In this issue:

Dollar Hits New Lows Against Euro, Other Currencies

SARS Has Greater Economic Impact on Airlines Than 9/11

EU Abandons Maastricht 2006 Target Date for Balanced Budgets

German Economy Shrinks in First Quarter

Lula Pushes for Infrastructure Investments; Readies for G-8 Meet in France

Brazil Renationalizes Sao Paulo Electric Utility

Mexico Suffers Huge Job Losses; Employed Work Longer Hours

Cheap, Plentiful Iraqi Oil Could Fuel Eurasian Development

Philippines Central Bank Takes Extreme Measures To Support Peso


From Volume 2, Issue Number 20 of Electronic Intelligence Weekly, Published May 20, 2003

World Economic News

Dollar Hits New Lows Against Euro, Other Currencies

U.S. dollar fell to a new four-year against the euro, further evidence of the disintegration of the dollar-denominated international financial system. After U.S. Treasury Secretary John Snow claimed on May 11 that the dollar collapse would help U.S. exporters, the dollar dropped as far as $1.1624 per euro, the lowest since the euro's $1.16675 starting rate in January 1999, then rose to end trading at $1.1563. The dollar also fell to 117.01 yen from 117.40. Moreover, the U.S. currency declined to its lowest since July 1997 against a basket of 17 major currencies. Snow's comments, echoed today by a U.S. Commerce Department official, were taken to indicate that U.S. authorities would not intervene to stop the dollar's slide, until it falls below the rate at which the euro was introduced. In the past year, the dollar has fallen 21% against the euro.

Gold futures, at the same time, rose $3, to $351.90 per ounce, the highest level since mid-March, in trading on the New York Mercantile Exchange.

SARS Has Greater Economic Impact on Airlines Than 9/11

SARS "is a crisis of major proportions" for the global airlines sector, having caused more economic damage than 9/11, said Thomas Andrew Drysdale, regional director for the International Air Transport Association, AP and Reuters said May 15. "At no time in the history of aviation have we ever seen declines of the magnitude that we are now seeing in the Asian region as a result of SARS," he told a meeting of Asian airport managers in the Philippines. "Virtually every airline in the world is affected." The world's airlines have lost more than $10 billion this year, he said, warning of even bigger losses over the next few months if no measures are taken to contain the spread of severe acute respiratory syndrome.

American Airlines warned it still may have to file for bankruptcy, despite having gotten almost $4 billion in cost cuts, including $1.8 billion in labor givebacks. "The company may nonetheless need to initiate a filing under Chapter 11 of the U.S. Bankruptcy Code," the airline stated in a May 15 filing with the Securities and Exchange Commission, "because its financial condition will remain weak and its prospects uncertain." The airline said it will furlough 3,123 flight attendants on July 1, as part of previously announced cost-cutting moves in an attempt to avert filing for bankruptcy. In addition, another 1,502 flight attendants will go on "voluntary leave" at that time.

EU Abandons Maastricht 2006 Target Date for Balanced Budgets

The European Commission has abandoned the Maastricht Treaty's 2006 target date for EU countries to balance their budgets, Agence France Presse reported May 13. French Finance Minister Francis Mer said, the "target has disappeared from Commission thinking," although he insisted that France remains committed to the "spirit" of the treaty. German Finance Minister Hans Eichel reiterated that the target "can no longer be achieved."

German Economy Shrinks in First Quarter

Speaking at a public event in Hanover on May 14, German Finance Minister Eichel announced what the Federal Statistical Office would officially release the following day: "Against all expectations by the Bundesbank and also by the government," Germany's Gross Domestic Product (GDP) in the first quarter of the year did not rise, but rather contracted by 0.2%. For the present quarter, the shrinkage of German economic activity will most likely be accelerated, and two consecutive quarterly contractions are what economic text books today call a "recession."

However, reality is even worse than what GDP figures reflect. The total German workforce at the end of the first quarter was 481,000 below the level of one year ago. Seasonally adjusted, the workforce had fallen by 149,000 compared to the end of 2002, the biggest plunge in any quarter in 10 years. As corporations continue to cut jobs, the German workforce is now shrinking for the eighth quarter in a row.

On May 15, the latest semi-annual tax-income estimate for Germany was released, warning of an 8.7-billion-euro shortfall compared to the last estimate, just six months ago. The corrections for the years 2004 to 2006 amount to a total of more than 100 billion euro: $nh34.3 billion euro in 2004, $nh39.6 billion euro in 2005, $nh43.8 billion euro in 2006. Almost half of the reductions in tax forecasts are in respect to state-level taxes. But some German states are already now in an impossible situation. In Sachsen-Anhalt the budget deficit this year will reach 80% of the state's income, followed by Bremen (40%), and Northrhine Westfalia (40%). The German municipalities are legally restricted from running high deficits and are instead cutting down on infrastructure spending. At the same time, they are illegally taking ever more bank loans to pay out salaries. Municipal bank credits, only permitted for covering short-term financial holes, have risen to 10 times the volume of 10 years ago.

Lula Pushes for Infrastructure Investments; Readies for G-8 Meet in France

The Group of Eight (U.S., Britain, Canada, Japan, Italy, France, Germany, Russia) should discuss the need for infrastructure investments in the Americas to be treated not as current government expenses, urges the final communiqué issued following the May 12 meeting of Brazilian and Uruguayan Presidents Lula da Silva and Jorge Batlle in Brasilia. Lula's meeting with Batlle was the sixth in his series of meetings with the Presidents of South America, and it centered, as have the others, around the importance of realizing the physical integration projects outlined in the Initiative for the Integration of Regional Infrastructure (IIRSA).

What was new, was the reference in the final communiqué to the agreement by the two Presidents, that it is necessary to get international financial institutions to accept that those investments must be treated separately from public expenditures, for the integration and development of the Americas to be viable. The communiqué specified that President Lula is charged with raising this necessity in the name of both countries, when he meets with the Group of Eight in Evian, France, at the beginning of June. (See article on "Infrastructure Centers Brazil's New Diplomacy," in this week's INDEPTH section, for much more on Brazil's South American diplomacy.)

Brazil Renationalizes Sao Paulo Electric Utility

The Brazilian government announced on May 9 that it would take over the majority stake owned by the bankrupt AES energy pirate in the big Sao Paulo electricity distributor, Eletropaulo. AES has been unable since last January to make payments on its $1.2-billion loan from the Brazilian development bank, BNDES (the Cardoso government had loaned AES a good portion of the money the company used to buy up the state company!), but kept trying to get the government to reschedule the loan, instead of declaring it in default. AES has also defaulted on loans to private lenders.

AES's bankruptcy is a marker of the collapse of the globalization model generally. AES is not the only big international private energy pirates which poured some $30 billion into buying up and looting Brazil's state energy sector, which are now bankrupt.

Mexico Suffers Huge Job Losses; Employed Work Longer Hours

Mexico is now losing 10,000 jobs a month; some 2 million jobs have been lost over the last two years, according to the president of Canacintra, Mexico's manufacturing industrialists' association. According to the Multidisciplinary Center of the National University of Mexico (UNAM), 10 million Mexicans—almost one out of four who hold a job in the "formal sector"—was forced to increase the number of hours worked each week by 48 hours, either by getting a second job, or accepting extra hours without receiving any increase in salary or benefits. In yet another recent study reporting the collapse of Mexican employment and working conditions, the Center for Reflection on Labor found that seven out of every ten jobs created under the Fox Administration, are temporary jobs, without any job security.

Cheap, Plentiful Iraqi Oil Could Fuel Eurasian Development

Iraq's largely undeveloped petroleum reserves could make Iraq the world's leading oil producer, according to Donald L. Barlett and James B. Steele, writing in Time magazine May 19. They cite an astonishing cost differential: $10 a barrel to produce oil from U.S. fields, versus $2.50 in Saudi Arabia, as against less than $1 for Iraq oil. The cost difference is largely attributed to the varying pressures at the wellhead, which under current conditions of depletion yields titanic gushers in Iraq, and relative trickles in American oil fields. The reporters' source for the Iraqi figure is Fadhil Chalabi, executive director of the Center for Global Energy Studies in London and former Iraqi Undersecretary of Oil.

If these data are even approximately accurate, there would seem to be hugely optimistic implications favoring the industrial development and economic progress of Eurasian regions near such an eager underground oil sea—assuming the oil isn't stolen or prevented from being accessed.

Philippines Central Bank Takes Extreme Measures To Support Peso

The Bangko Sentral ng Pilipinas (BSP) reported that it contracted some $686.7 million worth of non-deliverable forwards (NDFs) in March, an increase of over $581 million from the preceding month, according to Business World May 8. NDFs are derivative contracts entered into by BSP and banks with large dollar requirements. In NDFs, banks purchase dollars from the central bank at a pre-agreed rate for a future date, and would settle the difference in pesos upon maturity. Last March, the BSP contracted some $700-750 million worth of NDFs to stem the peso's fall against the dollar. The BSP started offering the NDF in mid-November 2002 under its currency risk protection program (CRPP).

Since no dollars are actually transferred, the facility allows banks to satisfy their dollar requirements without adversely affecting the exchange rate, or depleting the central bank's dollar reserves, estimated at $16.15 billion as of last February. As opposed to direct selling of dollars, NDFs allow the BSP to intervene in the foreign-exchange market by diverting corporate demand for dollars—for the time being.

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