From Volume 6, Issue 23 of EIR Online, Published June 5, 2007

World Economic News

Trade Unions Say Private Equity Buyouts Threaten a Crash

May 29 (EIRNS)—Labor unions from 35 European countries decided on an international mobilization against private equity "leveraged takeovers," saying they rob countries of taxes, workers of jobs, and could collapse the same market liquidity they are feeding off. The unions met in Seville, Spain, and targeted the takeovers occurring in Britain, in particular.

The London Financial Times reports today that these private-equity-fund buyouts of corporations are setting a record pace worldwide in 2007. In the United States alone, at least $82 billion worth of takeovers—mostly funded by debt—have taken place in May alone, the highest buyout level of any month in history. Today, another $22 billion buyout was announced (including $10 billion in new debt), of the Archstone-Smith Real Estate Trust, by Lehman Brothers Holdings and Tishman Speyer Properties. Some bankers told the Times they thought the buyout boom was peaking, before running into a sudden rise in interest rates and a collapse.

One of the leading trade unions in the mobilization against takeovers, the British Trades Union Congress (TUC), said in a statement today that buyouts had taken $100 billion out of Britain's capital markets in just six months, making the private buyout markets bigger than the stock markets. The TUC said the buyout funds were using highly leveraged (debt-heavy) deals to avoid paying taxes themselves or on the companies they take over, citing the loss of $260 million in tax revenue by the British Treasury on just one deal, KKR's takeover of Alliance Boots Corp.

Top Buyout Firms Hire Distressed Debt Experts

May 30, 2007 (EIRNS)—As a sign of things to come, the top winners in the global buyout bubble have been hiring the top distressed debt experts at the fastest pace in five years according to a report in These firms include some of the biggest, such as Goldman Sachs Group, Inc., which just hired Andrew Wilkinson, a lawyer who has advised some of the biggest bankruptcies ever, including Eurotunnel Plc and Parmalat Finanziara SpA. Others hiring such experts include Blackstone Group and Morgan Stanley.

The move is related to the massive leveraged buyouts based on less than good credit. For example, writes that in Europe alone, companies have acquired $256 billion in loans and bonds rated below investment grade. Another indication of what the future holds is the fact that the number of distressed debt bankers in Europe has increased by 30% to 400 this year and accounts for about one-third of all such banks in the world.

Funds Hedging Against Stock Market Crash

May 30 (EIRNS)—The Danish financial daily Borsen reports today that the fear of a "strong correction" in the financial markets is becoming more and more evident. Professional investors are buying derivatives to hedge themselves against falling stock markets like never before. Stock markets fell 7% during February and March of this year. "A certain part of the hedge fund industry is buying protection for a lot of money," Casper Hellas of Scandium Asset Management, who monitors hedge fund activity closely, is quoted by Borsen as saying. Borsen also reports that a study of the options on Standard and Poor's stock index shows very negative expectations for the stock markets over the next three months. A negative outlook is especially growing among the so-called long-short hedge funds that administer $800 billion.

Mortgage Carry-Trade Insanity

May 29 (EIRNS)—Millions of people throughout the world, especially in Eastern Europe, are using the carry-trade, usually the preserve of big-time gamblers, to take out home mortgages. In the carry-trade, an investor borrows money from one country, where the borrowing cost is low, and invests it in another country, where investments yield a high rate of return. Now, households are insanely engaging in this risky practice, taking out a home mortgage in a foreign currency at a low interest rate, sometimes half the rate of interest charged in their home country.

In Poland, one-third of all mortgages are contracted in foreign currencies. In Hungary, half of all the mortgage loans are foreign currency-denominated, according to the country's central bank. The Swedish bank SEB reports that 70% of its lending in Latvia, is in foreign currency, rather than the local currency, the lats.

The mortgage and regular carry-trade have created an immense danger. In Poland, Hungary, and Latvia, the foreign currency debt coming due now exceeds the reserves of those countries' central banks. Were foreign investors to pull out funds from those countries—which prop those currencies up—the currencies would crash.

To Stem Speculation, China Triples Stock-Trading Tax

May 29 (EIRNS)—The Chinese Ministry of Finance announced today that it will triple the tax on stock securities trading. This follows a series of moves this year to dampen China's overheated financial markets. The announcement comes on the same day that the head of the Hong Kong Monetary Authority warned of the effect of a sudden depreciation of the U.S. dollar. The new Chinese policy, effective May 30, will raise the stamp tax that investors must pay on each stock-trading transaction, to 0.3%, from its current 0.1%.

More than 20 million accounts to trade stocks have been opened at brokerages in China so far this year, four times the amount in all of 2006, according to the China Securities Depository & Clearing Group. The number of brokerage accounts in China has topped 100 million for the first time ever.

The Shanghai stock market's benchmark CSI 300 index has been surging. According to Bloomberg data, the CSI 300 Index is trading at a whopping 48 times earnings. The Chinese government has taken a series of incremental measures to slow speculative investment. On Feb. 27, it tightened measures for investing with borrowed money, which sent the CSI Index tumbling 9.2% for the day (it soon rose again). On May 18, the Chinese central bank raised the one-year bank deposit rate at banks from 2.79% to 3.06%, as a step to tighten liquidity. One week later, the stock regulatory authority instructed brokerage firms to have investors sign a declaration that they are aware of the risks when opening stock-trading accounts. Thus far, these measures have had only a modest effect on the rise of the stock market.

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