Once poster child of crisis, Iceland recovers

(Reuters) - In this small Icelandic village, sailors are making double their pre-crisis pay, haddock sales to places like Boston and Brussels are booming and unemployment is almost zero - signs of this island's surprisingly rapid rise from the ashes of banking ruin.

While much of Europe wallows in recession, the economy of this volcanic island in the mid Atlantic is growing at a clip that has surprised many people, thanks to a currency fall - in which the crown lost almost half its value to the euro - an export and tourism boom as well as growing consumer confidence.

"This is probably one of our best years," said Arnthor Einarsson, a fisherman readying his boat for his next catch as seagulls circle huge piles of fishing nets on a rocky peninsula about one hour south of the capital Reykjavik.

Only a few years ago, a banking boom in which the sector's assets grew to 10 times the country's GDP lured many of Iceland's 320,000 population from traditional industries into the world of finance. Fisherman got into banking and sailors speculated on booming real estate.

Those heady days have gone. Gas-guzzling Land Rovers have been replaced with fuel-efficient Volkswagens, a sign perhaps of a more sober consumer mood in which economic growth is based on a steady expansion of exports rather than flash-in-the-pan speculation.

The wounds that sparked massive street protests against the financial elite are slowly healing. Even the then prime minister has been tried by a special court, closing one chapter.

Granted, there is still a long way to go, but many see Iceland as offering a lesson particularly to European countries such as Greece and Spain, stuck with shrinking economies and lacking the option of devaluing to boost their international competitiveness.

Iceland's GDP growth estimated at some 2.6 percent this year will outshine even powerhouses like Sweden.

"These are among the highest numbers in Europe," said Finance Minister Steingrimur Sigfusson. "Sometimes it is easier to turn a small boat around than a big ship."

Currency depreciation though is only part of the picture.

Capital controls, progressive taxes and a careful phasing-in of austerity measures were also key to getting the country back on track, bringing a more than 10 percent fiscal deficit back to a near balance.

Iceland also did what other parts of Europe haven't dared to do - let its banks go under. It took some of the cost itself but forced foreign creditors to take the biggest hit.

Lauded by some economists for taking unorthodox measures to fix its broken economy, others see it as a one-off example that would be hard to replicate.

"The lessons don't transfer directly because of the relative size of the old banks in relation to the economy. What we were left with was quite manageable," said Jon Bentsson, senior economist at Islandsbanki.

BACK TO BASICS

Three years after its near meltdown, Iceland looks healthy on many measures. It successfully finished an IMF bailout program and has already made one early repayment. It expects the sale of assets from failed bank Landsbanki to cover its $5 billion in debts to Britain and the Netherlands.

In February, Iceland recovered its investment-grade rating from Fitch, which praised the country for restoring macroeconomic stability, adding to investment-grade ratings from Standard and Poor's and Moody's Investors Service.

Icelanders are getting work, going shopping and their house prices are rising again.

And while the penthouse of a gleaming new skyscraper in downtown Reykjavik sits empty, Icelanders are piling into a hip new restaurant on the ground floor called the Hamburger Factory.

Car sales doubled in the first quarter. Jon Olafsson, who runs an auto dealership on the outskirts of Reykjavik, expects to sell almost 1,000 cars this year, having sold less than 100 cars in 2009.

"This is a high volume day for us," he says, pointing at a shiny row of cars just rolled out on his lot. His customers are back en masse, hunting for leaner, greener cars, and he is recruiting staff to meet demand.

While signs point to recovery, many remain cautious about the future and bitter over the past.

Household debt exceeds 200 percent of GDP. The government must deal with the issue of capital controls, imposed after the crisis but which are seen by some economists as denting foreign investment confidence.

There is little trust in government three years after the fall of ex-Prime Minister Geir Haarde. Parliament has the support of only 10 percent of the public, polls show.

Pall Matthiasson, chief executive of mental health services at the National University Hospital of Iceland, flips through slides on his iPad showing the five stages of grief.

He says Icelanders remain in a state of depression.

"There is cohesive guilt, because only so much anger can be directed at the bankers," he said. "It's like looking in the mirror and asking 'did I do that'? It comes back to haunt us."

CLOSE THE TRENCHES

Many just want a clean slate.

That can be seen no more clearly than in recent polls which show a surprisingly strong lead for presidential candidate Thora Arnorsdottir, a fresh-faced mother who is due to give birth to her sixth child at the end of May.

In an election due at the end of June, the 37-year-old goes up against President Olafur Grimsson, who is running for a fifth four-year term having a few years back cheered on those who drove the country's banking expansion.

Haarde's trial, she says, was difficult for the nation.

"Instead of being a step towards reconciliation, it has been more an opening up of wounds," she told Reuters, curled up on a sofa in her suburban home and peeking out of her window every few minutes to check on her children.

People told her they couldn't bear to watch the news anymore.

"I feel that we can get through this without taking out the daggers," said Arnorsdottir, a journalist who also has her own quiz show. "My hope is to use the influence of the presidency to close the trenches."

Haarde, the world's only political leader to be tried for crimes related to the global crisis, was found innocent of major charges of gross negligence but guilty of failing to hold dedicated cabinet meetings ahead of the collapse.

In the months ahead, Iceland will bring former banking executives to stand trial, so the pain is not over.

Icelanders will meanwhile get on with their recovery.

"Did Icelanders have an identity crisis? Yes," said Egill Helgason, one of Iceland's best-known television commentators. "They thought they were financial wizards, but it was all an illusion ... Now it's back to books, music, and well, fish."

Outgunned Syria rebels make shift to bombs

(Reuters) - Syrian rebels fighting to topple President Bashar al-Assad say they are shifting tactics towards homemade bombs, hoping to even the odds between their outgunned forces and his powerful army.

A series of deadly blasts in the past week suggests they are getting better at it.

Suicide bombs, booby-trapped cars and roadside explosions, including blasts in Idlib on Monday and the capital Damascus last week, have rocked the Arab state. The attacks threaten to sour the UN-brokered two-week truce and have killed many from Assad's security agencies.

"We are starting to get smarter about tactics and use bombs because people are just too poor and we don't have enough rifles," a rebel fighter from the north of Idlib province said last week as he took a break across the border in Turkey.

"It is just no match for the army," said the man, who spoke on condition of anonymity, "So we are trying to focus on the ways we can fight."

Details of what disparate groups are doing inside Syria are sketchy because the government bars most independent media.

The bombings have produced an array of theories, including that some may be self-inflicted wounds by security agents out to discredit the rebels, or that they show the rise of al Qaeda-linked Syrian Islamists, of whose expertise there is no doubt after their years of activity across the border in Iraq.

However, mindful of Assad's portrayal of those who have opposed him over the past 14 months as "terrorists", and keen to maintain Western and Arab support, several rebel fighters who spoke to Reuters said that, unlike al Qaeda, their bombs were aimed at military, and never civilian, targets.

"We are not targeting civilians. We are strictly going against regime targets," said Haitham Qdemati, spokesman for a rebel group called the Syrian Liberation Army. "We're not killers. We're defending ourselves."

BOMBS VS BULLETS

The Free Syrian Army (FSA), which lays claim to overall command of rebel forces but lacks the means to control them, says it has nothing to do with the bombings and is sticking to the U.N.-brokered ceasefire. In 18 turbulent days, the truce has been jeopardized by army shelling and insurgent attacks.

But some fighters have rejected the truce. They say it cannot prevent a slide into civil war against a ruling elite that has no intention of bargaining away a dominance the rebels challenged first with street protests and now with armed rebellion.

Although an obscure Islamist group claimed recent suicide bombings in Damascus, many rebel fighters say their switch in tactics from guns to bombs is down to economics, not ideology.

Firefights and skirmishes are expensive for the ragtag rebel force, many of them young men from impoverished rural areas who have scrounged cash and weapons from sympathizers abroad.

Rebels say the price of rifles and ammunition smuggled from neighboring Lebanon and Iraq has skyrocketed. A Russian-made AK-47 can go for $2,000 with bullets at more than $4 each - several times the normal price in open markets. In the United States, the same gun costs under $400 and bullets about 30 cents.

"Buying chemicals in grocery stores or even smuggling in equipment is cheaper than getting weapons and we can do more with it once we improve our skills," said another rebel from northern Idlib province, who called himself Mustafa.

"We have a lot of guys who devote their time to this."

Some of these bombing skills may have been brought back from fighters who joined the Sunni insurgency in neighboring Iraq against the U.S. occupation forces. The presence of hardliners from a Syrian Sunni majority that feels oppressed by Assad and his fellow Alawites who dominate the administration has been among causes for concern among those who fear a sectarian civil war similar to that which devastated Iraq over the past decade.

"There's no question that a lot of Syrians fought with al Qaeda elements in Iraq and it's likely that many rebels today learned bombing skills fighting there," said analyst Joseph Holliday, from the U.S.-based Institute for the Study of War.

Armed attacks on military convoys travelling through the countryside have been overshadowed in recent weeks by blasts in Syrian cities targeting security force offices and other symbols of the Assad state, such as the central bank.

But Holliday said it could still not be ruled out that the government was orchestrating at least some of those attacks, especially those which have produced images on state television of bloodied civilians denouncing the rebels as terrorists.

"When rebels talk about making bombs now, most of them are likely referring to their use of explosions for military targets or army convoys," Holliday said. "I think that is different from targeting infrastructure in cities."

"MOTHER OF INVENTION"

Since the army routed them from their strongholds in cities, some rebels said they realized that even in guerrilla street battles they could not beat Assad's tanks or artillery.

The Syrian Liberation Army's spokesman Qdemati said his group's fighters were now focusing most of their attention on "manufacturing facilities" for bombs.

"You are going to start seeing an escalation as we improve our techniques of bomb-making and delivery."

An online statement on Islamist forums from the obscure al-Nusra Front claimed responsibility for a suicide bombing in Damascus on Friday that killed at least nine people. It has claimed responsibility for other suicide bombs in Damascus and one in the northern city of Aleppo.

Rebels say that without more support from foreign states, their struggle is becoming more chaotic and such radicals could play a bigger role.

Last week, Lebanese security forces said a leader from Lebanon's radical Sunni Islamist Fatah al-Islam group died in Syria, apparently planting a bomb.

But many fighters insist that given their meager means makeshift bombs are necessary to fight for a cause that has widespread support in among Sunni Arab states and the West.

Those who have given up on smuggling rifles say the switch has let them channel rare outside donations into better materials that have let them develop more sophisticated bombs.

"We have to be smart about this. Until there is a way to smuggle in anti-aircraft or anti-tank missiles, we won't win with arms," the first Idlib fighter said in Turkey.

"The rebels are getting better at bomb-making; as you know, desperation is the mother of invention."

Two horse race in final stretch for Egypt presidency

(Reuters) - Egypt enters the last stage of its first democratic presidential race on Monday with its field narrowing to a two-horse race between the urbane former head of the Arab League and a charismatic Islamist medic jailed for years under Hosni Mubarak.

A poll published in state-run al-Ahram daily on Monday showed veteran diplomat Amr Moussa in the lead, followed by Abdel Moneim Abol Fotouh, who has emerged in recent days as the leading Islamist candidate after securing the support of the ultra-conservative Salafist movement.

Both men are well ahead of 11 other candidates and, for now, look the most likely to face each other in a second round. That would give Egyptians a stark choice about the future of the Arab world's most populous state.

Moussa, 75, served for a decade as Mubarak's foreign minister before taking over the leadership of the Arab League, and must win over voters skeptical of the old elite.

Abol Fotouh, 60, grew to prominence in the 1970s as a student activist opposing Egypt's military rulers and was jailed in the 1990s as a member of the Muslim Brotherhood, which he split from last year. He needs to maintain the support of Islamists, while reassuring secular Egytians he will not impose a radical transformation on society.

Monday marked the official start of campaigning for the election, although candidates have been canvassing voters for months. A first round will be held on May 23-24, followed by an expected second round run-off in June.

Though they appear to be the clear leaders, it is still not certain Moussa and Abol Fotouh will make it to the second round: many voters are undecided and polls have no track record of accuracy. The Muslim Brotherhood has a candidate challenging Abol Fotouh for Islamist votes, and can never be written off.

"Nobody can talk about forecasts because in Egypt there are no scientific opinion polls. They are all impressions," senior Brotherhood official Essam El-Erian told reporters.

The election could prove to be one of the most important turning points in the Arab Spring of revolts that swept across the region since last year, bringing down the leaders of Tunisia, Libya and Yemen as well as Egypt's Mubarak.

Egypt's revolution has been an unfinished project. Since Mubarak was swept out by popular protest, generals have ruled uneasily, their tenure punctuated by bouts of violence, political quarrels and spiraling economic decline.

In recent days, unrest has rattled ties with Saudi Arabia, once a close ally. The West is closely watching the race in the first Arab state to make peace with Israel.

UNPRECEDENTED SPECTACLE

Moussa has generally led in the polls till now, benefitting from better name recognition than others. Abol Fotouh's growing appeal could make the race tighter. Some may yet be swayed by the unprecedented spectacle of a televised debate between the top candidates, the first of which is scheduled for Thursday.

Islamists have been on the rise since Mubarak fell. The Muslim Brotherhood, banned under Mubarak, won parliamentary elections four months ago, followed by the Salafists, who call for an even stricter reading of Islamic law.

Abol Fotouh broke away from the Muslim Brotherhood last year when it initially said it would not field a candidate.

He has solidified his position as the leading Islamist in the race by securing the backing of the ultra-conservative Salafists, but portrays himself as a moderate, keen to reassure secular Egyptians and Christians they have nothing to fear. He has played up issues of economic and social justice and promised to increase health and education spending.

"It's the Egyptian mainstream I am banking on, the ones I have been working to win over since I started my campaign, who make up more than 90 percent of Egyptians ... who understand sharia (Islamic law) correctly," he said in an April 23 television interview. "Wherever we look out for people's interests, we serve them, we are implementing God's law."

Abol Fotouh long clashed with the Brotherhood's leadership by advocating a more open approach to Egyptians from different social, political and religious backgrounds. Leading Salafis have acknowledged ideological differences with him, but have been drawn to a charismatic figure whose break with the Brotherhood gave him credibility as an independent voice.

Some liberals and more secular-minded Egyptians have also rallied behind him. Unlike Moussa, he has no links to Mubarak's era. But many Egyptians remain suspicious that he still holds ties to the Brotherhood that could surface in his presidency.

The Brotherhood reversed its decision not to field a candidate, but its first choice was barred from standing. Its replacement candidate, Mohamed Mursi, has a low profile so far and starts well behind in polls, but stands yet to gain from the support of the Brotherhood's unrivalled grassroots organization.

Senior Brotherhood official Mahmoud Ghozlan said rank and file Salafis could still back Mursi, even though their leaders picked Abol Fotouh.

As the largest group in the new parliament, the Brotherhood has clashed with the military rulers over who should appoint the cabinet, and with other Islamists and liberals over the make-up of a 100-member panel drafting a constitution, now stalled.

OLD GUARD, NEW GUARD

Moussa, who became popular with ordinary Egyptians as head of the Cairo-based Arab League, has to fight accusations by Islamists that he is a member of Mubarak's old guard.

"The question is not old guard or new guard. The question is either you were part of the corrupt people that have done a lot of harm to the country or among the people who have worked and done their duty according to the highest standard they could do," Moussa told Reuters last year early in campaigning.

Many Egyptians fondly remember how Moussa regularly criticized Israeli policies and in 2003 warned against the U.S-led invasion of Iraq, saying it would "open the gates of hell."

He benefits from fear of religious radicalism. Asked about his Islamist rivals last week, Moussa said Egyptians should "not get into an experiment that has not been tried before."

While Egypt has limped through the political transition, the economy has taken a nose-dive. Foreign reserves have plunged and talks with the International Monetary Fund on a loan facility seen as vital for restoring confidence have foundered.

Egypt's economic prospects may have taken a further hit on Saturday when Saudi Arabia, a long-time ally of Mubarak and potential donor, recalled its ambassador over protests outside its embassy against the Saudi arrest of an Egyptian lawyer.

"The current crisis between Egypt and Saudi Arabia will be contained, given the solid relations between the two countries which transcend any problem," Planning and International Cooperation Minister Faiza Abu el-Naga said on Sunday.

(Additional reporting by Tamim Elyan, Ali Abdelatti and Tom Perry; Writing by Edmund Blair; Editing by Peter Graff)

Analysis: Could domestic flak shoot down Netanyahu over Iran?

(Reuters) - He may be ready to brave Iranian air defenses, retaliatory missiles and Western diplomatic blowback in tackling Tehran's nuclear program, but Israeli Prime Minister Benjamin Netanyahu will find it hard to fly past flak from his own senior staff.

Remarks by recently retired security chiefs and the current military commander questioning the views of Netanyahu and Defence Minister Ehud Barak on Iran have opened a rare rift in a Jewish state that usually puts up a united front against regional enemies.

Yuval Diskin, who as former Shin Bet domestic intelligence chief was effectively in charge of vetting government officials, on Friday deemed Netanyahu and Barak "messianic" and unfit for war.

If the Netanyahu government was ever serious about carrying out a long-threatened, last-ditch and tactically thorny assault on Iran's nuclear sites against the misgivings of many Israelis and foreign allies like the United States, the criticism from Diskin and others may have tipped the scales against.

The right-wing premier describes a future Iranian bomb as a second Holocaust-in-the-making, to be stopped at all costs.

But that case may be tougher to make in the face of derision from men he once trusted to fend off immediate threats like suicide bombers, guerrilla rockets and armed infiltrators.

"They genuinely disagree and are trying to signal the Israeli public, knowing that they retain credibility," said Dennis Ross, a former Middle East adviser to U.S. President Barack Obama, in reference to Diskin and Mossad ex-spymaster Meir Dagan, another detractor of Netanyahu and Barak.

"They are raising the costs domestically to the Netanyahu government of acting."

A second-term prime minister with solid approval ratings, Netanyahu is mindful of public opinion, especially with the prospect of a scheduled 2013 election being brought forward to within months.

Arguments by Dagan and Diskin that an Iran war could spill out of control, with knock-on reprisals from Syria and Islamist militants in Lebanon and Gaza, resonate with Israelis who demanded commissions of inquiry over the costs of far more contained border conflicts in 1982 and 2006.

"With this kind of a prospect, many Israelis, regardless of political stripe, are reminded of past adventures which proved to be misadventures," said Amotz Asa-El, a fellow with the Shalom Hartman Institute, a liberal Jerusalem think-tank.

"REVOLT OF THE DEFENDERS"

Israeli officials accused Dagan and Diskin of using Iran to settle scores with Netanyahu and Barak after being denied extended tenures, or to launch political careers of their own.

But Israel's current top general, Benny Gantz, also clashed with government messaging last week by describing Iran as "very rational" and unlikely to develop an atom bomb.

"We are witnessing a very deep fissure between the security establishment and the political level (which is) quite unprecedented," said another U.S. ex-official, who asked not to be named. He dubbed it a "revolt of the defenders".

Such American apprehension is dreaded by Israel, which looks to its guardian ally to spearhead an international sanctions drive designed to curb Iran's disputed uranium enrichment.

Netanyahu aides say those negotiations can succeed only if the world thinks he is poised to attack, despite all the risks, and that this impression is dented by naysayers who can claim knowledge of Israel's secret capabilities and debates.

"If you are against Israel taking military action, the worst thing you can do is undermine the credibility of that option," one senior official said, suggesting that eroding the diplomatic pressure on Tehran risked making war Israel's only resort.

The official, who spoke on condition of anonymity given the sensitivity of the issue, said Israel worried that remarks like Diskin's could dilute international demands that the Iranians stop all uranium enrichment, a program that has bomb-making potential though Tehran insists it is for peaceful energy only.

"We are already seeing signs of capitulation" to Iran in the talks due to resume in Baghdad on May 23, the official said.

Such disclosures suggest that Israel's war footing may have been as much bluff as true intent. As Diskin put it, "barking dogs don't bite".

Indeed, during his accrued six years in top office, Netanyahu has not embarked on major military offensives - leading some critics to describe him as gun-shy.

Then again, Netanyahu would be loath to see Iran go nuclear on his watch, and has differed with military experts in the past. He warned against unilateral withdrawals from occupied Lebanese and Palestinian territories and appeared to have been vindicated when those evacuations hardened Islamist hostility to Israel.

Netanyahu's ideological forbear, Prime Minister Menachem Begin, beat back skepticism from some of his advisers to order the 1981 bombing of the nuclear reactor in Saddam Hussein's Iraq. The mission was a success, with world outcry later giving way to gratitude.

David Ivry, who oversaw the raid as then-Israeli air force chief, said Netanyahu and Barak might see the required cabinet approval for a similar Iran strike as enough to test fate.

"In the end, history is the judge," Ivry said.

Buffett's cancer to be No. 1 topic at Berkshire meeting

(Reuters) - Warren Buffett is not one to talk much about his personal life in public, but his prostate cancer may dominate the conversation this weekend when his conglomerate Berkshire Hathaway (BRKa.N) convenes its annual shareholder meeting.

The event dubbed "Woodstock for Capitalism" draws more than 40,000 shareholders to Omaha, Nebraska's convention center for a weekend of festivities, the highlight of which being the questions Buffett takes from investors. This year, for the first time, he will also entertain questions from a select group of analysts who follow Berkshire's stock.

Last year's meeting was dominated by the scandal-driven resignation of one-time Buffett heir apparent David Sokol. Few expected fireworks this year -- at least until Buffett's April 17 disclosure that he has stage 1 prostate cancer and will begin radiation treatment in July.

Bill Smead, chief investment officer of Smead Capital Management and a Berkshire investor, said he and investors like him are hoping for more substance from this year's session.

"I'd like it to go back to answering meaningful questions," said Smead, who holds both Class B shares and instruments representing fractional Class A shares.

The health issue is part of the larger succession question that has hung over Berkshire in recent years and has weighed on the company's share price. Buffett, 81, assuaged some of those concerns in February when he said the company had identified the person who would eventually succeed him as chief executive.

Of course, Buffett may have made the problem worse when he said a few days later that his designated successor had not been made aware of the fact.

The shortlist includes Berkshire's reinsurance boss Ajit Jain, railroad executive Matthew Rose and GEICO CEO Tony Nicely. All have their backers, though none are likely to get a public nod until the day when Buffett can no longer work.

QUESTIONS FROM THE STREET

Aside from the health question, the other major change this year is that Buffett will take questions from the Wall Street analysts he has historically held in such low regard.

A hand-picked panel of three insurance analysts, all of whom have "buy" ratings on the stock, will likely question Buffett about the stock's recent performance and future potential.

One, Barclays Capital's Jay Gelb, raised his price target on Berkshire's Class B shares last Friday as part of a 115-page review of the company's operations. Gelb and another of the questioners, KBW's Cliff Gallant, have both had the equivalent of a "buy" rating on the stock since last August.

"The question that's never been asked as far as I know, nobody's ever asked Warren Buffett 'why do you think the stock price has lagged so much?'" said Steve Check, president and chief investment officer of Check Capital Management in California.

"We get that from our clients," said Check, whose firm's largest holding by a wide margin is Berkshire B shares.

Through April 24, Berkshire's more widely held Class B shares were up 4.1 percent for the year, less than half the gains of the S&P 500 or of the S&P insurance index .GSPINSC. The stock also underperformed the S&P 500 in two of the last three years.

Many people maintain the stock is undervalued, perhaps even at one of its lowest valuations ever, but some say a discount could be warranted given the succession question.

Shareholders will also be hoping for a look at the two men who will shepherd Berkshire's investment portfolio after Buffett is gone, newly hired managers Todd Combs and Ted Weschler.

Combs has been building his portfolio, taking Berkshire into more tech and retail investments, while Weschler recently started and will soon show his hand.

Obama and Bill Clinton campaign together on economy

By Laura MacInnis

MCLEAN, Virginia | Mon Apr 30, 2012 11:00am EDT

(Reuters) - Former President Bill Clinton gave a rousing endorsement of fellow Democrat Barack Obama in his first 2012 campaign appearance with the president on Sunday night, and helped him raise more than $2 million.

A white-haired and svelte Clinton, 65, pounded the podium and pointed at the crowd while addressing about 500 Obama supporters outside the Virginia home of his friend and Democratic adviser Terry McAuliffe.

"I think he's done a good job," he told the crowd in his signature raspy voice, warmly introducing the man who beat his wife, Hillary Clinton, to win the 2008 Democratic presidential nomination and then made her secretary of state. "We are going the right direction under President Obama's leadership."

Clinton's support could be pivotal for Obama's efforts to raise money and to sell voters on his economic plans, which Republicans have denounced as fiscally reckless and rooted in populism instead of good business sense.

Clinton oversaw one of the most prosperous times in recent American history and managed to balance the federal budget, something Democrats are keen to remind voters before the November 6 election.

When he took the backyard podium, Obama, 50, noted Clinton's "remarkable" economic record in his two White House terms and referred frequently to the political powerhouse standing behind him, who stands to be a huge fundraising force in the final months of the presidential campaign.

"I didn't run for president simply to get back to where we were in 2007. I didn't run for president simply to restore the status quo before the financial crisis. I ran for president because we had lost our way since Bill Clinton was done being president," Obama said.

The state of the economy is expected to be the pivotal issue for voters in November.

With unemployment still relatively high and growth showing signs of slowing, Obama is under pressure to defend his string of big budget deficits and prove the soundness of his proposals to keep spending on infrastructure, clean energy and education and to raise taxes on the very rich.

'NOT HOUDINI'

Neither Obama nor Clinton referred to George W. Bush, the Republican who served two presidential terms in between their tenures, nor the presumptive Republican nominee for this year's White House race, Mitt Romney, by name in their outdoor remarks.

But Clinton said Obama's likely White House opponent this year wanted to revert to the policies that plunged the United States into crisis, but "on steroids, which will get you the same consequences as before, on steroids."

Clinton applauded Obama's efforts in healthcare, clean energy promotion and student loan reform, and argued that employment levels were rebounding quickly from the financial and mortgage crises that took hold before Obama took office.

"Look, the man's not Houdini, all he can do is beat the clock. He's beating the clock," he said, comparing the pace of recovery to Japan's extended weakness after its own crisis. "The last thing you want to do is to turn around and embrace the policies that got us into trouble in the first place."

Fresh from the previous night's White House Correspondents' Association Dinner, where he took several digs at Romney, Obama was clearly in good humor at the Virginia event.

Turning to foreign policy, Obama said he and Hillary Clinton had "spent the last three and a half years cleaning up other folks' messes," and made fun of Romney's recent comment that Russiawas the United States' "No. 1 geopolitical foe."

"I'm suddenly thinking, 'What? Maybe I didn't check the calendar this morning. I didn't know we were back in 1975,'" he said. The comment echoed Vice President Joe Biden's criticism last week of Romney as being stuck in a Cold War mindset.

Clinton had not appeared with Obama this election cycle. But last week the Obama campaign released a video of Clinton praising Obama for approving the commando raid that killed Osama bin Laden in Pakistan last May.

Tickets to Sunday's outdoor reception cost $1,000 and up, and Obama and Clinton later addressed a more exclusive dinner at McAuliffe's home for 80 people who paid $20,000 each. The money went to a fund supporting Obama's re-election, the Democratic National Committee and several state Democratic parties.

Obama declines to discuss Chinese dissident's case

(Reuters) - President Barack Obama on Monday ducked a question about a Chinese dissident believed to be under U.S. protection in Beijing but said Chinawill be stronger if it improves its human rights record.

At a news conference, Obama appeared to be walking a fine line between not saying anything to make it harder to resolve Chen Guangcheng's case while conveying U.S. respect for human rights and U.S. appreciation for wider cooperation with China.

Chen's case arose with the U.S. secretaries of state and treasury due in China on Thursday for talks with senior Chinese officials, an annual meeting sure to be overshadowed by the fate of the blind dissident.

Chen, who has opposed forced abortions in China, escaped house arrest in rural China last week and is under U.S. protection in Beijing, according to a U.S.-based rights group, creating a situation that complicates the ties of the world's top economic powers.

Asked directly about Chen's case, Obama replied: "Obviously I am aware of the press reports on the situation in China but I am not going to make a statement on the issue."

Obama said the issue of human rights comes up every time there are senior U.S.-Chinese talks, saying the United States does so both on principle and because "we actually believe China will be stronger as it opens up and liberalizes its own system."

"We want China to be strong, we want it to be prosperous and we are very pleased with all the areas of cooperation that we have been able to engage in," he said at a news conference with Japanese Prime Minister Yoshihiko Noda.

"But we also believe that that relationship will be that much stronger and China will be that much more prosperous and strong as you see improvements on human rights issues in that country," he said.

SENIOR U.S. DIPLOMAT IN BEIJING

A senior U.S. diplomat, Kurt Campbell, U.S. assistant secretary of state for East Asian and Pacific affairs, flew to Beijing to work on a solution to the Chen case ahead of this week's U.S.-China Strategic and Economic Dialogue in Beijing, a source briefed on the matter said on Monday.

The U.S. State Department declined to answer questions about Campbell's whereabouts during the weekend but on Monday confirmed he was in Beijing. State Department spokesman Victoria Nuland described his trip as part of the preparations for Secretary of State Hillary Clinton's talks this week.

Nuland declined to answer repeated questions about potential U.S. involvement with the Chen case or to say whether his trip had been previously scheduled. "I have nothing for you on anything to do with that matter," Nuland said.

Current and former officials have said that there appear to be two potential solutions: Chen going into exile, something he has told associates he does not want; or his being allowed to live in freedom in China.

"I think Kurt is there to negotiate one of the two more favorable outcomes, either his asylum or his exoneration by senior Chinese officials so that he can return home to Shandong and live unmolested," said the source, saying this was an inference on his part.

"I don't think either of those outcomes is going to be easy to negotiate."

Assuming it has Chen, it is inconceivable - on both ethical and political grounds - that the United States would turn him over to the Chinese authorities against his wishes, current and former officials have said.

On Sunday a top Obama administration official, White House counterterrorism adviser John Brennan, declined to comment on the Chen case or whether the United States was protecting the dissident, but he neatly summarized the dilemma for Obama.

"I think in all instances the president tries to balance our commitment to human rights, making sure that the people throughout the world have the ability to express themselves freely and openly, but also that we can continue to carry out our relationships with key countries overseas," Brennan said on the "Fox News Sunday" television program.

(Reporting By Arshad Mohammed; Editing by Eric Walsh)