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American Airlines’ parent company, AMR Corp., announced Tuesday that it has filed for chapter 11 bankruptcy. Britain’s coalition government unveiled sharply lower economic growth forecasts on Tuesday and said it would take much longer than hoped to wipe out its deficit, meaning tough austerity measures would extend beyond the next election due in 2015. Italy’s borrowing costs soared again at a debt auction Tuesday, adding to the pressure on European officials gathering in Brussels for their latest attempt at easing the crisis in the euro area. U.S. single-family home prices declined in September. The S&P/Case Shiller composite index of 20 metropolitan areas fell 0.6 percent from August on a seasonally adjusted basis.

AMR Bankruptcy

American has been widely seen as the weakest of the major airlines for some time now. It has reported a profit in only one quarter since 2007, and it lost $4.8 billion over those 3-1/2 years. AMR said American Airlines, American Eagle and all other subsidiaries will honor all tickets and reservations and operate normal flight schedules during the bankruptcy filing process, using its $4.1 billion in cash. ”Our very substantial cost disadvantage compared to our larger competitors, all of which restructured their costs and debt through Chapter 11, has become increasingly untenable,” said the airline’s statement. The airline also announced that Gerard Arpey, its chairman and CEO, is retiring. He is being succeeded by Thomas Horton, who was named president of the company in July 2010. The airline said that a bankruptcy reorganization is necessary to give it the competitive cost structure it needs and return to profitability. It signaled that it may try to use the bankruptcy process to force lower-cost contracts on its unions. The airline even announced a massive order for 460 jets from Boeing (BA) and Airbus in July in an effort to modernize its fleet. American was the world’s largest air carrier as recently as 2006. But mergers have dropped it to third in terms of miles flown by paying passengers, behind United Continental (UAL) and Delta Air Lines (DAL) Before Tuesday’s filing, American and Southwest (LUV) were the only major U.S. airlines that had not filed for bankruptcy reorganization. Shares of AMR (AMR,)which had already plunged nearly 80% since the start of the year through Monday’s close, tumbled another 63% to 60 cents a share in pre-market trading. Shareholders are typically wiped out during the bankruptcy process.

UK To Continue Austerity and May Fall Into a Recession

Finance Minister George Osborne, in one of two major annual economic setpieces, warned the British economy risked getting dragged into recession if the euro zone debt crisis was not solved. “If the rest of Europe heads into recession it may prove hard to avoid one here in the UK,” he told parliament. ”Much of Europe appears to be heading into recession caused by a chronic lack of confidence in the ability of countries to deal with their debts. We will do whatever it takes to protect Britain from this debt storm while doing all we can to build the foundations of future growth,” he said. The economy was now forecast to grow by only 0.7 percent next year, way below a March budget forecast of 2.5 percent, Osborne said, presenting figures from the independent Office for Budget Responsibility. The OBR expects the economy to shrink by 0.1 percent in the last three months of this year. Growth was expected to recover to 2.1 percent in 2013, down from a previous forecast of 2.9 percent, before accelerating to 3.0 percent by 2015.

Osborne said pay rises for public sector workers would be capped at one percent once a two-year pay freeze ends in 2013. Borrowing will fall much less than expected because of slower growth, erasing any margin for error in the government’s plan to erase the structural deficit within five years. The coalition has made erasing a deficit that peaked at 11 percent of national output its priority. Opposition Labour said its strategy had been blown way off course. Labour finance spokesman Ed Balls accused Osborne of a catastrophic error of judgment. Center-left Labour, ousted from power in May 2010, says the coalition is squeezing the life out of the economy by cutting too much and too quickly.

The OECD rich nations’ economic think-tank said on Monday that Britain will slip back into a modest recession early next year. It lowered its 2012 growth forecast to just 0.5 percent and urged the Bank of England to expand its money-printing program. The near-term forecasts are broadly similar to our own but I think the long-term forecasts — out to 2016 — are very optimistic given that fiscal restraints will continue for quite some time and the uncertainty created by the euro zone crisis. The Bank of England will pump an additional 75 billion pounds into the economy in coming months, a Reuters poll indicated on Tuesday, taking the total to 350 billion as it tries to revitalize growth. “The UK is partway through a ‘lost decade’, and I expect that 2012 will be another difficult year,” said Michael Saunders at Citi, who expects the total BoE spend to be at least 500 billion pounds — the highest forecast in the poll.

Recognizing that he has little scope to alter Britain’s short-term economic prospects, Osborne focused on measures that will boost growth in the longer term, such as promoting lending to small businesses and encouraging private sector investment in infrastructure. He plans to tap British pension funds to provide the bulk of up to 30 billion pounds of investment in building projects, while the government will underwrite up to 40 billion pounds of loans to smaller companies struggling for credit.

US Housing Doldrums Remain

The S&P/Case Shiller composite index of 20 metropolitan areas fell 0.6 percent from August on a seasonally adjusted basis. A Reuters poll of economists had forecast no change. With each passing year, the former Oracle of the Fed, Alan Greenspan, is reminded that there really was a housing bubble and lowering interest rates to record lows just made matters worse.  Nearly four years after the housing market peak in 2007, record low mortgage rates are no match for falling incomes and 9% unemployment.

U.S. National Home Price Index up by only 0.1% from its second quarter level. Home prices are down 3.9% across the board and are now back to their first quarter of 2003 levels. The market consensus was for a 3% decline year over year. From August to September, housing prices have fallen the most in Atlanta, with a 5.9% decline, followed by Tampa Bay and San Francisco, both with a 1.5% drop in housing prices. Boston, New York, Washington and Los Angeles remain the most expensive cities in the lower 48 states.

The number of U.S. homeowners who are underwater on their mortgages decreased modestly in the third quarter, though levels remained high, data analysis company CoreLogic said Tuesday. The number of properties with so-called negative equity — in which the amount owed on the mortgage exceeds the property’s value — was 10.7 million, or 22.1 percent of all residential properties with a mortgage. That is a slight decrease from 10.9 million, or 22.5 percent, in the second quarter, CoreLogic said. An additional 2.4 million borrowers fell into the near-negative equity camp in the third quarter, defined as those less than 5 percent equity. Hard-hit Nevada had the highest underwater rate with 58.3 percent of mortgages upside down. The top five was rounded out by Arizona, Florida, Michigan and Georgia.

Italian Debt Financing Reaches An All Time High

The Italian treasury sold €7.5 billion of bonds, including three-year bonds at a yield of 7.89 percent, meeting demand for 1.5 times the amount on auction. At an evening session, euro-zone ministers were hoping to nail down guidelines on how to expand the European Financial Stability Facility, the main bailout fund for heavily indebted euro-zone countries. Such a step could in theory make it possible for the fund to begin buying government bonds on a large scale by early next year. The ministers were also expected to approve the release of an €8 billion, or $10.7 billion, loan to Greece — the latest installment in its international rescue package.

Italy’s budget deficit is not huge in comparison with other developed nations, but its debt is among the world’s largest. Considering the burden of repaying that debt, interest rates of that magnitude will not be long sustainable. The auction was held as the lower house of the Italian Parliament was preparing balanced-budget legislation, a key measure for convincing investors and euro-zone partners of its commitment to reeling in its public debt.

Also on Tuesday, Belgium sold €502 million of three-month Treasury bills at an average yield of 2.19 percent, up from the 1.58 percent it paid just two weeks ago. Demand rose to 5.61 times the amount sold from 1.45 times at the previous auction. It also sold €513 million of six-month bills at an average yield of 2.44 percent, more than double the 1.09 percent on Nov. 8. The bid-to-cover ratio was 2.76, up from 1.85 times in the prior auction. Belgian borrowing costs rose after Standard & Poor’s on Friday cut its rating on the country’s sovereign debt to AA from AA-plus. In addition to the turmoil that is shaking all the euro-zone countries, the agency cited Belgian’s peculiar problems, which include the fact that it has been without an elected government for the past 19 months, as well as the cost of bailing out Dexia, the French-Belgian bank that last month became the first European bank to be partially nationalized amid the euro crisis.

European ministers Tuesday were planning to address an expansion of their bailout fund, which was meant to raise money by issuing bonds backed by the stronger European countries and loan it to shakier countries facing high interest rates on their debt. It now also plans to offer insurance of up to 30 percent to investors in some European bonds to encourage them to buy.