From Volume 38, Issue 8 of EIR Online, Published Feb. 25, 2011

Global Economic News

Moody's Fears Danish Burning of Bank Bondholders

Feb. 17 (EIRNS)—With the fear that the era of burning bankholders is already upon them, the financial oligarchy's attack dogs, the rating agencies, have downgraded Danish banks, because the Danish government burned the creditors for the first time by allowing Amagerbanken to go into bankruptcy last week without paying off the creditors.

Citing the Feb. 6-7 bankruptcy of Amagerbanken, Moody's said that Copenhagen "is now far less willing to continue to support bank creditors at the expense of taxpayers" than just a few months ago. "Last week's bankruptcy of Amagerbanken demonstrated the willingness and ability of the government to allow depositors and senior creditors of Danish banks to take losses in bankruptcy, where bank operations are continued as a going concern," Moody's analyst Oscar Heemskerk said.

Vietnam Gearing Up for First Four Nuclear Reactors

Feb. 17 (EIRNS)—Vietnam has quietly inked deals with Russia and Japan to build 4 GW of nuclear power generating capacity. The first power station, composed of twin Russian 1000-MW VVER reactors, will enter revenue service in 2020. The second, composed of two Japanese-built reactors, will follow a few years later.

The Russian-built nuclear power station, Ninh Thuan-1, will be a turnkey operation with financing through Atomstroyexport. Rosatom, Atomstroyexport's parent firm, has committed to supply the fuel and retrograde the used fuel back to Russia. The two reactors are estimated to cost $11 billion, with most of the money coming from Rosatom. The Vietnam Electricity organization (EVN) will be the operator of the reactors. Like Russia, Japan has committed to providing export credits for up to 85% of the cost of construction of two reactors. A consortium of Japanese firms will build the two reactors for about $11 billion.

At the same time, Vietnam's nuclear power program also faces some stiff challenges, including the need for trained personnel and an effective, fully funded nuclear regulatory infrastructure. For now, the country is importing nuclear engineering expertise, along with technology, while sending its citizens to Japan and Russia for technical training.

No U.S. firms are in line for deals to build nuclear energy projects in Vietnam. Westinghouse and G.E. Hitachi have shown an interest in pursuing contracts for future reactors. Until U.S. diplomats sort out the nonproliferation issues in a 1-2-3 agreement, however, the companies' hands are tied.

Swiss Banker Warns Switzerland Could Be 'Next Ireland'

Feb. 17—The governor of the Swiss National Bank, Philipp Hildebrand, warned in an interview with the German weekly Die Zeit, that his country urgently needs to learn a lesson from the collapse of Ireland and address the problem of financial institutions that allegedly are "too big to fail."

"Ireland indeed gives us a dramatic example of what can happen. Ireland is an economy that in many respects is comparable with Switzerland, from size, structure and fiscal point of departure and today is in a disastrous state," he said. "This country was thrown back 10 to 20 years, ultimately because it didn't have a handle on the too-big-to-fail problem," he warned. As for Switzerland, Hildebrand noted that the balance sheets of the two biggest banks, UBS and Crédit Suisse, alone dwarfed the GDP of the entire country.

The banks instantly voiced their objections to Hildebrand's remarks: Peter Gruebel, CEO of UBS, said the envisaged regulations were "too tough," and would create "disadvantages for the Swiss banks" on the international scene. A few days ago, UBS and Crédit Suisse even hysterically threatened to move their headquarters to London, should the government and parliament of Switzerland pass the regulations.

The SNB governor responded in the interview by warning against any attempts to soften the proposals: "I will seriously weigh in, in the discussion and, if needed, explain again and again what it's about," he said. "It's about the essence of Switzerland's economy." The regulations envisaged are the "minimum" of what Switzerland should have, he added.

Hildebrand also warned that there was "too much liquidity in the system," which had to be reduced considerably before it turned into inflation. "The situation we are in can indeed become dangerous," he said, referencing the SNB's monetary policy assessment in December, which said that the "current expansionary monetary policy" can't be maintained over the next three years "without jeopardizing long-term price stability."

German Municipalities Strike Back Against Banks

Feb. 16 (EIRNS)—There are hundreds of cases in which municipalities and firms are being faced with ruin because of fraudulent swap deals they were tricked into by banks. But so far, only a tiny fraction of these fraud victims are going to court against the banks.

A few law firms are bundling such cases and taking them to court, on well-founded grounds that these swap deals were nothing but sheer gambling under the cover of "swaps." That already is a fraud, and against the law in Germany. The "swaps" then claim to earn high yields for the clients from the tiny differences—arbitrage—between trading in Frankfurt and London, as well as from the fact that the Frankfurt exchange closes one hour earlier than London's. But the market value of the deals is mostly, or always negative, which the banks know, leaving the client always on the losing end, and the miniscule percentage swap differences easily translates into a loss of several hundred thousand euros for the client.

This is what happened to the municipality of Pforzheim, which was drawn by Deutsche Bank and JP Morgan into loss-making swap deals amounting to a loss of EU77.5 million by Autumn 2009. In order get the money to pay for its losses, which were gains for the banks, Pforzheim, which had no option of borrowing new money, was forced to lease or sell of municipal property, in some cases even doing so on the threshold of illegality, itself.

Pforzheim Mayor Gerd Hager, who came in at that time, decided to cancel the deals on well-founded grounds that they are speculative and gambling affairs, which municipalities are prohibited by law from engaging in; therefore they must be cancelled, and the banks must reimburse Pforzheim. The municipality fought this through against Deutsche Bank, which has to pay the city back EU8 million, but JP Morgan insists that the city pay, and therefore Pforzheim is taking JP Morgan to court, optimistic that it can win this case, too, and make JP Morgan pay up.

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