WORLD ECONOMIC NEWS
Global Stocks Markets Sink to Post-Sept. 11 Levels
Both the Dow Jones Industrial Average and the Standard & Poor's 500 Index last week skidded into the biggest slump since the first trading week after Sept. 11. After declining every single day of the week, the Dow plummeted 7.4%, while the S&P 500 dropped 6.8%, and the Nasdaq continued its long-term slide, losing 5.2%. Since March 2000, the total market value of U.S. stocks has crashed from $17 trillion to $10 trillion; that is, $7 trillion in paper valueequivalent to four times the annual GDP of Germanyhas been wiped out. U.S. stock-market losses this year amount to about $2.3 trillionso far.
The Dow Jones Stoxx 50 index of the 50 largest European corporations dropped 8.6% for the week, the biggest weekly decline since the week of Sept. 11. The German DAX index slumped 7.8%. The German Nemax-50 reached a new all-time low, 94% below its March 2000 peak. The French CAC fell to a three-and-one-half-year low. Britain's FT-SE 100 Index posted its biggest weekly decline since the global stock-market crash in October 1987. Unlike the crash of October 1987, these losses do not follow a period of stock-market rallies, but come on top of an almost uninterrupted 28-month market crash.
Indicating the mood in the markets, is the public admission by the London Stock Exchange on July 12, that it will sell all the stocks held by its pension scheme. Chairman Don Cruickshank expressed that he was making this decision "rather sadly," but that he doesn't expect "any immediate improvement in market conditions."
French National Interests Move To Control Vivendi
In the last couple of weeks, in an effort to save whatever is real in the Vivendi Universal empire, French President Jacques Chirac and his political allies have moved in to try to take control of the company and to save what is strategic.
Jean-Marie Messier was forced to resign as company president by three men who are very close to Chirac: Claude Bebear, head of the world's number two insurance company, who will head a financial committee; Henri Lachman, named to head a strategic committee; and Jacques Frydman, a very old friend of Chirac who was already part of the Vivendi administration council.
Jean-René Fourtou, a close collaborator of these men, replaced Messier at the head of Vivendi.
The banks that had previously refused to refinance Vivendi's debt have now announced their readiness to step in: George Pebereau, head of BNP-Paribas, declared that "there is no insolvency crisis at Vivendi," and that the creditor banks will be extending a 1-billion-euro credit line to ensure the cash flow of the company.
In the meantime, stock-exchange agents have mounted an important propaganda effort promote the stock, which is rising at this point. Nothing is solved, however, because the company has a whopping 34-billion-euro net debt. In fact, the only solution for Vivendi will be selling off all its major assets, and a refinancing, which will be paid for, in the last resort, by the taxpayer. French and American counterparts will try to come up with a deal in the weeks ahead.
Le Figaro Economy reported July 3 that Messier managed to escape a blackmail threat emanating from the French branch of the Bronfman familynot, however, without the DST (French counterespionage) becoming involved.
In Le Point July 5, Messier, responding to a question on who was out to get him, answered, "I think of those ... [who] use the methods of the bootleggers. Charles Bronfman, if one has to name him."
BIS Warns Against Debt, New Stock Market Declines
In its new annual report, issued July 8, the Bank for International Settlements (BIS) notes that "Household and corporate debt levels in a number of English-speaking countries seem very high when measured against disposable income and cashflow, respectively." Surging mortgage borrowing and, in particular, remortgaging, have contributed to the surge in private household debt. At the moment, says the BIS, debt servicing costs "still seem manageable" as interest rates are at, or close to, historic lows. However, the ability to maintain debt service would deteriorate "were interest rates to rise back to more usual levels." Therefore, "in conteplating when and how to raise interest rates," central bankers have to take into account "the possible fragility of household balance sheets."
Furthermore, the BIS emphasizes, despite the stock-market crashes of the recent two years, stock prices are still "exceptionally high," if compared to corporate profits (which have fallen even faster). Therefore, there is much room for additional heavy stock-market losses.
Merrill Lynch Warns of '89-Style Crash in UK Housing Bubble
Home prices in Great Britain, which saw a highly speculative increase of 15% last year, will not climb further, but instead see a correction, next year at the latest, according to the Evening Standard and other press July 13.
"It could be 10%, and it could be a lot worse than that. But it is impossible to say how much worse," Mark Hake of Merrill Lynch is quoted as warning. A 1989-style crash could be looming, or something even worse.
A crash in the housing market would cause an instant disaster in the mortgage sector, as the record borrowings by homeowners in the recent period, have been based on the illusion that ever-rising home prices will allow them to easily pay off the debt.
Ibero-American Economists 'in Shock' Over Speed of Disintegration
Economists are "questioning all the regional policies of the 1990s," according to the Argentine daily Clarin July 8, in an article by Sebastian Campanario, reviewing anecdotes from Ibero-America that reflect the shock produced in the region by the speed of their fall from "the path to glory," to disintegration.
"It took Brazil only nine weeks for its country-risk to rise 1,000 basis points. The same process in Argentina took 11 months. There are already investment banks which believe that Brazil today is equivalent to Argentina of October 2001," Clarin wrote. (Argentina's financial system imploded in December 2001.) Financial analysts tell Clarin that for Brazil to shake off the specter of default, the government would have to raise its primary budget surplus (revenues over expenditures, before debt service) from the current 3.75% of GNP (already killing the economy) to 6%, which no one is insane enough even to try to do in an election year.
Among the "emerging markets," Ibero-America has become the butt of jokes. Among them: There were nothing but long faces at a London investment house, after England lost to Brazil in the World Cup quarter finalsexcept for one cubicle, from which cheers were erupting. The head of the firm turned to an aide: "That has to be our Latin American division. I thought we'd gotten rid of all of them last week. Find out who's left, and fire them immediately!"
The region suffered three serious crises in less than a decade: Per-capita income rose only 7% between 1980 and 2000, after rising 75% in the 20 years before. "Why did the hypotheses of the 1990s fail? Does the uncertainty of the last weeks mark the beginning of another long era of inestability?" Clarin asks.
WorldCom Contagion: Embratel To Be Re-Nationalized?
Brazil's Tribuna da Imprensa reports July 5 that, although there's no public talk, the Brazilian government is extremely worried about Embratel, the country's largest long-distance phone carrier, in which bankrupt WorldCom has held a controlling position since Brazil's national telecommunications company was privatized in 1997. No action will be taken until WorldCom's situation is more defined, but the government is "even" considering using the Telecommunications Law to "intervene" in the company. The collapse of Enron did not cause many problems with its Brazilian subsidiary, Elektro, which provides the power for São Paulo, because Elektro was in fairly good financial shape. That's not the case with Embratel, which has a "monstrous" debt of its own, and requires billions of dollars in various kinds of investment over the next years, if it wants to continue in the market.
Malaysia Central Bank Head Hits Orchestrated Attack on Currencies
Bank Negara Malaysia Governor Tan Sri Dr. Zeti Akhtar Aziz disclosed in an interview with the July 6 Asian Banker, the scale of the 1997 attack on Asian economies, which led to Malaysia's decision to impose selective currency controls on Sept. 1, 1998, in defense of the Malaysian ringgit.
Dr. Zeti said she genuinely believed that after the collapse of the Thai baht in early July 1997, followed by the attack on the Filipino peso, the ringgit was next in line. She said Bank Negara was told by investment banks at that time, that there were orders to sell the Malaysian currency at different exchange rates by individual clients.
"For example," Dr. Zeti recalled, "an individual client had orders for U.S.$200 million [U.S.$1=RM3.8] at one level; U.S.$300 million at one levelthese were very large amounts compared to the average or normal transactions that take place during the stable periods. Normal transactions usually range from U.S.$1 million to U.S.$20 million each. At that point, I advised the government that we did not have the resources to face such an attack," she said. She said the authorities had all along wanted to zero in on the particular vulnerability of the offshore market in ringgit as a source of financing for speculative activity.
"There was no question in my mind that we should put in place some form of control that was, in fact, already in place in Singapore; that is, the restriction on lending of the domestic currency to non-residents. Singapore and Taiwan had it. The fact that we didn't have it led to the development of an offshore ringgit market, which was being used to finance speculative activity. This made us highly vulnerable," the Governor explained.
U.S. Accounting Firms Involved in 1997 Asia Crash
Professor Wahyudi Prakarsa, of the prestigious University of Indonesia, criticized a statement issued by the chairman of Indonesia's Capital Market Supervisory Agency, in which the chairman expressed doubt that Indonesia could fall prey to the billion-dollar scams reported of late in the United States.
On the contrary, Prof. Prakarsa points out in the Jakarta Post July 11, such scams, involving some of the same U.S. accounting firms, were very much a part of the looting of Indonesia and its neighbors in 1997 and thereafter. In particular, he pointed to a current case involving 10 public accounting firms operating in Indonesia. The 10 firms had audited 37 banks before the 1997 financial crisis, and the audit results revealed that their financial performance was sound. However, as the hot-money financial bubble burst, with help from international speculator George Soros and company, the banks collapsed, and currencies, especially the rupiah, went into a death spiral. Government investigation subsequently showed that the 10 firms, including local representatives of Deloitte Touche, Nexia International, Arthur Andersen, and Grant Thornton, had been involved in accounting scams.
Chinese Press Increasingly Reflects Serious Financial Concerns
The People's Bank of China has instituted an anti-money-laundering system, reflecting serious financial concerns on the part of the government. China, however, needs a "full range of coordinated" action to "combat money-laundering," the People's Daily said July 9, especially at a time when "money-laundering is rife across the world," the article reported. The Daily article is one of many recent reports in the Chinese press commenting on financial worries.
Money-laundering in China involves at least 200 billion yuan ($25 billion) a year, about 2% of GDP. During 2000, the eqivalent of $30 billion in funds "evaporated," despite China's $24-billion-trade surplus, and nearly $40 billion in foreign investment. Serious corruption among financial and political officials is responsible for the problem, the Daily said.
The day before, an article focussed on flows of funds from China into the United States, much of it illegal capital flight.
Japan Times Warns of 'Trans-Pacific Economic Crisis'
A commentary in the July 8 Japan Times approaches the reality of the world financial crisis which has been appearing in the establishment European press recently. Of special note is the open airing of the United States' vulnerablity to a collapse of foreign investment.
The "recovery path" line about the U.S. and Japanese economies, the editorial states, "is now clouded increasingly by falling U.S. stock prices. What's worrying is an apparent shift in investor behavior, with dire implications for international capital flows.
"The rout on Wall Street ... highlights the potential vulnerability of an economy hooked on a stock-market boom. Japan's problem is a glut of money created by years of rock-bottom interest rates. In the absence of real demand, that surplus money appears to be going nowhere....
"America's Achilles' heel is well known: its gargantuan appetite for consumption.... America is living on debt. Now, however, the fund influx is dwindling.... Foreign investors are fleeing the U.S. market.
"A crisis of confidence is all too apparent.... Under scrutiny is the very strategy of American corporations' lifting their earnings on the back of rising stocks.... American consumers, not consummate savers like Japanese, are feeling the effects of the stock market jitters.... Now the nightmare of 'twin deficits'trade and budget deficitsis back.
"America's grim economic prospects are casting a shadow over Japan's economic future as well.... But policymakers on both sides of the Pacific appear to lack a sense of crisis. Apparently they believe that the decline of confidence in the stock market and its impact on the real economy are temporary and limited....
"If there is a lesson U.S. officials can learn from Tokyo, it is that failure to take drastic action to clean up the post-bubble mess will spell more trouble."
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