Global Economic News

Death Rattles of a System

July 28 (EIRNS)—The IMF's Global Financial Stability Report briefing opened July 28, with the relevant bureaucrat intoning:

"Global financial stability remains fragile, and systemic risk seems to be returning, despite the important decisions made by financial authorities and significant adjustments by financial markets in the past few months." In sum: The IMF has discovered a relationship between "the real economy" and financial markets. There is "no end in sight" to the U.S. banking crisis (the IMF calls it a "housing crisis"); in other developed countries, too, the ability of banks to raise significant capital cannot be expected to continue; and the developing sector nations are going to be "tested" next.

The "epicenter" of the financial crisis is moving to Europe and Oceania, the French bank BNP Paribas is warning, wrote the London Daily Telegraph's Ambrose Evans-Pritchard on July 28. Indeed, Australia's bank stocks plummeted on July 29, after top banks admitted their losses, provoking reassurances from top officials that the "local finance sector remains strong."

Such "your banks are safe" reassurances in the United States moved on July 28 from leading stories in the newspapers, onto CNN, whose "How Safe Is Your Bank?" segment delivered the same message sounded by Business Week the same day: People need not pull their money out just because their bank's name appears in the headlines of those in trouble.

And, yes, Virginia, if the banks collapse, so does lending. The New York Times estimated on July 28 that commercial and industrial loans were down in 2007 by $150 billion. Now, as a Wachovia executive admitted, that bank (like the others) is saying no to almost every loan request.

Meanwhile, Merrill Lynch sold $8.5 billion of stock and liquidated $30.6 billion of money-losing assets at a fifth of their original value on July 28—only to see its stock fall another 12%.

Australia and New Zealand: 'Worse Crisis than U.S.'

July 30 (EIRNS)—The Australian and New Zealand banking systems are about to blow out, according to the Daily Telegraph's Ambrose Evans-Pritchard. At the center of the crisis are the problems of National Australia Bank, which wrote down $450 million in "senior strips" of collateralized debt obligations based on U.S. mortgage debt, by 100%—i.e., to nothing—even though they were AAA-rated. Evans-Pritchard comments that no U.S. bank has admitted to such write-downs. National Australia Bank also wrote down over $1 billion in direct holdings of U.S. mortgage debt, "an admission that its AAA-rated securities are virtually worthless."

Despite the fact that there is a global commodity price upsurge, Australia—a major wheat, grain, and minerals exporter—cannot cash in on it, because of its balance of payments crisis. This is a result of the Japanese yen carry trade: Over recent years, cheap Japanese capital has gone into Australian assets, which pay a higher interest rate, and which now has to be paid back. Much of this went straight into real estate, which has since collapsed. Australia's current account deficit is 6.2% of GDP, and personal debt is at almost a world record of 177% of GDP.

As for New Zealand, Guardian Trust suspended withdrawals from its mortgage fund because of "liquidity difficulties in the market." Hanover Finance, the country's third-largest finance company, froze payments to investors, saying its "industry model has collapsed." So far this year, 23 other finance companies have gone bankrupt.

Berlin Minister: High Heating Bills? Wear Sweaters!

July 29 (EIRNS)—Berlin Finance Minister Thilo Sarrazin (SPD), who some weeks ago advised people how to live on Eu3/day, and then supported a minimum wage of Eu5/hour, now has explained to Germans how to cut their energy consumption in the face of soaring oil and gas prices. In an interview with the Rheinische Post, he said that people should put on sweaters and reduce their thermostats to 15-16°C (59-61°F). "When energy costs are as high as rents, people will think about whether they cannot also live reasonably with a thick sweater at 15 or 16° room temperature."

Sarrazin also attacked the idea that poor people or Hartz IV welfare recipients should receive an extra payment. He also wants to cut completely "commuter support." If somebody lives outside of Munich and has to pay more for commuting to work, he spends less for rent than in Munich, argues Sarrazin. "There is no reason to subsidize the consumption of energy by tax means."

Vietnam Staggered by Inflation, Workers' Strikes

Aug. 2 (EIRNS)—An inflation rate of 27% continued in Vietnam during the month of July, provoking strikes involving over 5,000 manufacturing workers. This was the ninth consecutive month of double-digit inflation. Hanoi raised state-controlled domestic fuel prices by as much as 36% on July 28—being forced to narrow the gap between the official price and world market prices—further squeezing the population.

Vietnamese rice farmers are in deep trouble, as inflated rice prices have fallen by nearly half since April, but fertilizer, fuel, and pesticides continue to rise, leaving farmers with no profit margin. Vietnam is the world's second-largest rice exporter, after Thailand.