From Volume 6, Issue 28 of EIR Online, Published July 10, 2007

World Economic News

Nuclear Expert: World Can Build Five Reactors Per Week

July 7 (EIRNS)—"If the OECD countries, plus China and India, were to build at France's 1980s start-up rate, the result would be five reactors per week, rather than one," stated John Ritch, director-general of the World Nuclear Association, on July 4. France built an average of 3.4 reactors per year from 1977 to 1993, achieving a nuclear share of electricity near 80%. Ritch was responding to a new report issued by the Oxford Research Group in Britain, "Too Hot to Handle? The Future of Civil Nuclear Power." This report concludes that "nuclear power should be taken out of the energy mix," because of concerns with proliferation and safety, and because it would be impossible to build even 48 new reactors per year, between now and 2075. This is the construction rate the Oxford report says would be required to combat global warming.

"Whereas the authors dismiss as a pipedream the idea that the world's nations might somehow combine to build one reactor a week," Ritch said, "the future expansion of nuclear power will probably be even more rapid." Ritch labelled the Oxford report as "a grab bag of fatuities that blends ignorance and ideology in equal measure." His remarks were reported in the World Nuclear News.

What 'Growing Economy'? June Auto Sales Fall Worldwide

July 3 (EIRNS)—Against forecasts and "expectations" of an auto sales rise in June, U.S. sales appear to have fallen 3% from a year ago's low levels, and auto sales fell more steeply in France, Germany, and Japan.

In the United States, 16 automakers, alphabetically from Audi to Volkswagen, reported that they sold 1,428,163 cars and light trucks in June, down 5% from the previous month, and down 2.95% from their June 2006 total of 1,469,030 units. Up to the last few days, auto analysts had been forecasting an increase in June sales, because the automakers have returned to substantial dealer incentives and discounts to move their inventories. But it could not revive the exhausted U.S. household debt bubble. GM and Ford had substantial declines; Chrysler, which was expected to report an increase, said its sales fell 1.8% instead. Japanese automakers increased in their U.S. sales, but Korean automakers' sales fell.

In France, June auto sales were announced as 3.2% down from one year ago. In Germany, the drop was 7.0%, according to the auto industry confederation, which is now forecasting that German sales for the year will wind up 8.6% lower than the level of 2006. And in Japan—despite the Japanese automakers' rising sales in the United States—total sales were down 11% from a year earlier, making June the 14th straight month of falling sales.

Good News from Germany: Locust Funds Begin Pull-Out

July 7 (EIRNS)—The prospect of new legislation regulating activities of hedge funds and private equity funds in Germany, and the flop of speculative profit expectations, especially on the German housing and real estate markets, apparently have led fund managers to the conclusion that "this is not a good country to stay in." That is also the conclusion in an international overview report for the private equity sector, just published in London, and reported in the Frankfurter Allgemeine Zeitung today: Germany is getting a very negative rating, because of "excessive regulation of the labor market, too high wages, and the tax burden on enterprises." For equity funds, conditions on the German market are "outspokenly miserable," the report concludes.

Another problem for funds is that German enterprises are overly "oriented towards the employees, labor unions, clients, and the influence of the state, and never focus on the interests of the shareholders." Cerberus is already pulling out, selling about 30,000 apartments owned by its daughter firm Baubecon; and Goldman Sachs, is announcing the sale of corporate real estate just purchased in early May. The U.S. fund Oaktree also sold apartments, and other funds are said to be following soon.

Watchdog: U.K. Subprime Mortgages in Big Trouble

July 4 (EIRNS)—The U.K. Financial Services Authority (FSA) today warned of "serious wider consequences" if mortgage lenders continue expanding the subprime mortgage market in the U.K. Based on a review of over half the subprime lenders—some 11 firms and 34 brokers—FSA Managing Director for Retail Markets Clive Briault issued a statement saying that, "Poor sales practices in this market may lead to serious wider consequences."

Different estimates put the U.K. subprime sector at 6-8% of the whole mortgage market, and the London Daily Telegraph reports that its overall scope is some 30 billion pounds (US$60 billion). U.K. consumers are burdened with an unpayable 1.3 trillion pounds (US$2.6 trillion) in personal debt, about 80% of that mortgage debt. The cost of servicing debt in Britain is the highest since 1992, and interest rates are expected to go even higher. Already, personal bankruptcies in the U.K. are up 24% over a year ago, Bloomberg reported July 4.

None of the lenders reviewed by the FSA had "adequately covered" all lending considerations in giving out mortgages. Over half the subprime customers had "self-certified" their income, even though the vast majority were salaried workers, and their financial situation could have been checked by the lender. Already, five out of 34 subprime mortgage brokers are being investigated by the FSA enforcement division, and more may follow.

Hong Kong Chief Banker: Hedge Funds Could Take Banks Down

July 5 (EIRNS)—Joseph Yam, Chief Executive of the Hong Kong Monetary Authority (HKMA), warned of a panic in the system coming from exactly the type of crisis unfolding now around Bear Stearns.

Writing today in the "Viewpoint" column on the HKMA website, Yam said that hedge funds threaten "significant systemic risk" which is "most likely to arise from the failure of a systemically important hedge fund that has large exposures to other financial institutions." Yam points to the Amaranth and Bear Stearns crises, noting that such a hedge-fund failure, "and any panic sell-off afterwards, could push up the risk premium, causing a sharp decline in asset prices that might eventually drain the market of liquidity. It might also trigger herding behavior among some less sophisticated hedge funds."

Yam also notes that the "potential systemic risk from hedge funds is further amplified by their unstable capital base, which is likely to shrink quickly in times of stress, either because of redemption by the investors, or the funds' leverage ratio being too high. The latter problem is becoming more acute, because it is difficult to accurately measure the embedded leverage in complex structured products."

30% of Hedge Funds in Illiquid Securities Puff Profits

July 5 (EIRNS)— reported on July 3, that a recent research report by the Paris risk-management firm Riskdata shows that 30% of the hedge funds dealing in illiquid securities "smooth" their returns, i.e., they over-state their profits or under-state their losses. "Illiquid" securities are those not traded quickly and easily (e.g., stocks and bonds). Unlike liquid securities, whose valuations are set via numerous transactions in their market, illiquid securities (e.g., mortgage-backed securities) are usually assigned values by the firms holding those securities. HedgeWorld says this overstating of values is a third reason for the recent collapse of the two Bear Stearns hedge funds, beyond the frequently cited meltdown of the subprime mortgage market and the over-leveraging of the funds.

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