WORLD ECONOMIC NEWS
'Tectonic Shifts' on Foreign Exchange Markets; Gold Soars to Five-Year High
Fuelled by a rapidly declining U.S. dollar, which just fell to a three-year low against the euro, the gold price shot up by $4 per ounce last Dec. 13, by $5 on Dec. 16, and by another $4 Dec. 17, peaking at $341.7 on the London spot market, reaching its highest level since June 1997. It has risen $88 since early 2001 (from $253) and $26 in December alone.
In a commentary to the current turmoil on foreign exchange and precious metal markets, the German daily Frankfurter Allgemeine Zeitung noted on Dec. 17 that among the factors contributing to the downward slide of the U.S. dollar in recent weeks, are rumors on financial markets that "Islamic countries are accelerating their efforts to replace the dollar by an Arab dinar, backed up by physical gold," a plan that has been put out by the Malaysian government and is now receiving much attention in the Middle East. FAZ characterized the ongoing developments with respect to gold and the dollar as indications of "tectonic shifts" on global financial markets.
Meanwhile, capital flows into U.S. markets are rapidly shrinking. According to new figures presented by the Japanese Finance Ministry on Dec. 16, the share of U.S. bonds and stocks in the overall foreign investments by Japanese financial institutions crashed to just 10% in October, while the share of portfolio investments in the European Union jumped up to 66%. According to U.S. Treasury data, European Union net purchases of U.S. long-term securities, including government bonds, agency bonds, corporate bonds, and stocks, plunged from $78.92 billion in the full year 2001 to just $18.49 billion for the first three quarters of 2002.
Public-Sector Wage Talks Fail in Germany; More Strikes Threatened
Public-sector wage talks failed after 13 hours of negotiations in Kassel Dec. 18, after which the Unified Services Union, representing more than 3 million public-sector workers in Germany, threatened more strikes and protest actions.
Labor's demand that wages be increased by 3% were met with the public-sector employers' offer for 0.9% increases from January on, and 1.2% from October on.
The wage-bargaining commission of the union resolved that mediation procedures presided over by two independent negotiators (one from either side) begin, before Christmas. If the mediation starts on time, a compromise agreement may be worked out and adopted by mid-January. Under German labor laws, strikes are illegal during the mediation periodbut chairman Frank Bsirske has threatened a "strategy of a thousand needles" to put pressure on the other side.
Should the mediation fail, preparations will begin for a full-scale national strike of the public sector. That union members would support a strike, is indicated by the fact that on Dec. 17, during the national day of warning strike actions, 110,000 took part in temporary walk-outs, throughout Germany. 10,000 rallied in Kassel Dec. 18, including policemen (their national union leader was one of the rally's main speakers) and firemen.
Outgoing Brazil Central Bank President Fraga Raises Benchmark Rate
In a parting shot before leaving office, Brazil's Central Bank president Arminio Fraga raised the benchmark interest rate by 3 percentage points, up to 25%, the highest rate since April of 1999. While the hike is supposedly going to reassure investors that the government intends to control inflation, in reality, it will exacerbate the existing crisis, by increasing borrowing costs and further squelching any productive activity. (Sugar producers now pay real annual rates above 50% to refinance loans, for example). A sizable portion of Brazil's debt is indexed to the benchmark interest rate, and when it increases, so do debt costs. Bloomberg, in their coverage Dec. 18, fantasized that this added cost will be offset, alleging that a "strengthening" real will reduce the cost of Brazil's debt which is indexed to the dollar.
One day before the interest-rate hike, the Senate Economic Affairs Committee approved Bank of Boston executive Henrique Meirelles as Fraga's replacement at the Central Bank. Meirelles promised that he would continue Fraga's policies, and fully respect the "autonomy" of the Bank to determine monetary policy "without interference" from other sectors of government. "Were it necessary" to raise interest rates to control inflation, Meirelles said, he would have no problem doing so. Most of Meirelles testimony directly countered most of the long-held economic proposals of the Workers' Party.
ASEAN+3 To Fund Missing Links in Trans-Asia Rail Line
The proposed construction of the "missing links" in the $2.5-billion trans-Asia railway through Cambodia, Vietnam, and Laos is expected to be funded by ASEAN+3 partners China, Japan, and South Korea, apart from Asian Development Bank loans. Malaysian Transport Minister Dr. Ling Liong Sik said Prime Minister Dr. Mahathir Mohamad has spoken to leaders of the three countries, and they were willing to assist ASEAN in linking Singapore to Kunming, China.
The proposed 5,500-km link would include the double-tracking project from Johor Baru to Padang Besar within Malaysia, which is expected to be completed in 2008, and the present tracks in Singapore, Thailand, and southern China. "It is Cambodia, Laos, and Vietnam which need assistance from richer countries, which have good financial institutions offering low interest rates," Dr. Ling told reporters. He expressed confidence that the countries involved could settle the loans, which have a 40-year repayment term.
Several gaps would be filled in, including, in Cambodia, a 48-km stretch from Poipet to Sisophon and a 240-km stretch from Phnom Penh to Ho Chi Minh City, Vietnam.
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