From Volume 6, Issue 36 of EIR Online, Published Sept. 4, 2007

World Economic News

Another Blow to German Industry—IKB Now Rated 'Junk'

Sept. 1 (EIRNS)—Fitch Ratings downgraded the so-called mezzanine notes of a Structured Investment Vehicle (SIV), owned by of the German IKB (Industrial Credit Bank), to junk, citing the SIV's inability to access the commercial paper market, Reuters reported Aug. 31. The rating on the SIV Rhineland's mezzanine capital notes was cut nine notches to "B," five notches below investment grade, from "A," the sixth-highest investment grade ranking.

The credit crunch faced by IKB after its July 30 near-default, will become worse since the Fitch downgrading and reduce the bank's ability to continue making loans to German small and medium-sized firms, which have relied on IKB as a crucial source of credit. IKB holds 30% of that market. The pattern of such Mittelstand firms being particularly victimized by the onrushing banking crisis, will be taken up also in Germany's leading business weekly, Wirtschaftswoche, dated Sept. 3.

The rating action also reflects "the relatively limited availability of committed liquidity to cover maturing commercial paper, the use of which would put the SIV at risk of breaching a liquidity test," Fitch said in a statement. Though Rhinebridge, a sub-fund of IKB's Rhineland, is in discussions to secure alternative sources of funding, it has not yet secured any, and may be forced to sell assets, or draw upon its committed liquidity, Fitch said.

The role of the rating agencies is increasingly being questioned in Germany, and elsewhere in Europe, as they were the ones to originally give AAA ratings to the very commercial paper which turns out now to be junk.

Hyundai Workers in South Korea Vote To Strike

Sept. 1 (EIRNS)—South Korean Hyundai auto workers have vowed to strike on Sept. 5, if negotiations for better pay are not resolved favorably. Hyundai has been hampered in its efforts to sell record numbers of vehicles this year, by partial walkouts by union members, and in the last year, has lost billions in sales due to labor disputes.

Workers want an 8.9% pay raise and 30% profit-sharing, according to Bloomberg news service on Sept. 1. Workers also want the retirement age raised from 58 to 60. Hyundai is offering much smaller concessions, but talks will continue on Sept. 3. Almost 69% of the workers voted in favor of a strike.

Italy: Home Repossessions Skyrocket in Global Crisis

Sept. 1 (EIRNS)—According to consumer groups, 450,000 Italian families are having troubles with their mortgage rates, due to the increased costs of mortgages bought at a variable interest rate. The magazine L'Espresso found out that in Milan, repossessions are already 1,591 in August, as compared to 1,883 for the whole of 2006. Facing the social crisis, the government is proposing a 10-million-euro fund, to help families pay penalty and notary costs for a 24-month delay of mortgage rate payments to their bank.

Bank of England Injects Massive Liquidity into Barclays

Aug. 31 (EIRNS)—The Bank of England was forced to pump an emergency 1.6 billion pounds ($3.2 billion) into a single bank Aug. 30. When it was then revealed that that bank was Barclays, which had already borrowed from the Bank of England's emergency window earlier this month, Barclays managers put out the unbelievable story that they don't have any financial difficulties, but only borrowed such a huge amount of money at a "penalty" short-term interest rate of 6.75%, to handle a "technical breakdown in the system used to clear and settle money-market transactions," on Aug. 29.

Barclays announced the next day that it had just injected $1.6 billion into the Cairn Capital hedge fund which it had helped set up, an amount which was half the amount borrowed from the BoE. Barclay's bailout kept the fund from launching a "fire sale" of its assets. Cairn is one of four exotic financing funds, called SIV-Lites, created by Barclays, which until this month sold short-term commercial paper backed by worthless mortgages and car loans. Two of the four have already collapsed, and are selling their assets at a loss, and a third is about to follow suit. The Bank of England helped Barclays "save" one.

Germany State Finance Minister Resigns Over Bank Crisis

Aug. 31 (EIRNS)—According to, Horst Metz, the finance minister of the German state of Saxony, announced his resignation on Aug. 31, effective Sept. 30, as a consequence of the crisis at Sachsen Landesbank. Metz was also the chairman of the board of directors of the SachsenLB, and continued to defend the emergency sale of the bank the previous weekend without the agreement of the state parliament as required by the state constitution. The chairmen of the parliamentary groups had accepted a two-day suspension of the constitution as urged by the state governor, Georg Milbradt.

On Aug. 31, it was also announced that the CEO of SachsenLB, Herbert Suess, resigned from his post, effective Sept. 15, to be replaced by Joachim Hoof. In addition, management board members Yvette Bellavite-Hoevermann and Werner Eckert were removed from the board by the company, which did not give a reason for the move, according to Forbes.

Swiss Analysts See Collapse of Big Hedge Fund Coming

Aug. 30 (EIRNS)—Warnings of an imminent collapse of another big hedge fund are widespread:

* The leading Swiss news daily, Neue Zuercher Zeitung, today reports Moody's warning that another hedge fund collapse of LTCM size cannot be ruled out, adding an assessment by the Geneva firm Dominice & Co., that the collapse of a big hedge fund is even very likely, sometime during September-October.

* A gloomy outlook for the coming weeks was issued by Standard & Poors, with a warning that profits at the big investment banks on Wall Street and in the City of London will collapse by 70% in the second half of this year, if the credit crunch continues. Revenues would collapse by 47%, following the same pattern which followed the collapse of LTCM and the sovereign debt default by Russia, according to a report in the London Times, today.

* Two major conduit funds are on the verge of collapse: The West German Landesbank may soon shut down its Brightwater fund, with admitted exposure of 1.2 billion euros on the U.S. mortgage market; the German IKB is expected to shut down its Rhinebridge fund in the U.S.A., with an exposure of $2.4 billion.

Food Shocks Continue: Wheat Futures Reach Record Levels

Sept. 1 (EIRNS)—Extremely tight wheat supplies, and an increase in wheat import activities by South Korea, India, and other countries, pushed December wheat futures at the Chicago Board of Trade to record levels for a short time on Aug. 31, rising to $8.07 and 3/4 cents before settling down to $7.84 and 3/4. That was a 30% rise over last month's prices—the biggest monthly gain since 1973.

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