Lord Hutton, the Labour former work and pensions secretary charged by the coalition with reviewing public sector pensions, will publish his final report on Thursday, and it now looks likely to act as a starting gun for extended industrial action against the government's austerity programme.

The report will recommend that 6 million nurses, teachers, local government and other public sector workers should pay more into their pension pots, retire later and receive less when they do. All state employees will be affected, and it will create the first legal basis for simultaneous strikes across the public service unions.

Under the plans, the normal pension age of 60 would increase to match the state pension age, which by 2020 will be 66 for men and women. The changes should be brought in by the end of this parliament, though the armed forces should get longer to implement them, Hutton says.

Hutton has called on the unions and government to negotiate, saying the status quo is not tenable long term. "These proposals aim to strike a balanced deal between public service workers and the taxpayer. They will ensure that public service workers continue to have access to good pensions, while taxpayers benefit from greater control over their costs," he said.

Dave Prentis, the general secretary of the biggest public sector union Unison, said: "On top of a pay freeze, and the threat of redundancy, they now face a pensions raid. This brings the threat of industrial action closer."

The yield on 10-year bonds briefly surged to 7.8 per cent after the Chinese rating agency Dagong downgraded the country's debt to BBB+. "These levels of interest rates are not sustainable over time," said Carlos Costa Pina, secretary of the Portuguese Treasury, blaming the latest upset on the lack of a coherent EU debt strategy rather than any failing by Portugal to deliver on austerity.

Mr Costa Pina rebuffed calls by leading economists in Portugal for an EU-IMF bail-out rather than drawing out the agony. "It is not justified. Portugal doesn't need external help, it needs urgent measures by the EU to restore market confidence." David Owen from Jefferies Fixed Income said last week's shock move by the ECB to pre-announce rate rises had tightened credit and effectively doomed the country. "The ECB by its actions has made it inevitable that Portugal will need a bail-out. There are parallels with the actions of the Bundesbank during the ERM crisis in 1992," he said.

Mr Owen said the ECB is playing brinkmanship with EU leaders, pressuring them to come up with a grand solution to the debt crisis at summits this month. It is a dangerous game. "Spain is not yet safe. It has 2.5 trillion euros of combined household and company debt. That is an awful lot," he said

"The EU will do too little, too late: the markets will dictate the solution," said Louis Gargour from LNG Capital, speaking at a Euromoney bond forum. He said Greece is already in the grip of an unstoppable debt spiral, spending 14.3 per cent of tax revenue on interest costs. He expects 50 per cent 'haircuts' on the debt, perhaps along the lines of the Brady Plan following Latin America's debt crisis.

The Greek crisis is going to from bad to worse. Ten-year yields spiked to 12.78 per cent yesterday and unemployment jumped sharply to 14.8 per cent in December, a reminder that the social trauma of austerity has yet to hit. Greece is undergoing the harshest fiscal squeeze ever tried by a modern Western economy, yet public debt will end above 150 per cent of GDP by 2013 even if it complies with EU-IMF terms. "We should default and return to the Drachma to punish foreign loan sharks who have bled us dry," said Avriani, a paper linked to the ruling PASOK party.

The insurgents told the relatively reliable Al-Sharq Al-Awsat, as translated by the Lebanese news portal Iloubnan.info, that the government is using mercenary pilots from Syria, Algeria, Ukraine, Serbia and Romania to fly air force warplanes because Libyan pilots are no longer considered reliable.

Muammar Gaddafi's air force staged new raids on rebels on Tuesday as rebels said they rejected attempt by intermediaries for Gaddafi to talk with the provisional national council. A council spokesman said there is nothing to talk about until Gaddafi leaves the country. "We're not going to negotiate with him. He knows where the airport is in Tripoli and all he needs to do is leave and stop the bloodshed," the official said, according to Voice of America.

Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data.

"The US economy has become alarmingly dependent on government stimulus," said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. "Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits."

The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, "either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion," she said.

In a speech to the London School of Economics on Tuesday, Miliband called for social democratic parties in those countries to try to regain ground by focusing on wealth creation and greater control of privatised utilities.

"Not since the first world war has there been this kind of domination from the right. The whole era of democratic suffrage," said Miliband. He added: "Left parties are losing elections more comprehensively than ever before. They are losing from government and from opposition; they are losing in majoritarian systems and PR systems."

"Just for good measure, they are losing whatever position the party had on the Iraq war and they are fragmenting at just the time the right is uniting."

There was a 6.3 magnitude aftershock shortly after the main quake, the meteorological agency said. In Tokyo, office buildings swayed and creaked for about 30 seconds during the quake.

Japan lies on the "Ring of Fire" - an arc of earthquake and volcanic zones that stretches around the Pacific Rim and where about 90 percent of the world's quakes occur. In 1933, about 3,000 people were killed around Ofunato by an earthquake and tsunami that had a maximum wave height of 94 feet (28.7 meters), according to the USGS. In 1896, a magnitude 8.5 earthquake generated a tsunami that killed 27,000 people in the area.

There were also reports of protests in other Yemeni cities, amid widespread unrest in the region. The Yemeni protesters, mostly students, have been camped out in front of the university since mid-February. They want Mr Saleh to stand down and are calling for more job opportunities, an end to corruption, and a fairer distribution of wealth.

As large crowds tried to build up the camp, security forces fired rubber bullets, tear gas and live rounds. Medics told BBC Arabic that 20 people had been shocked by electric stun guns and that 85 people had suffered the effects of tear gas. Several thousand women had also joined the march to mark International Women's Day. Opposition spokesman Muhammad Qahtan said the incident had been "a massacre". "It is a crime by security troops against students engaged in a peaceful sit-in," the Associated Press quoted him as saying.

Tuesday also saw protests in the southern city of Aden and in Ataq. In Ataq, hundreds of children took part in anti-Saleh demonstrations chanting "No studying, no teaching until the president falls," Reuters reports. Yemen is one of a number of countries in the North African and Middle East region that have seen increasing unrest since the presidents of Egypt and Tunisia were ousted in popular revolts. The president has been power for 32 years, facing a separatist movement in the south, a branch of al-Qaeda, and a periodic conflict with Shia tribes in the north.

They said they would "recycle" the fish carcasses into fertiliser. "We need to get rid of them," Redondo Beach Police Sergeant Phil Keenan was quoted by the local Daily Breeze newspaper as saying. "This is going to create a terrible pollution and public health issue if we don't." With the temperature on Tuesday already passing 68F (20C), the dead fish were beginning to smell.

Roughly 1,400 boats are moored at the harbour, including about 500 with full-time residents. In some places, the dead fish were so thick boats were unable to leave the marina, officials said. Local officials said they had found no traces of toxins or pollutants, and that they believed the fish had used up all the oxygen in the marina. He said it seemed likely that the fish had got lost after entering the marina and had been unable to find their way out. "We're confident that it is a naturally occurring, but unusual event," said Andrew Hughan, spokesman for the California fish and wildlife department. Redondo Beach is about 16 miles (26km) south-west of Los Angeles.

In May 2008, Vallejo filed for bankruptcy. The filing drew little national attention; most people were too busy watching banks fail to worry about cities. But while the banks have largely recovered, Vallejo is still in bankruptcy. The police force has shrunk from 153 officers to 92. Calls for any but the most serious crimes go unanswered. Residents who complain about prostitutes or vandals are told to fill out a form. Three of the city's firehouses were closed. Last summer, a fire ravaged a house in one of the city's better neighborhoods; one of the firetrucks came from another town, 15 miles away.

Is this America's future?

Cities across America are facing dire financial distress. Meredith Whitney, a banking analyst turned independent adviser who correctly predicted the banking meltdown, has issued an Armageddon-like prediction of mass municipal defaults. Others - notably Newt Gingrich - have suggested that state governments as well as cities should be allowed to file for bankruptcy. Congress held a hearing to examine the idea.

These forecasts of apocalypse have touched a nerve. Americans, still reeling from the devastating impact of the mortgage debacle, are fearful that the next economic disaster is only a matter of time. To anyone reading the headlines of budget deficits and staggering pension liabilities, it takes little imagination to conclude that the next big one will be government itself.

The European Economic Advisory Group (EEAG), a group of leading European economists, has warned that Greece may need another bailout by 2013 at the latest. Greece's current savings program won't suffice to cope with its debt problems, the EEAG said in a new report which was published Tuesday. Greece is unlikely to be in a position to refinance itself via the financial markets once the current rescue package runs out, the economists said.

The Greek government has so far stressed that it will "pay back every cent" and will start reducing its debts in 2014 at the latest. The EEAG recommends drastic steps to prevent the EU from having to provide Greece with long-term aid: Greece should either return to its national currency, the drachma, or launch even tougher austerity measures, including general cuts in wages and salaries. According to a Suddeutsche Zeitung article published on Tuesday, leading banks are already giving up hope that Greece will be able to pay back all its debts. Thomas Mirow, the head of the European Bank for Reconstruction and Development, believes a Greek debt restructuring is unavoidable.

"It is doubtful that Greece will be able to bear a debt ratio of more than 150 percent over the long term," Mirow told the Suddeutsche. "The markets have been pricing in a debt restructuring for some time. The ratio should be lowered to 100 percent so that the country can overcome its problems." That would mean creditors would have to forego more than 30 percent of their loans.

The old Picture House, the cinema, has closed. Tumbleweed rolls into the still corners behind the grain elevators, soaring prairie cathedrals that spoke of prosperity before they were abandoned for lack of business. Happy's problem is that IT HAS RUN OUT OF WATER FOR ITS FARMS. Its population, dropping 10 per cent a year, is down to 595. The name, which brings a smile for miles around and plays in faded paint on the fronts of every shuttered business - Happy Grain Inc, Happy Game Room - has become irony tinged with bitterness. It goes back to the cowboy days of the 19th century. A cattle drive north through the Texas Panhandle to the rail heads beyond had been running out of water, steers dying on the hoof, when its cowboys stumbled on a watering hole. They named the spot Happy Draw, for the water. Now Happy is the harbinger of a potential Dust Bowl unseen in America since the Great Depression.

In the 1950s a lot of wells were drilled, and the water went down. Those wells were drilled into a geological phenomenon called the Ogallala Aquifer. It is an underground lake of pristine water formed between two and six million years ago, in the Pliocene age, when the tectonic shifts that pushed the Rocky Mountains skywards were still active. The water was trapped below the new surface crust that would become the semi-arid soil of the Plains, dry and dusty. It stretches all the way down the eastern slope of the Rockies from the badlands of South Dakota to the Texas Panhandle. IT DOES NOT REPLENISH.

Happy is the canary in the coalmine because the Ogallala is deepest in the north, as much as 300ft in the more fertile country of Nebraska and Kansas. In the south, through the panhandle and over the border to New Mexico, it is 50-100ft. And around Happy, 75 miles south of Amarillo, it is now 0-50ft. The farms have been handed over to the government's Conservation Reserve Programme (CRP) to lie fallow in exchange for grants: farmers' welfare, although they hate to think of it like that.

Although both moves are aimed at easing public consternation over the run-up of prices at the pump to more than $3.50 a gallon on average for regular gasoline, they also likely would rile conservatives in Congress. The strategic reserve has been tapped only during emergencies, such as the Persian Gulf War, while critics say further easing by the Fed would only stoke oil-fed inflation while doing little to help the economy.

Divisions have emerged on the Federal Reserve Board over what to do, but many members appear to side with Chairman Ben S Bernanke, who hinted in testimony last week that the central bank might react if oil prices go too high. Dennis P Lockhart, president of the Federal Reserve Bank of Atlanta, for the first time Monday spelled out what level of oil prices might trigger Fed action, pinpointing the record level around $150 set in 2008. Many economists say those oil prices, along with $4-per-gallon gas, helped throw the economy into a recession.

The Senate plans to vote Tuesday on competing proposals to cut spending, but Democrats have rejected GOP-backed cuts of more than $50 billion, and Republicans have ruled out Democrats' cuts of less than $10 billion, meaning neither plan will draw the 60 votes needed to overcome a filibuster and pass.

"We've all done the math and we all know how these votes will turn out: Neither proposal will pass, which means neither will reach the president's desk as written. We'll go back to square one and back to the negotiating table," said Senate Majority Leader Harry Reid, Nevada Democrat.

The two sides are facing a March 18 deadline, which is when the current stopgap funding bill expires. Without a new spending agreement by then, the government would shut down. The House two weeks ago passed a bill that would cut $57 billion more from 2010 spending levels, including major reductions in a number of domestic programs.

February is traditionally a bad month for federal finances. The previous two records were $220.9 billion, posted exactly a year ago, and $193.9 billion in February 2009.

Demonstrations are banned in Kuwait without prior approval and youth groups Kafi and al-Soor al-Khames (Fifth Fence), the main organisers, will present a challenge to the government since they have not sought approval for the protests. Inspired by unrest in the Middle East and North Africa that has toppled leaders in Tunisia and Egypt, the organisers want Prime Minister Sheikh Nasser al-Mohammad al-Sabah to be replaced.

Some are demanding the appointment of a politician from outside the al-Sabah family, which has ruled Kuwait for about 250 years. The prime minister, a nephew of the ruler, has already survived two non-cooperation motions in parliament since he was appointed in 2006. All other key portfolios such as defence, interior and foreign affairs are also held by al-Sabahs. The emir has the final say in all political matters.

Tension with stateless Arabs, longtime residents of Kuwait known as "bedoun" who clashed with police last month in protests demanding citizenship, appeared to be easing after some lawmakers promised to discuss a draft law in parliament on Tuesday that would grant them basic civil rights.

The rebel interim council, based in the eastern city of Benghazi, reportedly rejected the offer because such an 'honourable' exit would offend Gaddafi's victims. Gaddafi allegedly sent Jadallah Azzouz Talhi, a former prime minister, to meet the rebels to work out the fine print of a deal. The offer proposed that the dictator would hand over power to a committee formed by the General People's Congress.

A source close to the rebel council said he had heard that 'one formula being proposed by the other side would see Gaddafi hand power to the head of parliament and leave the country with a certain guaranteed sum of money'. He added: 'I was told that this issue of money is a serious obstacle from the national council's point of view.' But Essam Gheriani, a media officer for the council, said: 'No such offer has been put to the council as far as I am aware.'

Talhi, a leading member of the ruling establishment in the 1980s, had earlier appealed to rebel leaders for dialogue in the clearest sign yet that Gaddafi may be ready to compromise with opponents challenging his grip on power. The fact state television screened Talhi's appeal indicated it was officially endorsed. But the council said there was no room for broad dialogue with Gaddafi and any talks must be on the basis that he quits.