In this issue:

Telecom Meltdown Hitting Europe, Too

IMF Chief Hints at G-7 Action To Rescue Dollar

Fund Manager: Markets To Decline For 5-10 Years

Venezuela Faces Even More Brutal Austerity

Uruguay's Reservers Drop by More Than Half

Chile's Economy Has Run Out of 'Miracles'

Singapore: Derivatives Soaring While Stocks Tank

Credit Card Bubble Exploding in Philippines

China and South Korea Sign Swap Agreement


From the Vol.1, no.18 issue of Electronic Intelligence Weekly

WORLD ECONOMIC NEWS

Telecom Meltdown Hitting Europe, Too

The meltdown of the telecom sector, which EIW has been reporting in detail over recent weeks, has by no means been confined to U.S. shores. Like their American counterparts, Europe's former "model" high-tech firms, based on information technology and privatized infrastructure, are now crumbling beneath excessive debt, the global tech meltdown, and "shareholder value" stupidity, if not outright fraud.

In the telecom sector, the stock price of Germany's Deutsche Telekom, in the last week of June, sank to just above 8 euros, the lowest level ever, and only about one-half of the IPO price in 1996. While Deutsche Telekom's takeover mania has produced an incredible mountain of debt, at 65 billion euros, since March 2000, the company has sunk the investments of millions of small stockholders.

France Telecom, at a debt level similar to its German cousin, is now paying the price for "successfully" entering the German telecom market. Its bailout of the German mobil-phone operator MobilCom will probably drive up its debt to 75 billion euros by year-end. As a consequence, Moody's, on June 24, downgraded the giant French company to just one level above junk.

Another large French conglomerate, Vivendi Universal, saw its stock price plunge to the lowest level since September 1996, after it became known on June 21 that the second-largest media company in the world had just received a 1.4-billion-euro cash injection by Deutsche Bank to overcome a liquidity crisis. Vivendi has about 30 billion euros in debt, with about one-quarter coming due within the next few months, and the company posted a record loss in 2001. On June 25, the fourth member of Vivendi's board of directors this year stepped down; and its mighty CEO, Jean-Marie Messier, was forced to resign on July 1.

Alcatel, the largest European procucer of telecom equipment, announced June 26 that it will cancel another 10,000 jobs, on top of the huge job cuts announced in the last two years. At the beginning of last year, Alcatel still employed 110,000 people. By the end of 2003, the Alcatel workforce is projected to shrink to 65,000.

Cap Gemini, Europe's largest computer-services company, will cut another 5,500 jobs, or one-tenth of its workforce. CEO Paul Hermelin argued on June 26: "We can no longer wait for a hypothetical recovery at some point in the future."

In Britain, the mobil-phone giant Vodafone just reported the largest annual corporate loss in European history, while the Italian telecom equipment producer Marconi, formerly a successful defense contractor, is struggling to stave off bankruptcy.

Railtrack, the company that ran down the privatized British rail system in a failed attempt to boost "shareholder value," has already declared bankrupty. The 37,000-km railway infrastructure will now be re-nationalized into the newly created, state-controlled Network Rail holding.

IMF Chief Hints at G-7 Action To Rescue Dollar

As London's Financial Times reported July 5, IMF managing director Horst Koehler "signalled" on last Thursday that "The International Monetary Fund could seek international coordination of exchange rates if nervousness in currency markets led to a run on the dollar." Koehler told the FT that, if the dollar were to fall rapidly and in a disorderly fashion, "no intervention at all is not the right answer."

Fund Manager: Markets To Decline For 5-10 Years

Stock markets will continue sliding for five to 10 years ahead, the London-based hedge-fund manager Hugh Hendry told the Frankfurter Allgemeine Zeitung, in an extended interview published July 2. Stocks will have to crash for another 35%, states Hendry, and thereby the "stock market culture will be eradicated."

The top central bankers, and, in particular, the U.S. Federal Reserve, are to be blamed for the disaster on world stock markets. They have pumped massive liquidity into the markets in an attempt to prop them up, and now, as investors lose confidence in corporations and their stocks, this liquidity is ending up in physical assets like gold, raw materials, and real estate.

It all started in 1971, states Hendry, echoing Lyndon LaRouche, when the dollar was decoupled from gold. Since then, central banks, again and again, have created money to rescue the stock markets. In addition, semi-public agencies like Fannie Mae and Freddie Mac were used to create huge amounts of cheap credit for consumers.

The last stock market bubble, based on the "New Economy" Nasdaq, was triggered by none other than Alan Greenspan, "who played James Bond, rescuing the world." Therefore, Hendry wouldn't be surprised at all if the Federal Reserve intervened directly as a buyer at stock markets. Greenspan is very worried about the huge liquidity which he himself created, and which is no longer tied to stock markets.

For the U.S. economy, with all the implications for the rest of the world, there are only two possible scenarios, states Hendry. First, a long, and worldwide recession, triggered by the U.S., which could take on the dimensions of a 1930s-style depression. Alternatively, states Hendry, central banks could create even more liquidity trying to rescue the stock markets. In this case, there will be a huge inflationary push, and in the end, investors will lose confidence in any paper values. We would then see the return to a gold standard, he said.

Venezuela Faces Even More Brutal Austerity

The regime of President Hugo Chávez is planning another round of austerity, even more brutal than what was previously announced, guaranteeing Venezuela's descent into chaos. The reason for the harsher measures is that the IMF has just "discovered" a 2.7-billion-bolivar deficit, which puts the total deficit at 4.4 billion (2.7% of GDP)—and this doesn't include 5 billion bolivares (about $4 billion) in debt-service payments due this year. Francisco Rodriguez, economic adviser to the National Assembly, thinks the deficit is actually higher, around 6% of GDP, but monetarist Planning Minister Felipe Perez says he "trusts" the IMF figure as the true one.

Should the National Assembly approve the new package, it will immediately mean higher taxes. Under discussion is the establishment of a differentiated VAT tax, depending on the type of services provided. So, for example, there would be an 8% tax on electricity, which is now tax-exempt, and which will raise rates substantially. One goal of this is to reduce consumption, since very low water levels at the El Guri dam have made supply very erratic. The tax on phone service, also now tax-exempt, would be at the same 8% rate, and the tax on other goods and services, now at 14.5%, would be raised to 16%.

Another factor guaranteed to enrage the population, is the increase in the gasoline price, which has always been low in this oil-rich country. As of September, there will be only one leaded gasoline, instead of three, available at 70 bolivares/liter, a 10 bolivares increase, and one unleaded gasoline at the current price of 90 bolivares/liter. The cheapest leaded gasoline is the one most commonly consumed now, especially by taxi and bus drivers, who will only accept the new rate. if they're allowed to increase the rates they charge customers.

Uruguay's Reservers Drop by More Than Half

Uruguay's reserves droped 52.5% in the first six months of this year, falling 20% just in the month of June to $1.5 billion, Reuters reported from Montevideo July 2. Dollar bank deposits fell by 29% in the first five months of the year. The drain on reserves was largely due to depositors withdrawing their funds from banks. The government used $500 million of a $1.5-billion IMF loan, to shore up reserves.

Chile's Economy Has Run Out of 'Miracles'

The only "miracle" left in Chile's economy is that it is still there. On July 2, the peso plummeted to a new low of 702 to the dollar. The government and business sectors are so concerned about Brazil, that they have set up a special joint committee, whose only purpose is to monitor the Brazil crisis, and evaluate its effect on Chilean companies in that country, as well as exports to the Brazilian market. Chile's exports, overall, dropped by 32.5% during the first four months of this year. The government is frantically looking for new markets for the country's products, but isn't likely to find them. Chile's industrial output fell in May by 3.8%, compared to a year earlier. Unemployment rose to 9.1% in the period between March and May, up from 8.8%.

Singapore: Derivatives Soaring While Stocks Tank

Hopes of an earnings recovery by most Singapore technology companies in the second half of 2002 have all but evaporated, with their share prices tumbling more than 30% in the last three months. "New Economy" exports account for some 60% of overall non-oil trade. But while the stock market is in the doldrums, the Singapore Exchange's derivatives market is booming, with total volumes traded in the first six months of 2002 breaking last year's record. The January-June period this year saw a total of about 15.62 million contracts traded, rising 3.2% from last year's record of 15.13 million contracts.

Last month alone, about 3.05 million contracts were traded—16.5% higher than the 2.62 million contracts traded a year ago.

Credit Card Bubble Exploding in Philippines

Deputy Governor of the Central Bank of the Philippines Alberto Reyes, warns that the government may ban the issuing of any new credit cards, because of the rapid rise in defaults on credit-card debt in the first quarter, the Singapore Business Times reported July 2.

Almost half of credit-card loans were overdue in the January-March quarter, up from about one-fifth in the preceding quarter. Credit-card purchases accounted for 97% of nearly $1 billion in credit-card sales in the first quarter. Although credit-card interest rates run as high as 40%, this has not deterred people from continuing to buy. Foreign banks, led by Citibank, HSBC, and Standard Chartered, have been the most aggressive promoters, cornering 46% of new cardholders.

China and South Korea Sign Swap Agreement

China and South Korea have signed a $2-billion swap agreement as part of the Chiang Mai Initiative of the ASEAN+3. This comes in the context of increased worry across Asia in about the dollar collapse, and the concern that perhaps the U.S. recovery is about as real as WorldCom's profit reports. Even Reuters acknowledges this July 2, while saying there is no particular reason for angst, since "the region is in much better shape" than when the Chiang Mai Initiative of May 2000, created the ASEAN+3 and an Asian Monetary Fund.

The latest $2-billion deal, the seventh such swap agreement, brings the total to $19 billion, with more in the works. Nihon Keizai Shimbun reported June 30 that Japan plans to sign swap agreements with Singapore and Indonesia in the fall.

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