In this issue:

Swiss, German Reinsurance Firms Reeling from Stock Losses

Brazil Heads Toward Argentina-Style Blowout; Contractors Protest Infrastructure Cuts

Uruguay Authorities Extend Bank Suspensions

French Press Admit: The 'Recession' Is On

Moody's: 'Reform' Could Lead to Financial Catastrophe in Japan

Nigeria Cuts Service on Foreign Debt; Funds Needed for General Welfare


From the Vol.1, no.27 issue of Electronic Intelligence Weekly

World Economic News

Swiss, German Reinsurance Firms Reeling from Stock Losses

The implosion of stock values over the past two and one-half years has had a mammoth impact on insurance firms worldwide, much of whose reserves were invested in stocks. The latest example is the announcement on Aug. 29 by Swiss Reinsurance, the world's second-largest reinsurer, that profits for the first half of 2002 had plunged 91% compared to 12 months before. Swiss Re explained that the dramatic decline in profits was not caused by Sept. 11, whose costs were already reported in last year's figures. Natural disasters, including the recent flooding in Central and Eastern Europe, also had a limited effect.

In fact, by far the biggest factor for the profit erosion, Swiss Re admitted, was the worldwide stock-market crash. Swiss Re, like other insurance firms, especially in Switzerland, decided during the stock-market boom of the late 1990s to lower the share of bonds and increase the share of stocks in its reserves. Swiss Re chief executive officer Walter Kielholz told a Zurich press conference that the firm may have to book additional write-offs "if stock prices don't improve." Swiss Re stocks on Aug. 29 had their biggest plunge since Sept. 11.

A similar case is Credit Suisse Group, which on Aug. 14 had to report a much bigger than expected quarterly loss of $389 million. The firm owns Swiss insurer Winterthur, which earlier this year needed a capital injection of 1.7 billion Swiss francs to stay alive due to "negative equity market conditions."

Meanwhile in Germany, the world's largest reinsurer, Munich Re, on Aug. 29 reported a second-quarter loss of $378 million, after writing down the value of its stock holdings by $1.5 billion.

Swiss media on Sept. 1 reported that Zurich Financial Services, Europe's third-largest insurance firm, has suffered a 50% meltdown of its capital since the beginning of the year, and therefore will be forced to raise $2.5 billion cash by selling new stocks. Zurich Financial Services will publish its quarterly figures on Sept. 5.

On Sept. 2, stock prices of European insurance companies accelerated their declines after Morgan Stanley lowered its recommendation for the global insurance sector due to tumbling stock markets. If markets don't recover, said a Morgan Stanley expert, "a radical restructuring of the [insurance] industry appears inevitable" and this "will not be a happy event for ordinary shareholders."

Brazil Heads Toward Argentina-Style Blowout; Contractors Protest Infrastructure Cuts

The Cardoso government of Brazil, in agreement with the IMF, raised its primary budget-surplus target from 3.75% to 3.88% of GNP, effective this quarter, according to leaks in Brasilia to the various Presidential candidates. Although not yet confirmed, the policy coordinator for government candidate Jose Serra, defended the increase as reflecting the worsening of the country's financial situation, thus lending credibility to the reports. To meet the new target would require that the government cut the equivalent of $2.6 billion out of the budget this month alone, unless it can raise that amount in revenues. Tax revenues, however, are not increasing, but falling, at a rate which is accelerated by every cut in government investment and outlays.

The "primary budget surplus"— revenues minus all expenditures except debt service, with the "surplus" then used to pay that debt service— is equivalent in effect to the zero-budget deficit imposed by the IMF upon Argentina, which accelerated Argentina's fast-track to bankruptcy in 2001.

Brazil's budget has already been cut several times this year, including R$5.3 billion (around US$1.7 billion) last May.

Meanwhile, responding to the accelerating deconstruction of the economy, private contractors have threatened to take the Cardoso government to court for its cuts in infrastructure commitments. The president of the National Association of Highway Projects Companies (Aneor), Jose Pereira Ribeiro, sent a strong message to the Transportation Ministry, protesting the government's effective dismantling of its "Avanca Brasil" infrastructure program, and violation of its contractual agreements with private contractors around that program.

Initially, Avanca Brasil identified 387 priority infrastructure projects for public-private partnerships, with a multi-year commitment to see the projects through to completion. The projects included everything from roads to railways, port improvements, river dredging, telecommunications, and more.

The original 387 projects were then cut back to 64 projects last year, and just now, were cut again to a mere 24! Avanca head Jose Paulo Silveira tried to claim that the government is not abandoning the other projects, but just prioritizing funding for 24 chosen projects. This lie didn't satisfy the private contractors, some of whom have yet to be paid for work done in 2001, while only 37.4% of the work undertaken in 2002 has been paid for.

Aneor may sue the government for breach of contract, Pereira threatened in his letter. He also noted that the cuts will defer even more, any attack on the problem of unemployment in the country.

Uruguay Authorities Extend Bank Suspensions

Uruguay's monetary authorities have extended for 30 days the suspension of two leading banks, in hopes that plans to recapitalize them privately will be successful. Both banks, the Banco de Credito, which is part of the Rev. Sung Myung Moon financial apparatus, and the Banco Comercial, partly owned by JP Morgan, Credit Suisse-First Boston (CFSB), and Dresdner Bank, were scheduled to be officially liquidated on Aug. 5. As a conditionality of the latest agreement with the IMF, the Central Bank has sworn not to bail out any failing banks.

At least 30,000 Banco Comercial clients are linked to the agricultural sector, and its liquidation would mean a catastrophe for this crucial sector of Uruguay's economy. According to La Republica, 80% of the Comercial's clients have actually offered to swap their deposits for stock in the bank, to prevent its liquidation. Others are offering to convert their maturing investments into new fixed-term deposits (certificates of deposit), to help recapitalize it.

In the case of the Banco Comercial, the government stands to lose a great deal, should it be liquidated. According to a report in La Republica Aug. 22, last February the Uruguayan government signed a secret agreement with the bankrupt JP Morgan, CSFB, and Dresdner Bank, in which it promised that the state would guarantee the Comercial's liquidity and "financial solidity." Were the government not to comply, the agreement stipulated that the government would then have to buy all stock in the bank owned by those three foreign entities (in the range of 25% each), giving them the "absolute priority" to recoup any losses, above depositors and even the state. This is a scandalous case of foreign bank looting.

French Press Admit: The 'Recession' Is On

The editorial boards of the economic supplements of Le Monde and Le Figaro seem to be considering, for the first time, the possibility of a recession, and perhaps even of a global depression.

Le Monde de l'Economie carries on its front page Sept. 3 a panicky article by its editor-in-chief, Serge Marti. "The black clouds are accumulating" this autumn, he states, analyzing the stock-market debacle. "Expected growth didn't take place and the double-dip scenario"— a falling stock market following just after the beginning of a new boom cycle— "is actually happening in the U.S.," he says, quoting from Otmar Issing of the European Central Bank. "It is not capitalism itself that is globally condemned, but one of its worst misadventures: an extreme form of finance capital."

The "crisis of confidence is extreme" in the markets, confirms a French expert. The present stock-market crash is not merely a repeat of the "tequila, "vodka," "samba," and other exotic crises, says Marti. This time "it is the heart of the system which is threatened by the risk, taken more and more seriously, of suffocation of the main financial flows towards the first economy of the world, and, by way of consequence, of other economies.... The specter of deflation provoked, not by a drop in demand but directly by a fall of prices of financial assets, is being raised.... A Japanese scenario which had been covered up until now, is resurfacing. Even the Federal Reserve has already thought about the strategy to be adopted were it to find itself in the same situation as in the early 1990s."

A separate article in Le Monde's economic supplement Sept. 4, reports that the European central banks are taking seriously the severe risk of a credit crunch. An article by Laurence Caramel reviews the grim perspectives for the world economy. "The illusions that the stock-exchange crisis would not affect growth are long gone," he states, wondering if we are not going towards a "recession." This will be determined by what happens in the U.S., where everything is dependent on the real-estate bubble. "The latest indicators, however, show that this trust is beginning to wither," says Caramel, indicating that the recent spectacular bankruptcies have led the U.S. investors to withdraw their money from mutual funds. Withdrawals reached $49 billion in August, far surpassing Sept. 11, when only $30 billion was withdrawn.

In terms of investment, there is no upswing in sight, says Caramel, who compares the present situation to that of the early 1990s. At that time, unable to go to the banks for money, companies borrowed directly from the financial markets. Today, their situation is too precarious to do the same, and the banks are reducing their own credits drastically. Between November 2000 and last July, outstanding banking credits and commercial paper went down from $1.432 to $1.116 billion. The danger, at this point, is a credit crunch.

Moody's: 'Reform' Could Lead to Financial Catastrophe in Japan

Moody's Investors Service of Wall Street issued a warning Sept. 4 of a Japanese financial crisis as Nikkei share prices fell to a new 19-year low.

"Moody's believes that market reforms in the absence of financial-sector stabilization, which looks increasingly likely to require public funds injections, could prove catastrophic for the financial system," the statement said.

In April 2002, Japan had introduced a 10-million-yen limit on government guarantees for time deposits. As of April 2003, the unlimited guarantee on all other bank deposits will be cut to 10 million yen. However, there have been recent indications that Tokyo would delay or curtail this "reform."

"These efforts," says Moody's, "reflect the continuing challenges faced by the regulators to push through market reforms and, at the same time, preserve financial-sector stability.... However, the resulting conflicting messages serve to heighten anxiety over the state of the financial system and could exacerbate financial and economic difficulties."

Also, a fund manager at a Japanese firm was quoted in the press Sept. 4 saying that the stock-market "slide raises concerns over a possible financial-system meltdown, and that is reflected in the banks' share prices."

Nigeria Cuts Service on Foreign Debt; Funds Needed for General Welfare

Nigeria has said it can no longer afford to service its $33 billion in foreign debts because of plunging oil revenues and the failure of some of its privatization plans. Consequently, Central Bank governor Joseph Sanussi announced Aug. 27 that he had decided to halt all debt repayments. Sanussi said the shortfall in oil revenues had eaten away at Nigeria's foreign-exchange reserves, which had fallen to $8.29 billion last month, from $10.27 billion in December. Central Bank spokesman Tony Ede is quoted: "We are not saying that we will not pay. We will resume once our balance-of-payments problems are solved."

On Aug. 18, the Nigerian government announced it would be cutting down substantially on its external debt servicing to enable the government to commit more resources to the welfare of Nigerians, according to Dr. Magnus Kpakol, Chief Economic Adviser to the President.

The same day, the chief adviser also spoke on the privatization program, saying that, contrary to widespread belief, the administration was not privatizing for its sake. He said, "The government is not privatizing everything it sees. For example, we are not privatizing the ports as some people have falsely reported. Instead, we are enhancing private activity at the ports to make them more efficient. The government will always own the ports."

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