From Volume 6, Issue 37 of EIR Online, Published Sept. 11, 2007

World Economic News

'They're All Bankrupt!'

Sept. 8 (EIRNS)—At the International Ambrosetti Workshop in Cernobbio, Italy, bankers and economists discussed how much the international financial system has already disintegrated, and which large bank will announce bankruptcy first, the Italian daily Corriere della Sera reported today.

According to Kenneth Rogoff, former chief economist at the IMF, at least $1.3 trillion has evaporated in recent weeks. At least one large bank will go bust, Rogoff says, adding that Moody's could go bankrupt too: "They make 45% of their profits with ratings on high-risk assets." But nobody knows where the largest holes are. "Not even the banks know that," says Alessandro Mitrovich of the Royal Bank of Scotland. "Even if we sat around a table, we would not get a picture of the situation."

Spanish Real Estate Debt Bubble Is Bursting

Paris, Sept. 6 (EIRNS)—The worrisome state of the real estate bubble is the main subject of discussion in Spain today, according to France's Le Figaro. If Spain has currently a high economic growth rate of 4%, real estate debt amounts to $540 billion, the incredible equivalent of 70% of Spain's GDP!

For months, the Bank of Spain has exposed the fact that household debt increased an additional 18.5% this year, while the share of overall real estate debt increased even faster, at 20.2%. Enrique Garcia, the spokesman of the Spanish Consumers and Users Union (OCU), said, "One Spanish household out of four has to pay real estate debt, some of it over a 40-year period.... However, 98% of these loans have been contracted at an adjustable rate, which is quite worrisome." Indebted families spend 44% of their income to pay off their real estate debt. In two years, monthly payments went up at an average of 23%. Result: 80,000 households cannot keep up with their debt.

The Spanish press is full of stories about middle-class couples returning to live at their parents' home and trying to increase their income by renting out the apartments they had purchased.

Drastic Drop in German Manufacturing and Home Construction

Sept. 6 (EIRNS)—German manufacturing orders dropped the most in at least 16 years in July, led by a decline in demand for goods such as ships, trains, and airplanes. Orders, adjusted for seasonal swings and inflation, fell 7.1% from June, when they gained 5.1%, the Economy and Technology Ministry in Berlin said in a press release today.

That's the biggest drop since September 1991, assessed. Economists expected a decline of 2.5%, according to the median of 37 estimates in a Bloomberg News survey. One may add to this picture of a shrinking real economy, figures published by the federal statistical office of Germany, about a drop of new home-building licenses by 38%, during the first six months of this year, as compared to the same period a year ago. Permits for private homes (housing one or more families) even dropped by 47-50%. An important factor here is the scrapping of state support for housing starts, since Jan. 1, 2007, along with the coinciding drop in family incomes, making new housing projects unaffordable.

Derivatives Drive Losses on Canadian Junk Paper to 50%

Sept. 5 (EIRNS)—Despite the so-called bailout of Canada's Asset Backed Commercial Paper market, investors could still lose 50% of their investment in the $35 billion market, according to

The bailout scheme, which converts short-term paper into long-term, failed to take into account the derivative trades that stood behind them.

According to one analyst, up to two-thirds of the $35 billion in investments is backed by derivatives, such as credit default swaps, which are leveraged up to ten times, and leveraged again. "There is an imprudent amount of leverage," said the analyst, with understatement.

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