WORLD ECONOMIC NEWS
German DAX Finishes Worst Quarter Since 1959
German stock prices nosedived in 2000; they slid further in 2001. Then came the first half of 2002, which proved to be one of the worst half-years in the history of German markets. Now, the third quarter has finished, and the DAX index has lost another 37%, wiping out $186 billion in market value. For the DAX, which was established late 1987, this was the worst quarter ever. If its predecessors are included, the third quarter of 2002 was the worst for German stock markets since 1959. What will the fourth quarter bring? Meanwhile, as reported last week in EIW, the German high-tech Nemax, decimated by the global meltdown in tech stocks, will close altogether early next year.
European Bank and Insurance Sectors on the Brink
The risk premiums on the debt of German banks exploded in the last week of September, as the creditworthiness of the German banking sector is questioned by international markets. Worst hit was Commerzbank, where rumors of mounting problems due to loan defaults and plunging stock prices sent the risk premium up from 98 to 150 basis points in one week. Bank worries also included Dresdner Bank and HypoVereinsbank. On Sept. 30, Commerzbank admitted that it will have to set aside more money than planned for loan loss reserves. Commerzbank chief executive officer Klaus-Peter Mueller attempted to calm things down in an interview Sept. 29 by insisting that "We have our problems under control," and "no one should be questioning the existence of the bank." However, he added, "Banks are facing the stiffest headwind in 30 or 40 years." The bank's stocks plunged another 10% Sept. 30.
Reuters reported that, in spite of the usual nonsense statements from the recent G-7/IMF gatherings, one of the key topics discussed in Washington was "the nightmare possibility of systemic banking defaults."
The biggest French reinsurer Scor is the latest European insurance company to announce it will sell stock in order to survive the coming weeks. Selling stock under present depressed market conditions is seen by everybody as an act of desperation by a company that is close to insolvency. Following this announcement Sept. 30, the stock price of Scor, already down 83% since January, fell 31%.
More 'Hellish' Financial Reports in Europe's Dailies
"This is a crash," admitted Deutsche Bank chief economist Norbert Walter Sept. 30, commenting on recent developments on world stock markets. Leading European dailies ran front-page headlines Oct. 1, such as: "World markets sent into tailspinRenewed fears over global economy, corporate profits and war in Middle East cause sell-off"; "Losses to continue after worst quarter in 15 years" (Financial Times); "Grim data unnerve markets worldwide" (International Herald Tribune); "DAX crashes to Six-Year-Low" (Financial Times Deutschland); "DAX crash eliminates 200 billion EuroBiggest quarterly loss on German stock market since 1959" (Frankfurter Allgemeine Zeitung). A Reuters wire notes that shocked investors are "turning to professionals who have followed stocks for decades to help them put declines in perspective. The problem is, the old-timers are as stunned as everyone else." They quote a stock trader, who went through the 1973-74 disaster period, but now says, "It's as bad as I've ever seen it." The FT quotes Thomas McManus, chief strategist at Bank of America Securities: "This is the worst we've seen in years. But you can always go lower. The only thing that will stop you is zero."
The German economic daily Handelsblatt featured a cartoon Oct. 1 showing distressed brokers in an elevator, which has just stopped after a painful ride downward. The door of the elevator opens and the Devil appears, surrounded by fire. The devil says: "Oh, it's you, the stock exchange guys. Sorry, you don't belong here. You have to go down much further."
State Budget Deficits Explode in Germany
While Germany's Red-Green government coalition fights over how to cover the budget deficitwhich, as presently admitted, will need cuts or tax increases of at least another 10 billion euros, in order to comply with the insane "Maastricht" criteriathe (really not so new) news is hitting the headlines, that there are similar problems among the state and local budgets.
Handelsblatt's front-page article Oct. 4 is headlined "States Eye Corporate Cashiers," with a large graph depicting the budget deficit run-up by the 16 German states, in the first eight months of this year. The graph is headlined: "State Budgets Face Collapse." The paper cites Federal Finance Ministry statistics, showing that in the first eight months of this year, the 16 states have run up a total deficit of 24 billion euros, while they projected a deficit of 19.9 billion euros for the entire year. At an average of 3 billion euros a month, these deficits will reach 36 billion euros, at least80% higher than projected.
Hardest hit is Germany's capital Berlin, with a deficit of 4.12 billion euros, followed by North Rhine-Westphalia (2.98 billion), Lower Saxony (2.13 billion), Baden-Wuerttemberg (2 billion), and Rhineland Palatinate (1.66 billion). While states' expenses rose by 1.4% compared to last year, their income shrank by 4.3%.
At the same time, the German Cities' Association (DST) reported, according to the Sueddeutsche Zeitung Oct. 4, that Germany's cities have run up a deficit of 5 billion euros in 2001. This is a 50% rise, compared to 2000, and, given the rising unemployment, will most certainly be surpassed again this year. The DST's general manager Stephan Articus reported: "The cities are not in a phase of economic weakness, but rather, they are in their most severe financial crisis in the postwar period." The DST demands financial relief from the state and Federal governments, for the citieswhich, given the facts reported above, is highly unlikely, as long as the Maastricht insanity prevails.
Venezuela's Economy Heads into Argentina-Like Tailspin
Against the backdrop of political upheaval, Venezuela's national economy is unravelling at astonishing speed. On Sept. 24, Standard & Poor's lowered the credit rating on both long- and short-term foreign currency bonds citing "the worsening of Venezuela's tense political stalemate and deepening economic crisis." It also warned that payment of foreign debt obligations in 2003 might be "difficult." Venezuela needed $4 billion in financing this year, but is having increasing difficulty in obtaining foreign loans and selling its bonds.
For the first half of the year, the economy shrank by 7.1%, with a stunning 9.9% drop in the second quarter. Unemployment stands at 16.2%, which one analyst warns "is very close to what you had in Argentina." High oil prices can't offset the effects of the global financial crisis, combined with domestic political instability and the Chavez government's insane economic policies. Moreover, due to lack of investment, the state oil company PdVSA doesn't have the capacity to produce more oil quickly. In the second quarter, the oil industry's economic output fell by one-sixth. During the same period, manufacturing fell by 9%, the construction industry by more than 30%, and financial institutions saw an 8.5% decline. The decline in the construction industry is particularly striking. The number of workers in the sector has dropped from 1.1 million to 440,000.
Capital flight is also increasingly significantly. Venezuelans took out between $5-10 billion in 2001, and the trend has continued, especially since last February's lifting of strict exchange controls and the floating of the national currency, the bolivar. It has lost 46% of its value since that time.
South Korean Government Propping Up Crashing Markets
The Seoul government on Oct. 2 decided to arrange for the national pension and other state-run funds to put about 6 trillion won (US$4.6 billion) into the stock markets in 2003 to boost the KOSPI index, which is crashing along with the Dow and the Nikkei. Japan announced last week that the government would purchase stock held by the banking system, to support both the market and the banks. Due to the steep fall in the U.S. stock markets, the Seoul index has plunged 25% since May to 646 on Monday, the lowest level since Dec. 21, 2001.
International investors went on a selling spree of Seoul stocks in September for the eighth month in a row, making net sales of over $3 billion, the Korea Stock Exchange (KSE) said Oct. 1. So much for trying to live on hot money after promoting IMF policies.
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