In this issue:

Lula Will Propose Argentine and Brazil Create Common Currency for Trade

Bank of England Alarmed by 'Explosion' in Home Prices, Consumer Debt

German Bankruptcies Head for All-Time High This Year

Bank of Japan Chief Warns of 'Unprecedented' Bank Stock Crash

Standard Chartered Advises Asian Central Banks: Get Out of Dollar

India Revives Water Project To Link Himalayan and Peninsula Rivers

Transrapid Shanghai-Beijing Maglev Ahead of Schedule


From Volume 1, Issue Number 38 of Electronic Intelligence Weekly, Published November 25, 2002

WORLD ECONOMIC NEWS

Lula Will Propose Argentine and Brazil Create Common Currency for Trade

Brazilian President-elect Lula da Silva will propose that Argentina and Brazil create a common currency for trade when he visits Argentina on Dec. 2, Senator-elect Aloizio Mercadante told reporters in Brasilia on Nov. 20. Stressing that "Argentina is really a strategic partner," the new government proposes that the two countries increase their trade and cheapen the cost of food for both, by establishing a "green currency," Mercadante said. The idea, as he elaborated it, would be to use the common currency as a unit of accounting, with any trade imbalances between the two nations settled periodically in dollars by the central banks.

Why call it the "green" currency? "We call it 'green' because at the beginning it would be used exclusively for agricultural trade," Mercadante explained, but it could become the embryo of a future common currency. "The idea is that trade be carried out without the necessity of using foreign currencies. Put another way, a single market would be formed between Brazil and Argentina where the producers of each country would operate as locals. The Argentine producer receives pesos, in their 'green money' equivalent, for their sales in Brazil. In the same way, the Brazilian receives reals for his sales in Argentina. Under this plan, the central banks of each country pay the exporters in local currency."

Both countries face financing problems for anything in dollars, because of the cutbacks in their credit lines, but this way, agricultural trade would be carried out without the necessity of using any foreign exchange. This could not only increase trade, but cheapen the cost of food, while increasing its supply, he argued.

Mercadante will accompany the President-elect on his trip to Argentina.

Bank of England Alarmed by 'Explosion' in Home Prices, Consumer Debt

Last week, Bank of England (BOE) deputy governor Mervyn King rang alarm bells about the "enormous uncertainty" surrounding the British housing market. The dramatic rise in home prices "exceeded" the Bank's expectations and, in combination with global developments, poses "significant risks" for both growth and inflation in Britain, King stated.

According to the BOE, household debt has grown to a record 801 billion pounds, or 111% of disposable income. In September, household debt was up 13.1% compared to one year ago, the highest year-on-year growth recorded since the BOE began collecting these figures nine years ago. The BOE warned that "the larger the build-up of household debt, the greater the risk of a sharp correction."

Britain's Institute for Fiscal Studies (IFS) put out a new study emphasizing that the burden of consumer debt is spread highly unevenly across the population, and that a slight increase in interest rates or unemployment would lead to mass insolvencies by British households. As in the United States, the rise in household debt is being accelerated by a giant housing bubble. According to most recent figures, average house prices in Britain are now rising at a rate of 25% to 30% per year.

German Bankruptcies Head for All-Time High This Year

According to the federal association of German debt collection firms, BDIU, the number of corporate bankruptcies in Germany this year will go up to 41,500, almost one-third higher than last year, which already marked a postwar record. Bankruptcies for 2002 have generated 50 billion euros (about $50 billion) in bad debt, and have directly caused the elimination of 650,000 jobs in the German economy. For the next year, the BDIU expects "another sharp increase" in German corporate bankruptcies.

At the same time, states the BDIU, there are now more than 2 million private households in Germany which are over-indebted. The average debt of any German households has reached 40,000 euros. Due to the economic downturn and rising unemployment, the BDIU expects a sharp rise in private insolvencies as well.

Bank of Japan Chief Warns of 'Unprecedented' Bank Stock Crash

Bank of Japan Governor Masaru Hayami said Nov. 21 that an "unprecedented" plunge in bank shares has the BOJ on alert to provide cash to the banks. "Stock prices, especially those of banks, have fallen in an unprecedented manner," he told a news conference when asked about a BOJ policy decision to move to the upper range of credit targets. "The fall in bank shares is extremely troubling," he said. "I think it's the first time in the postwar period that we've seen such a situation. I don't recall any such rapid falls in bank share prices since I entered the BOJ in 1947—that's been 55 years." The BOJ tweaked monetary policy Nov. 19, announcing it would keep system funds at the top of its $122-$163 billion range, rather than in the middle.

Shares of the $700-billion UFJ Bank have fallen 52% this month alone, and 72% since Sept. 30, amid a barrage of media reports that it will be nationalized soon, plunging 10% this week. Moody's warned it may soon downgrade UFJ stock to "Ba1"—junk - from "Baa2." Shares of the world's largest bank, the $1.3-trillion Mizuho Holdings, have fallen 46% this month, and 51% since Sept. 30. Similar figures apply to Sumitomo Mitsui Bank and Mitsubishi Tokyo Bank. The Tokyo Stock Exchange's banking index has fallen 18.7%. Among the Big Four banking groups alone, $500-$600 billion of their loans are estimated to be non-paying at this point.

With UFJ's total market capitalization now shrunken to $4 billion, and Mizuho's to about $8 billion, these banks "are now a buyout targets for cash-rich financial institutions in Europe and the U.S.," Nikkei reported with some alarm Nov. 19. Only the government threat of nationalization is preventing it at this point; there are no other Japanese buyers around.

Japanese industrial companies, which under the traditional "cross-share" system still hold a lot of stock in their main lender bank partners, are desperate now to unload bank stocks before they have to declare major financial losses. According to an estimate from Daiwa Institute of Research, nonfinancial companies had unrealized portfolio losses of roughly $17 billion in bank stock holdings over the last six months.

In fact, without announcing the full range of LaRouche measures and nationalizing the banks, there is almost nothing Japan can do to stop the "market value" of these banks from falling to zero.

Standard Chartered Advises Asian Central Banks: Get Out of Dollar

Gerard Lyons, chief economist and head of global research for Standard Chartered Bank, at a conference in Thailand advised the Bank of Thailand (BOT) and other Asian central banks to begin diversifying their foreign-exchange reserves out of U.S. dollars in anticipation of a fall in the value of the greenback, Business Day reported Nov. 15. "The mood within the U.S. has become more pessimistic," he said, "and it is not clear whether the country will produce below trend growth or go into a deep recession. Even if the uncertainty over Iraq and the Middle East is resolved, the U.S. has to do extensive economic housecleaning. The consensus is that the dollar is overvalued, maybe by as much as 25% on a trade-weighted basis."

Lyons pointed out that Asian central banks' purchases of dollars, to add to their reserves, have been a factor in helping to keep the dollar strong. About 80% of the world's foreign-exchange reserves are now held in dollars—and in some Asian countries it is as high as 95%—much higher than the 62% portion in dollars a few years ago.

India Revives Water Project To Link Himalayan and Peninsula Rivers

A great water-infrastructure plan for India, to "link the Himalayan and Peninsular Rivers," is now being revived as an answer to drought, according to Indian press reports Nov. 22. The monsoon failed in many areas of the Subcontinent this year, causing the worst drought in 15 years.

On Nov. 20 in New Delhi, Indian Prime Minister Atal Behari Vajpayee said that the national government is proposing to take up the plan to link the rivers on a "war footing" as a long-term, permanent solution to the recurring problem of drought. Vajpayee said that the government saw the plan as a permanent solution to India's water crises, which could "change the destiny of the country."

The plan, first proposed in the 1950s, by Dr. K.L. Rao, Irrigation Minister in Jawaharlal Nehru's cabinet, was then worked out in much more detail by the engineering company Dastur in the 1970s.

The plan would link by canals and reservoirs the huge Himalayan rivers, including the Ganges, Bramaphutra, and Meghna river basins, which frequently flood, to the smaller rivers of the Indian peninsula, most of which are rain-dependent. A key area to benefit from this plan would be India's dry northwest.

Vajpayee told the Parliament that resources and political will would not be lacking to solve the drought problem. Congress Party leader Sonia Gandhi responded that "we welcome the government's proposal for linking of river waters."

Vajpayee said he would soon convene an all-party meeting to seek consensus on the project, which could take two to three decades to build.

Transrapid Shanghai-Beijing Maglev Ahead of Schedule

On Nov. 21, the new head of the Transportation Systems division at Siemens, Hans Schabert, announced at a press conference in Berlin, that the Shanghai Transrapid maglev project is fully on schedule, and that there is a good possibility for further Transrapid projects; in particular, the very important Shanghai-Beijing route.

Last week, he said, the Transrapid was tested successfully on the 32-km route between Shanghai and the Pudong airport, reaching a speed of 405 km per hour. On Dec. 1, one month ahead of schedule, the Transrapid will reach the supposed maximum travel speed of 430 km per hour. And there can be no doubt, Schabert said, that German Chancellor Gerhard Schroeder and Chinese Prime Minister Zhu Rongji will be able to officially open the Shanghai Transrapid at a celebration at the end of December, as scheduled.

Furthermore, he said, negotiations are well under way for building a 303-km Transrapid route between Shanghai and Nanjing, part of the Shanghai-Beijing corridor, and along the 242-km stretch from Shanghai to Hangzhou in the southwest. The Chinese, he said, are making tough demands, such as lower prices and higher local content (local workforce and supplies). But these demands can be met, as the new routes are much longer than the present one.

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