In this issue:

German Weekly Warns Against 'Mother of All Threats': Dollar Crash

Britons Fear Job Insecurity, Pension Shortfalls

Germany Increases Trade with China, as West Sinks into Depression

Uruguay Admits Default: Asks Creditors To Take Losses in Bond Swap

Japan, German Machine Orders Evaporate

Histadrut Calls Off General Strike as Netanyahu Backs Down—For Now

China To Begin 14 Projects in Western Regions


From Volume 2, Issue Number 15 of Electronic Intelligence Weekly, Published April 14, 2003

World Economic News

German Weekly Warns Against 'Mother of All Threats': Dollar Crash

The "Mother of All Threats" would be a dollar crash, ran a headline in the April 15 issue of the German weekly Der Spiegel. Spiegel notes that the U.S. dollar, "once a symbol of American strength," is rapidly losing value as there is the "growing fear in financial markets of a sudden downturn of the U.S. economy." Bankers, including Goldman Sachs chief economist Jim O'Neill, are quoted as saying that a dollar ratio of 1.40 to the euro is quite possible in the medium term. Mideast oil exporters are debating whether to sell oil against euros, instead of dollars. And central banks, including Russia, China, Taiwan, and Canada, have already announced plans to replace some of their dollar holdings with other currencies or gold.

The biggest threat for the dollar, states Spiegel, lies in Asia. Much of the huge U.S. current account deficit is being financed by capital flows from Japan, China, and other Asian countries. The Bank of Japan alone holds $363 billion U.S. Treasuries, the Chinese central banks another $102 billion. Sooner or later, investors from Tokyo, Beijing, and Hong Kong will no longer be willing to take the risk. At that point, says economic historian Harold James of Princeton University, there will be "the great crash." The dollar, as well as the U.S. economy, will go under. It could turn into a global currency crisis, adds O'Neill. He says, "President Bush is right now trying to refute economic theory and economic history. He will fail." Concerning the threat of a dollar crash, Speigel warns, "Forget the Iraq war. Forget the transatlantic conflict. The mother of all threats is lurking on a different front."

Spiegel compares the coming upheavals centered around the fall of the U.S. dollar to the collapse of the Bretton Woods system in 1971-73, a system created in 1944, which "secured stability at global foreign exchange markets for more than 20 years."

Britons Fear Job Insecurity, Pension Shortfalls

"Unions Urge Brown To Tackle Pension Crisis," reads the headline in the London Times on April 9. One day before British Chancellor of the Exchequer Gordon Brown was scheduled to present his outlook for the British economy, the 1.1-million-strong private-sector union Amicus made a dramatic appeal to the government to tackle the twin crises in pensions and manufacturing. According to the Times, "an overwhelming majority of its members feared job insecurity and pension shortfalls in old age." Amicus general secretary Derek Simpson said, "These people are Labour's core constituency, and the way to encourage these vital voters to support Labour in the future is to address the issues they are concerned about." As the stock-market crash has devastated British pension funds, Amicus calls for compulsory pension payments from employers.

Brown admitted on April 9 that the government has to lower its growth assessment for the British economy for the second time in five months. Last year, manufacturing output in Britain fell 4%, the most in 12 years. The trade deficit is rising rapidly, in particular as exports to the U.S. decline. Already last year, the British trade deficit soared to its highest levels since records began in the 17th century. Consumer confidence in March declined to an eight-year low. The government's budget deficit this year will go up to £27 billion ($42 billion); the biggest since Labour took over six years ago. However, Brown has a plan to handle the budget problem. On April 9, he announced plans to boost taxes on cigarettes, beer, and wine.

Germany Increases Trade with China, as West Sinks into Depression

According to official German export data released April 7, in January Germany increased its exports to China by 28.9%, as compared to January 2002. Exports to the 11 Eurozone countries only increased by 3%, for the same period. Machines, industrial facilities, chemical-tech, and cars, are cited as top categories of goods exported to China. For many Mittelstand (smaller, privately held) companies in Germany, a minimum of 15% of their total sales go to China alone, which is no longer atypical; in fact, the tendency is increasing, as other markets in the West are shrinking.

Uruguay Admits Default: Asks Creditors To Take Losses in Bond Swap

Whatever the technicalities, the tiny Ibero-American nation of Uruguay cannot pay its debt. The second week in April, Uruguayan authorities asked investors to take losses on $6.5 billion in bonds with one-year maturities, by swapping them for bonds with five-year maturities, and interest rates the same or lower. The country's economy is devastated, and Uruguay's $11.3 billion in foreign debt equals 90% of the country's gross domestic product.

The Finance Ministry is attempting to entice investors by announcing that new bonds issued will be international ones, under the jurisdiction of New York courts, while some bondholders predict they may rise in value, if the government can show that the debt is "sustainable." But the government itself doesn't even believe that. The new bonds also include "collective action" clauses, which make it easier to negotiate with creditors, in the event of default.

Mexico just recently issued bonds including the same type of clause, the first "emerging market" country to do so, making clear it doesn't expect to be able to pay on those bonds. Uruguay doesn't, either.

Standard & Poor's announced on April 10 that they will cut Uruguay's rating to "selective default," if a large number of bondholders participate in the debt swap, which will force them to take big losses. "If the debt swap goes through, we would consider it a default," said an S&P executive. The agency just cut Uruguay's rating to CC from CCC, and said it would decide by mid-May whether to apply the "selective default" classification, depending on how many bondholders agree to exchange bonds with short-term maturities, for new ones with longer maturities.

Japan, German Machine Orders Evaporate

According to new figures released by the Japan's Economic and Social Research Institute on April 9, core private-sector machinery orders plunged 9.6% in February, compared to the previous month. Core machinery orders, which exclude ships and electric power firms, are regarded as a key indicator for overall capital spending six to nine months in the future. At the same time, even public core-machinery orders crashed by 21.2%, while foreign orders for Japanese machines fell 20.1%. In terms of machine categories, biggest hit were orders for transport machines (-39.6%) and information services equipment (-35.2%).

At the ongoing industrial fair in Hanover, Germany, Diether Klingelnberg, president of the German machine-building association VDMA, said that another 25,000 jobs will be eliminated this year in the German machine-building sector. Domestic consumption of machines is shrinking. German machine exports to the U.S., says Klingelnberg, are very much threatened by the transatlantic political conflict. However, counter-balancing these problems, he emphasized, are rising exports to China, Russia, and the Middle East.

Histadrut Calls Off General Strike as Netanyahu Backs Down—For Now

In response to what is seen as a backdown by Israeli Finance Minister Benjamin Netanyahu, the Histadrut Labor Federation called off a pending general strike, after the government agreed to open negotiations over Netanyahu's economic austerity program, Ha'aretz reported April 11. Netanyahu had threatened to introduce legislation unilaterally that would have abrogated collective bargain agreements, if Histadrut did not accept the program as is. Such legislation is a flagrant violation of the conventions of the International Labor Organization, of which Israel is a signatory. These are the moral equivalent of the Geneva Conventions for war.

Mass protests nonetheless continue. The Hanoar Haoved v'Halomed, the Histadrut's Youth movement, held demos throughout the country, including in front of a downtown Tel Aviv hotel, where Netanyahu was speaking before a business group. Some of them managed to penetrate the event and disrupt it. Demonstrators were carrying signs saying, "Bibi [Netanyahu] is good for the rich." The pensioners' union is planning to broaden its daily protests at 15 main intersections April 13.

The Labor Party's Secretary General, Ophir Pines-Paz, who also chairs a coalition of all opposition parties and other social organizations against the economic plan, attacked Netanyahu and told him to accept the fact that his plan is rejected by the people. "The defeat and humiliation of the Finance Minister over his impervious economic plan are unprecedented in the history of the State of Israel. The Treasury should take note and draw the necessary conclusions about the destructive plan, based on economic discussion and social justice."

China To Begin 14 Projects in Western Regions

The Chinese government will invest 130 billion yuan (about $16 billion) in developing the western regions of China in 2003, Xinhua announced April 8. The funds will go to start 14 new projects in the West, the State Council (cabinet) group responsible for the region, has announced. By end-2003, there should be a total of 50 key projects under construction there, with a total investment of over 700 billion yuan.

The biggest "burst" of investment came between 2000-2002, when 600 billion yuan was invested. The projects this year will include water management, railroads, highways, pipelines, and energy.

Two railways will be built: one, from Wanzhou in Chongqing, to Yichang in central Hubei Province, and the second, from Chongqing to Suining in Sichuan Province.

City infrastructure will be built in Tibet and Xinjiang.

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