World Economic News

Is a Run on Brazil's Debt in the Making?

Brazil's country-risk rating broke 4% on July 25, rising in one day by 1.69% to hit 4.22%. At the end of the week before, JP Morgan Chase, ABM-Amro, and Merrill Lynch recommended to their clients that they reduce their Brazilian debt holdings, leading Brazilian bankers cited by O Estado de Sao Paulo July 26 to (conservatively) project that Brazil's country risk could rise to 5.7% soon, as the political crisis balloons.

A rising country-risk—the premium over U.S. Treasuries' interest rates which governments and companies from a country have to pay to sell their bonds—can blow Brazil's debt out of the water faster than you could say "Impeach Lula." Brazil's official foreign debt was US$200 billion as of April 2005; its public federal debt is nearly 1 trillion reals-worth, i.e., some US$379 billion.

The rising country risk immediately hit Brazil's debt auctions. On July 26, Brazil ran into trouble rolling over its debt, as investors demanded higher interest rates than the government was willing to pay. Rather than pay those rates, the government withdrew two-thirds of what it had been offering. It could get no takers at all for its long-term NTN-F bonds, which do not have the floating interest rates that the markets now demand of Brazil.

Equity Funds Advancing on Takeover Market

While the danger posed by hedge funds is known, less attention is paid to private equity funds. With no less aggressiveness than hedge funds, private equity funds are advancing on the takeover market in Germany. In 2003, they invested 13.6 billion euros in the purchase of real estate and of housing conglomerates, but also in shares, preferably shares of Mittelstand firms (small to medium-sized entrepreneurs); in 2004, 23.5 billion were invested; in the first half-year of 2005 alone, 12.9 billion were invested—an increase of 22 percent over the second half-year of 2004.

DaimlerChrysler CEO Resignation Takes Industry by Surprise

The unexpected announcement July 28 by DaimlerChrysler CEO Juergen Schrempp that he would step down by the end of the year, two years before his contract expires, sent shockwaves through financial circles, and the abruptness with which the boss of Germany's largest industrial conglomerate, was kicked out by the rest of the top management, took the industry by surprise. This is a sign of the times, characterized by abrupt, unexpected developments. And it was marked as potentially a more fundamental, constitutional shift, and downgrading of "shareholder value," by a noted German columnist.

In the lead commentary of the largest German mass-tabloid, Bildzeitung July 29, Paul C. Martin, a longtime chief commentator of the tabloid on financial markets and investment issues, wrote that Schrempp was one of those top managers whose salary surpassed any reasonable ratio, with an accumulated income over 30 years that is more than any average citizen would earn (if he could) in 6,000 years.

"We have plenty of worries about jobs and pensions," Martin wrote. "What is going on at the top echelons of the big firms, is threatening to tear the society totally apart. The Constitution states, unmistakenly, The Federal Republic is a freedom-based, democratic and social law-state. Social does not mean to get a premium for failure. Nor to squeeze consumers with shameless price-driving.

"The next government must restore respect for the Constitution. Or else it will fail, like the outgoing one."

Martin's remarks are indicative of a broader discussion about essentials of economy and society, that is going on in the elites behind, mostly, closed doors, a debate which the BueSo, led by Chancellor candidate Helga Zepp-LaRouche, however, wants to force into the open, in the upcoming elections (see InDepth for Zepp-LaRouche's election platform).

10 Million Jobs Missing in German Economy

This week, the Federal Labor Agency (BfA) released the latest data on unemployment in Germany. Here are the highlights: Official unemployment in July 2005 reached 4.77 million, almost half a million higher than one year ago. Out of these people, 1.82 million have been seeking a job for more than 12 months. The number of unemployed people under age 25 is 629,000.

Now, that's the "registered" (i.e., official) unemployment. In addition, there are currently 1.98 million people undergoing job training or participating in public-work programs or some other kind of government-sponsored activities, thereby falling out of the unemployment statistics for the moment. Officially therefore, there are 6.75 million people "seeking jobs."

Furthermore, there is the "quiet reserve" of people no longer looking for a job at this moment, as they realistically can't expect to get one under current circumstances. The Institute for Labor Market Research (IAB) provides annual estimates on the average "quiet reserve." For the year 2005, the estimate is 2.61 million. As this overlaps in part with the public-work programs, already included above, the IAB estimate for the "quiet reserve in the narrow sense" amounts to 1.73 million. All of this adds up to a total number of missing jobs of 8.48 million (4.77 + 1.98 + 1.73 million). During the winter months, this figure already crossed the 9 million mark.

Still, this isn't the full story. The reason is the dramatic transformation of those jobs that still exist. Between 1991 and 2004, the number of full-time jobs in Germany crashed from 29.5 to 23.5 million, a loss of 6 million full-time jobs. During the same time period, the number of part-time jobs doubled to 11 million. Out of these part-time jobs, there are 4.8 million "mini-jobs," which means monthly wages below 400 euros, and also reduced social-security coverage. According to conservative estimates, based on surveys by public agencies, there are at least 1 million part-time workers who would immediately switch to a full-time job, if they could get one.

In summary: In order to provide a job for every working-age person in Germany who wants one, about 10 million jobs have to be created.

London Hedge Fund Troubles Send Investors Fleeing

GLG Partners, based in London, is right now ranked as the fourth-largest hedge-fund group in the world, with about $11 billion in assets. And GLG's flagship Credit Fund is in big trouble. It suffered heavy losses in May, and more losses in June. According to the GLG management, the Credit Fund was down 20% during the first six months of the year. Allegedly, there was a slight recovery in July. But even the GLG management has to admit, that investors of its Credit Fund have already threatened to withdraw one-third of the fund's entire capital. As redemptions are only allowed at specific dates in the future, the management hopes to convince some of the investors to stay in. Hedge funds don't maintain large cash reserves, and premature liquidations of contracts will certainly cause additional losses.

Probably, the real mess is much worse than what has been admitted so far. As London's Financial Times July 27 noted: "The swings at GLG are being closely watched by the investment industry, since the fund is one of the largest, and there has recently been debate about the scale of losses and redemptions that hedge funds suffered because of the May turmoil. Measuring such losses precisely is impossible, since funds release only limited data and many have invested in opaque assets, such as tranches of collateralized debt obligations."