World Economic News

IMF Solvency Depends on Financial Stability of Turkey

The solvency of the International Monetary Fund (IMF) now comes down to the financial stability of Turkey, according to the "Final Report of the Committee to Study Sustainable Long-Term Financing of the IMF," released Jan. 31, 2007. Turkey is a nation whose finances are a bubble sustained only by the now-unwinding carry trade. According to a March 1 Bloomberg wire, Turkey now represents around 75% of the IMF's total loan portfolio, a portfolio which has dropped to a mere $11.8 billion, from its 2004 high of $81 billion. The big shift came in January 2006, when both Argentina and Brazil paid off "the damn IMF," as some in Ibero-America put it. Other nations in Ibero-America then followed suit. Total IMF loans today to that region, whose nations were once its greatest debtors, are less than 1% of its global portfolio, at a mere $50 million. (Yes, that's million, not billion.)

Here's the problem: the IMF's revenues rely "primarily on interest income derived from lending," the Committee stated in its final report. "It is already the case that the income derived from lending is not sufficient to cover the Fund's projected operating expenses," it said. The main conclusion of the committee, which included such brilliant thinkers as Alan "Bubbles" Greenspan, was that the IMF "should commence immediately" to devise "an alternative revenue model" to finance its activities.

Will Japan Allow Foreign Ownership of Brokerage Operations?

Citigroup was nearly shut down in Japan in 2004 when the government closed its private banking operations due to money-laundering charges against the company. Now, Nikko Cordial, the third-largest brokerage in Japan, is in similar legal trouble over accounting irregularities, which led the Tokyo Exchange to consider de-listing them, despite its being one of the oldest firms in the country, with $250 billion in assets, the New York Times reported March 7. Citigroup announced a $10.8 billion takeover bid, saying this will solve both their problems.

The question of how this mega-deal intersects the collapsing carry trade, the rising yen, and the falling market is not addressed in the Times commentary, but is the obvious context of this unusual opening of the normally closed Japanese brokerage business. Citigroup offered a 15% premium over the current market price to purchase over half the shares in Nikko, in which Citigroup already held 4.9%. The purchase lifted the Nikko stock and helped the first stock market rise in a week.

In Nuclear Debate, France, Germany at Opposite Poles

The early-March EU summit on energy, which the German Presidency wants to make a step forward on renewable energies, revealed a deep gulf between green Germany and pro-nuclear France, but also between East and West. France, which calls for nuclear power as the only way to reduce CO₂ emissions, is backed by the Eastern European nations, notably the Czech Republic, and even by Poland, which is not really pro-nuclear, but dislikes profoundly any EU guidelines from Brussels that would bind the Poles to a particular policy.

The "green hedge funds," which are investing heavily in renewables, have told the German political party leaderships that a non-nuclear orientation is the alleged "pot of gold" for German industry in the future.

Yen Could Continue Rise Through End of March

The yen could well continue rising until the end of this month, a City of London analyst said in a discussion with EIR March 6. He had earlier warned that a rise of 2%-3% of the yen (already surpassed) would hit the carry trade hard. March 31 is the end of the fiscal year in Japan, after which Japanese business and financiers could again begin investing abroad. These renewed capital outflows from Japan could bring the yen down again.

The analyst pointed to the possible role of John Merriweather–, the Salomon Bros. hedge-fund trader who was one of the founders of LTCM, in setting off the current yen rise, and the risk to the yen carry trade. Merriweather is known to have taken "long" positions on the yen, and is making a lot of profit at this time, he said.

The real danger for the international financial situation right now, the analyst said, is that the subprime mortgage market could "seize up": now, this market is 1,500 basis points over Treasuries, which is, by definition, "one step from default." He himself is watching the home equity part of asset-backed securities markets: if the instability there spills over into other sections of world finance, this could "lead to systemic problems."

UPS Cancels Airbus Order for 10 Cargo Jets

UPS has reportedly lost confidence in the ability of the European airplane manufacturer Airbus to deliver A380 planes by 2012, after Airbus decided to delay production of the freighter version of its super-jumbo jet so that it could focus on the passenger version, according to Bloomberg March 2. Airbus expects to lose as much as EU4.8 billion by 2010 and the decision to delay the A380 freighter is just one measure the company is taking to try to reduce losses. It also plans to cut 10,000 jobs across Europe, and sell or find partners for six factories.