World Economic News
Public Costs of German Mass Unemployment Rise Sharply
According to a new a report published by the Institute for Labor Market Research of the German Labor Ministry, the total public costs of unemployment in the last year amounted to 82.7 billion euro10% more than the year before (75.0 billion euro). This figure includes both the additional public expenditures directly caused by unemployment, as well as reduced tax revenues and social security payments. Public expenditures for the unemployed amounted to 40.1 billion euros, additional social aid to unemployed people was 4.0 billion euros. Tax losses due to unemployment are estimated to be 15.9 billion euros, and losses in social security fees to another 22.7 billion euros.
Not included in the 82.7 billion euro figure is an additional roughly 20 billion euros in public labor-market programs. Furthermore, there are several million people unemployed in Germany beyond the official average of 4.38 million last year. Indirect repercussions of unemployment, such as lower consumption, aren't included either.
Philippines Activates Currency Swap with ADB
The Philippines has activated the currency swap arrangement with the Asian Development Bank (ADB) to meet debt payments, although it was originally intended to counter speculation, the Manila Times reported May 17. The $200 million swap gives the Philippines dollars that can be paid back in pesos. The last several efforts to issue sovereign bonds have either demanded exorbitant rates, or had failed altogether. "It is effectively a foreign borrowing," the official said. "The ADB lends the swapped peso to the domestic or foreign banks." The Philippines effort to get the swap at below market rates was rejected by the ADB.
Brazil Runs Into Trouble Refinancing Debts
Brazil, the largest Third World debtor in the world, was forced to tap into its cash reserves on May 19, in order to meet an exceptionally large debt payment of 33 billion reals ($10.6 billion) that came due, Bloomberg reported May 20. However, as investors were demanding ever higher yields on newly issued Brazilian bonds, the government could not cover the payment by bond emissions. Brazil has already cancelled three bond auctions during May, because demanded yields had crossed the 18% mark. Therefore, when the biggest domestic debt payment in at least a decade came due on the 19th, the government had to dip into Treasury reserves (roughly 85 billion real, or $28 billion) to be able to repay maturing debt.
Any withdrawal from exchange reserves, however, increases the fears among investors that Brazil might default on $425 billion of domestic and foreign government debt, again driving up yields and threatening a sinking of the real. Between now and the end of the year, another $40 billion in debt comes due.
The government put out a report on May 19, saying that it had 458 billion reals of domestic debt with yields indexed to the central bank's overnight rate, and another 310 billion reals of fixed-rate domestic debt. Furthermore, the government has about $170 billion in international debt.
Bank of England Rate Rise Puts Pressure on Greenspan
The Bank of England monetary policy committee met May 5-6, and voted 9-0 to increase the repurchase interest rate (roughly equivalent to U.S. federal funds rate) by one-quarter of a percent from 4.0% to 4.25%. This is the third quarter-percent increase in the past six months. However, the minutes of the Monetary Policy Committee (MPC), which were released May 19, show that the BOE debated whether to raise rates by a full half-percent. The minutes stated that, "A 50 basis point rise could therefore be warranted by the Committee's central projection. Moreover, there were upside risks to this projection; for example, it is not certain that demand would ease as markedly as projected.... The surprise entailed by a 50 basis point increase might help to moderate the continuing rapid rate of increase in consumer indebtedness."
The BOE was keen to attempt to contain the housing bubble; so much so, that it issued a denial that this was the case, thus indicating this was its real intent. The MPC's minutes stated, that the recent monetary tightening, "did not imply that it was targetting house price inflation, or any other asset price."
The move by the BOE will generate effects in United States: if the Brits keep aggressively raising rates to contain their housing bubble, this will put enormous pressure on U.S. Fed chairman Alan Greenspan, who was just renominated for a fifth term, to raise the federal funds rate from its 45-year low of 1%.
Bloodbath on Asian Stock Markets
As part of the ongoing financial disintegration worldwide, on Monday, May 17, Asian stock markets suffered one of their biggest massacres in recent years. The triggers are manifold: the explosion of the oil price to record-highs, the fear of rising U.S. interest rates, foreign investors liquidating their credit-financed holdings in "emerging markets," the situation in Southwest Asia, disappointing news on the Japanese "recovery," new "bad loan" problems in the Japanese banking system, perhaps slower growth ahead in China, elections in India and Indonesia. The results on stock markets were quite dramatic: Nikkei -3.2%, Hongkong -2.7%, Singapore -3.1%, Thailand -4.6%, Taiwan -5.1%, South Korea -5.1%, Indonesia -7.5%, India -11.6%.
In Mumbai, India, the stock market had to be shut down twice when stocks plunged 17%, the worst crash in 129 years on the Mumbai (formerly Bombay) stock exchange. At day's closing, stocks were down "only" 11.6%, wiping out $25 billion, the biggest fall in 12 years. The Reserve Bank of India announced it would intervene, if needed, to protect the rupee.
Japanese bank stocks were crashing, after the daily Yomiuri Shimbun reported that Japan's fourth-largest bank UFJ will soon announce a much bigger loss than expected, due to bad-loan writeoffs. UFJ stocks plunged 10%, stocks of Mitsui Trust Holding even by 13%. The Nikkei has now lost 14% since April 26.
Meanwhile, regional finance ministers and central bank heads at an Asian Development Bank (ADB) meeting in South Korea, stated that the combination of extremely high oil prices and rising interest rates poses the biggest threat to Asian economies in the last four years.
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