting a record $147.27 in July.

BP has a 30% stake in the Baku-Tbilisi-Ceyhan oil pipeline, the world's second largest, that runs from Azerbaijan through southern Georgia into Turkey and can transport up to 1.2 million barrels of oil a day. A smaller pipeline also runs to the Georgian Black Sea port of Supsa. A BP spokesman said the pipeline had not been damaged by the fighting. But reports said a fire had disabled the pipeline last week before the conflict erupted. It had been hoped that transporting oil through the region would make the West less dependent on supplies from Russia.

President George W Bush told US TV he had frank discussions with Russian prime minister Vladimir Putin when the pair met at the Olympics in Beijing, calling Russia's actions "disproportionate".

One sovereign fund, said to have earmarked $29 billion to purchase foreclosed residential real estate, recently hired a West Coast mortgage broker and is starting to search for bargains, The Post has learned. The search, which is being carried out, in part, by Field Check Group mortgage consultant Mark Hanson, who was retained by the broker, Steve Iversen, is concentrating on single- and multi-family REO (real estate owned) homes, or homes that have already been taken over by the mortgagee.

HANSON IS NOW WILLING TO PAY 50 CENTS TO 60 CENTS ON THE DOLLAR for a collection of California REOs worth at least $500 million. In fact, this week Hanson's team negotiated a $2 billion package mixed with homes across the country for 31 cents on the dollar. While progress seems slow, Hanson reminds us this is only a nine-month old industry.

There was "no doubt that the mood has darkened in the last two or three months," its director general Richard Lambert warned members in a letter. FORECASTERS, INCLUDING THE CBI, HAD BEEN "OVER-OPTIMISTIC" ABOUT THE ECONOMIC OUTLOOK, he added. High inflation and slowing growth have prompted fears of a possible recession. "A year ago it seemed reasonable to hope that the worst would be over by now. That has not turned out to be the case"

Economic activity is slowing in all key sectors of the economy, business confidence is waning and falling house prices and tight credit conditions have dented consumer spending. "This is why most analysts are now suggesting that the economy will at best only manage to stagnate in the coming few quarters, and that the growth prospects through 2009 and into 2010 look no better than anaemic," Mr Lambert said.

The CBI earlier cut its forecast for growth in 2009 from 1% to 0.4%. And last week the International Monetary Fund again revised down its forecast for UK economic growth this year and next year. It now expects growth of 1.4% this year and 1.1% in 2009, although the government still expects the figures for both years to be 2% or above.

But after years of unrelenting drought, the lush valley soils of south-east Australia's Riverina wine belt are becoming cracked and dry, putting the competitiveness of best-selling labels such as Jacob's Creek at risk. The drought has now lasted nearly a decade, and is the worst in the past century, hitting not just the wine trade but the way of life of outback farming communities. It has ruined some sheep and wheat farmers and turned many rural settlements into virtual ghost towns. MORE THAN 10,000 FAMILIES HAVE BEEN FORCED OFF THE LAND IN THE PAST FIVE YEARS. In some outback schools, a generation has grown up without ever splashing through a large puddle.

Worst hit have been the creeks and streams of the Murray-Darling river system, where around 1,300 growers produce more than 400,000 tons of mainly shiraz, cabernet sauvignon and chardonnay grapes, about a quarter of Australia's total. To produce reliable supplies for big-selling labels such as Lindemans and Roberts Estate, vineyards have relied on highly regulated irrigation systems flowing from enormous reservoirs in the nearby Snowy Mountains.

But storage levels have now fallen to about 40 per cent of normal, and with the current winter the driest since records began 118 years ago, fears are growing that the diminishing water flow could lead to a reduction in grape yields – ultimately putting up the price of a bottle for British drinkers.

The pre-dawn violence in the restive Muslim region of Xinjiang came despite tightened security following a deadly attack there a week ago and threats by an Al Qaeda-linked militant Islamic group to disrupt the games. The official Xinhua News Agency, citing local police, said one dozen bombings occurred at government buildings in Kuqa county in the early hours of Sunday. Xinhua described the attackers as suicide bombers.

On Thursday, a video purportedly made by the Turkistan Islamic Party was released in which the militant group threatened to attack buses, trains and planes during the two-week Olympic competition. The group wants independence for Xinjiang and is believed to be based in Pakistan, where security experts say core members received training from Al Qaeda. Xinjiang is home to the Uighurs, an 8 million-strong Muslim minority with a long history of tense relations with the Chinese. Uighurs complain the Communist government has been restricting their religion and Turkic culture.

(Xinjiang is the largest political subdivision of China - it accounts for more than one sixth of China's total territory and a quarter of its boundary length. Xinjiang is known for its fruits and produce, including grapes, melons, pears, cotton, wheat, silk, walnuts and sheep. XINJIANG ALSO HAS LARGE DEPOSITS OF MINERALS AND OIL.)

After a day of heightening international tensions, Georgian leaders claimed that the Baku-Tbilisi-Ceyhan pipeline, which transports oil from the Caspian Sea to Turkey, had been attacked. Their claims came after Russian jets struck deep into the territory of its tiny neighbour, killing civilians and 'completely devastating' the strategic Black Sea port of Poti, a staging post for oil and other energy supplies.

Georgian economic development minister Ekaterina Sharashidzne said: 'THIS CLEARLY SHOWS THAT RUSSIA HAS TARGETED NOT JUST GEORGIAN ECONOMIC OUTLETS BUT INTERNATIONAL ECONOMIC OUTLETS AS WELL.' The pipeline is 30 per cent owned by BP and supplies 1 per cent of the world's oil needs, pumping up to a million barrels of crude per day to Turkey. IT IS CRUCIAL TO THE WORLD'S VOLATILE ENERGY MARKET and the only oil and gas route that bypasses Russia's stranglehold on energy exports from the region.

South Ossetia won de-facto independence in a war that ended in 1992 but has been a source of tension ever since.

Russian PM Vladimir Putin has suggested it is unlikely that South Ossetia will re-integrate with the rest of Georgia. Meanwhile, Russian warships are being deployed to impose a naval blockade on Georgian ports on the Black Sea coast to prevent arms and military shipments, Russian media reports say.

The current fighting began three days ago when Georgian forces launched a surprise attack to regain control of SOUTH OSSETIA, WHICH HAS HAD DE FACTO INDEPENDENCE SINCE THE END OF A CIVIL WAR IN 1992. The move followed days of exchanges of heavy fire with the Russian-backed separatists. In response to the Georgian crackdown, Moscow sent armoured units across the border frontier.

The danger now is that Russia will not only use this crisis to demonstrate its military power in the region, but argue it is time to redraw the map. Moscow has said there can be no "consultations" with Georgia unless Georgian forces withdraw to the positions they held outside South Ossetia before Thursday. On Saturday, Russian Prime Minister Vladimir Putin accused Georgia of seeking "bloody adventures" and trying to drag other countries into the conflict.

In an outspoken attack, he referred directly to GEORGIA'S ASPIRATIONS TO JOIN NATO, a move which Moscow strongly opposes.