From Volume 6, Issue Number 5 of EIR Online, Published Jan. 30, 2007

World Economic News

Why the Sudden Fall of the Pound Sterling?

Following a Jan. 23 speech by Bank of England governor Mervyn King, the pound sterling suddenly reversed its steep climb against the dollar, and fell on Jan. 24 by two and one-half cents. King suggested in his speech that the U.K. was about to cease its recent increases in interest rates, which have included aggressive moves unexpected by many markets. In response, the pound's rise stopped at just under $2 ($1.992)—its highest level in 14 years—-and then fell to $1.966.

The Financial Times Jan. 25 called the result "crunching gears on global markets," as the yen carry trade was scaled back.

The interest rates on British Exchequer securities have risen by more than 0.1% in January. The rising British rates, and some withdrawals from U.S. Treasury securities by some countries, such as Italy, have pressured U.S. long-term securities, and their interest rates have risen by more than 0.2% in January. In addition to the potential threat to the dollar in these developments, these rate increases will worsen the U.S. housing bubble collapse, because mortgage rates are based on these Treasury rates.

Davos Forum Hears Report on 'Global Risks'

A report on "global risks," compiled by leading financial firms, was presented at the Davos World Economic Forum which opened on Jan. 24. Put together by Citigroup; Marsh & McLennan Companies, a financial consulting firm; Swiss re (reinsurance); and the Wharton School Risks Center (University of Pennsylvania), the report paints a dark picture of the risks of the last 12 months, citing 12 global risks the world is facing, including a new oil-price shock, the abrupt end of the Chinese economic boom, the spread of diseases, and a major stock market crash.

The study goes at length into the issue of climate change and the need to reduce worldwide carbon emissions. It underlines the need to develop nuclear energy as an alternative to reduce dependency on oil, and mentions the danger of pandemics in the future, suggesting that a country risk officer be installed in each country, so as to be equipped to deal with such pandemics.

The report's gloomy outlook was seconded by the director of the Swiss National Bank, J. Roth, who warned against stock market exuberance and, given the amount of cash sloshing around and the appetite for risk-taking, he forecast major "market corrections."

Global Imbalances 'Setting Stage for Crisis'

The executive vice president of the Bank of China, Zhu Min, warned that massive imbalances, including out-of-control derivatives, are setting the stage for a massive crisis, the Telegraph reported Jan. 25.

Zu Min said there is no less than $370 trillion dollars in derivatives flooding the global system—a tidy sum, although significantly less than EIR's best estimates. Predicting that the storm would break by next year, he said, "There is money everywhere. You can get liquidity from the market every second for anything. Derivatives are eight times global GDP and much of the money is flowing to Asia, where people have no idea what risks they are taking." He went on to say, "The global imbalances are becoming more concentrated, not less."

Montek Ahluwala, deputy chief of India's planning commission, said the derivatives revolution had allowed banks to park risk elsewhere, disguising the danger.

Nouriel Roubani, an economics professor at New York University, said the U.S. is in the midst of a slow motion "hard landing" as the delayed effects of 17 interest-rate increases have begun to bite. The question is whether the hard landing will hit the entire global economy. "We have a banking crisis," he said, citing the collapse of 16 sub-prime lenders over the winter and an emerging credit crunch across the mortgage sector.

Locust Funds Lobby To Overcome Resistance in Germany

Private equity and hedge funds operating in Germany no longer feel that their aggressive interests are appropriately represented in organizations in which they are members, such as the Association of Alternative Investors, the Financial Times reported Jan. 25. To overcome resistance in Germany, the funds plan to form a lobby group to target information to the media and the public, modelled after the Private Equity Council in the U.S.A.

The funds want to have control of the "fund transparency" which is very much under discussion in Germany these days. The project was initiated by Michael Philips, of the APAX Deutschland fund.

U.S. Agency Issues Negative Rating on Siemens

Apparently, those in the Anglo-Dutch financial domain that unleashed their Transparency International neo-jacobins against Germany's Siemens Corp., were not sure that would suffice, to corner the firm's board of directors at its shareholder meeting in Munich Jan. 25. The Institutional Investors Service, an influential rating agency, published an alert for investors just before the meeting, hinting that the meeting would likely feature disapproval of the Siemens management by shareholders. The alert noted that the firm was burdened with hundreds of millions of euros in financial losses caused by internal corruption, and by the recent bankruptcy of its former mobile phone section, last owned by the bankrupt Taiwanese firm, BenQ.

All rights reserved © 2007 EIRNS