World Economic News
Hot Money Surges Into Emerging-Market Nations
The flow of private money into 29 "emerging market" nations hit the level of at least $279 billion in 2004, which is more than double the level in 2002, and heading upward. The peak year was 1996, at $322 billion, before the 1997 "Asian flu" crack in the world monetary system. The flow represents so-called "private capital," less outflows and repayments. These figures were released Jan. 19, in a new report by the Institute of International Finance, Inc., which represents more than 300 banks and many additional financial houses.
The 2004 "direct investment" flows include a heavy component of speculation, as in the hot money going to China; and also a significant grab of assets of all kinds, including natural mineral resources, as well as farmland, water rights, etc., especially in Brazil and Argentina (a new world food-export center), and Turkey.
The breakdown given in the new report estimates that nearly half of the $279 billion is going into plants, equipment, and businesses, rather than into stocks and bonds, according to Yusuke Horiguchi, the Institute's chief economist. The other half includes lots of hot money flows into China, especially during the fourth quarter of 2004, with bets of various kinds on whether the fixed exchange rate will be dropped. Also identified is Russia, where banks have been borrowing money abroad, to speculate on a rise in the ruble.
"There could be a dimension of a bubble," said Institute managing director Charles H. Dallara at a press conference.
The geographic breakdown of the money flows: $146 billion to Asia-Pacific; $97 billion to Europe's "emerging nations"; $26 billion to Latin America; $9.2 billion to Africa and the Middle East.
Bank of England Fears Another Derivatives Disaster
"The Bank of England is stepping up its attempts to prevent another Barings-style financial catastrophe by strengthening its team that monitors emerging threats to the system," the London Guardian reported Jan. 18, adding, "The Bank has expressed concerns over the past year that the rapid rise in the number of hedge funds and the ever-increasing size of the derivatives markets could represent a potential threat to the stability of global financial markets. A team will be redeployed from the Bank's trading division and built up into a market intelligence team led by Paul Tucker, a member of the monetary policy committee." The Guardian also reports that in order to "minimize the impact of any financial crisis, the Bank has been running through possible disaster scenarios with the FSA [Financial Services Authority]."
A City of London insider noted to EIR, that these moves by the BoE follow intense rumors on London's financial markets during December, that a worldwide operating company had been hit by a large derivatives disaster. The source then pointed to another potential time bomb in the present financial systemcorporate bonds. In order to get higher yields than those offered by U.S. Treasuries, hedge funds and other speculative investors have massively bought up corporate bonds recently, thereby increasing the prices and lowering the yields of such corporate bonds. A situation has emerged in which corporate bond yields no longer reflect the much higher risk which they incorporate. However, any single problem in the corporate bond market could trigger a panic flight.
London's Financial Times observed Jan. 17 that "investors are braced for turmoil in the corporate bond market after hints of a possible downgrade for General Motors, one of the world's largest borrowers. The troubled U.S. carmaker, which has $291 billion of debt outstanding, including tens of billions of dollars in bonds, is teetering on the edge of junk status. A downgrade would have serious repercussions, because many funds are only allowed to hold investment grade debt."
Mahathir: It's Time To Review Ringgit Peg
Malaysia's former Prime Minister Dr. Mahathir bin Mohamad was the architect of Malaysia's successful currency peg in 1999, which has effectively protected the nation's economy for more than six years. But Dr. Mahathir is now calling for a review of the peg, due to the weak U.S. dollar, which has caused the ringgit to depreciate against major currencies, according to the Malaysia Star Jan. 20.
Mahathir met Jan. 20 in the capital, Putrajaya, with journalists, following a meeting with economist Joseph Stiglitz from Columbia University. Mahathir said that, while dollar depreciation had little impact on Malaysia's imports from the U.S., it was now costlier to buy products imported from Japan, Europe, and elsewhere.
The Star reported, "From the onset, Mahathir, who had served as the country's former Finance Minister, said: 'we have said that although we have a fixed exchange rate, we can fix it at any level we want. That is the most important thing ... the freedom to fix the exchange rate.' "
WHO: Bird Flu May Mimic Spread of 1918 Flu Pandemic
The evolution of the avian flu virus may favor the pattern of the deadly human influenza pandemic of 1918, the World Health Organization warned Jan. 20, in a new six-page report issued by the Secretariat. The current situation "may resemble that leading to the 1918 pandemic," in which more than 40 million people died, the UN health agency cautioned in its latest report, "Influenza Pandemic Preparedness and Response." The death toll from the H5N1 avian virus endemic in Asia stood at 32 as of Jan. 5, out of 45 confirmed human cases, which were contracted by persons in close contact with infected fowl, or who ate infected chicken. Several instances of possible human-to-human transmission are being investigated in Vietnam. Whatever these specific cases, WHO stresses that recent epidemiological and laboratory studies reveal unusual features that "suggest that the virus may be evolving in ways that increasingly favor the start of a pandemic."
New Alert Issued for Avian Flu in Two Thai Provinces
Thai officials announced a high alert Jan. 20 for new avian flu outbreaks in two provinces, where a 21-day surveillance regime has been imposed, under which no poultry can be taken in or out. The outbreaks involve 50 chickens in the central province of Phitsanulok; and 20 fighting cocks in the eastern province of Rayong. All told, some 100 million chickens have been culled to date throughout Thailand and Vietnam combined, because of the lethal avian flu of the H5N1 strain, identified in the region a year ago. In Vietnam, at least six people have died over the last month; another patient remains ill; and 10 more cases are suspected.