World Economic News
BIS Reports 'Unusual Divergence' in Market Views
April and May 2003 saw an "unusual divergence" in market views about global economic prospects, states the Bank for International Settlements (BIS) in its latest quarterly review, released June 2.
On one side, says the BIS, there are the investors in the main government bond markets, who recently had to revise downward their overall economic expectations, again and again. There had been "a series of disappointing macroeconomic announcements" in the recent few months concerning the U.S., European, and Japanese economies, including "the surprisingly weak U.S. non-farm payroll figures in March and April." As a consequencebecause investors expect more rate cuts by central banks"long-term interest rates in the major markets fell to historic lows in May." As an example, "the nominal yield on the 10-year U.S. Treasury note stood at 3.31%" on May 22, "its lowest level since 1958 and approximately 50 basis points lower than its end-2002 level. The yield on 10-year German government bonds fell by a similar magnitude to 3.54%, its lowest level in decades. Yields on corresponding Japanese and Swiss government bonds were lower still."
"By contrast," remarks the BIS review, "investors in equity and credit markets discounted the weak macroeconomic data," and actually started a big buying spree in stocks, corporate bonds, and emerging market bonds. In the U.S., the corporate bond market, between October 2002 and May 2003, experienced one of its biggest rallies in 10 years. Stock markets were recovering. And, at the same time, investors moved large amounts of money into emerging market bonds like those from Brazil, Argentina, Turkey, or South Africa.
The rush into stocks and secondary debt was, of course, driven by the much higher yields that these types of investments were promising. However, these investors are also betting that the world economy will soon improve, that corporate balance sheets might soon show "robust earnings growth," and that the period of large private and public defaults is essentially over.
In typical BIS language, the review raises the question, whether these optimistic investors are "getting ahead of themselves?" The BIS closes its overview chapter by emphasizing that "such forecasts have in the past consistently proved to be overly optimistic."
Schroeder at Evian: European Nations Must Stimulate Growth
In response to questions from reporters at the Evian, France G-8 Summit June 1, about the apparent conflict between European governments' insisting on growth on the one hand, and the Maastricht budget-restricting criteria on the other, German Chancellor Gerhard Schroeder came down emphatically on the side of national sovereignty and economic growth. "What must be done is to stimulate growth, Schroeder said. "This means that deficits have to be tolerated in Europe for some time.... This can be done if there is no deviation from the consolidation course, in general."
For the time being, however, none of the EU governments is openly challenging the Maastricht system. The path they are likely to choose is to risk conflict with the criteria system and the ensuing legal problems with the EU Commission, but to proceed with deficits irrespective of the 3% GDP criteria and stretch the legal procedure over several years. The French government has been the most outspoken on this approach: Risking legal conflicts is the lesser evil, and the outcome can be influenced over the course of time.
French Workers Strike Against Pension Cuts
Public-sector strikes closed much of France June 3, leading the Chirac government to warn of "dramatic consequences" for the economy. The proteststhe second public-sector walkout within the monthcenter on the government's planned overhaul of France's retirement system, which would require public-sector workers to work 40 years to retire with full benefits, instead of the current 37.5 years.
Demonstrations took place in more than 100 towns and cities, disrupting airline schedules throughout Europe. Air France scrapped 65% of its short and medium-haul services for the day; British airlines reported cancellation of 90 of 120 flights from France, and 97 out of 138 of Germany's Lufthansa flights were grounded.
Asia Bond Fund Officially Established
The Asia Bond Fund (ABF), first proposed by Thai Prime Minister Thaksin Shinawatra, was officially established on June 2, and will begin operations with $1 billion in dollar-denominated bonds, purchased by the central banks of 11 Asian countriesChina, Hong Kong, Indonesia, Philippines, Thailand, Malaysia, Singapore, South Korea, Japan, Australia, and New Zealandfor reinvestment in development projects in the region. The fund is intended to serve as a means of defending national economies against currency speculation, for pooling of Asian reserves for investment, and as a step toward an Asian Monetary Fund.
The BIS is designated as "manager" of the ABF, and the IMF has agreed to allow the central banks to count the ABF bonds as part of their reserves for international requirements purposes.
ASEAN-Plus-3 To Begin Transfer of Dollar Reserves?
Combined with the initiation of the Asian Bond structure, intended to pool reserves in Asian securities for development, the "Chiang Mai Initiative" report to the Asian Development Bank (ADB) Board of Governors at the June 30 meeting is expected to rapidly reduce the amount of surplus being reinvested in the United States.
Some astonishing data, quoted from Citigroup's director of investment research, Arun Motianey: The ASEAN-plus-3 countries account for 95% of the world's surplus in currency accounts; four-fifths of this surplus is sent back into the U.S.; the 13 nations hold 90% of all U.S. dollar reserves worldwide. One result is that between 30-40% of U.S. debt is held by foreigners.
Mexico Ordered To Make Bond PaymentsEven on Fraudulent Loans
Mexico had better not even think about reneging on bond payments to the foreign banks, even on loans that are found to be fraudulent, the Financial Times threatened on June 4. The FT's warning was provoked by the decision issued by Mexico's Auditor-General that Banamex, Citigroup's Mexican subsidiary, should repay the Mexican government some U.S.$ 650 million it received as part of the government's bank-bailout program, because it was paid out to back up loans which were fraudulent. The Auditor General, a post appointed by the Mexican Congress, and the three major political parties, believe that the government should not make good on bailout bonds issued to Mexican banks, in cases where the loans for which they were issued are proven to have been fraudulent, and are seeking further audits of the bank loans. Sounds reasonable, no?
Oh, no. Should this decision be upheld, the FT writes, it could have "sweeping consequences for the international banks that control almost 90% of the sector in Mexico." They might go bankrupt.
At issue is the $65-$100-billion bailout by the Mexican government of those private banks which went belly-up in 1995. The bailout was sheer robbery of the Mexican people and the nation: The government assumed the bad debt of the banks, issued lucrative bonds to the banks in lieu of that debt, so the private banks could then be sold for a song to foreign owners. A hefty portion of the profits of the now-foreign-owned banks comes from the interest earned on those bailout bonds, and they are counting on receiving even greater sums in the coming years, as those bonds become repayablethe whopping sum of nearly $17 billion worth in 2005 alone, the FT reports.
Moody's Mexican bank analyst, Phil Guarco, is trotted out to threaten that if the foreign banks do not receive 100% of the money they expect to earn from these bonds, the government would be "bankrupting banks, by not making good on [its] obligations." If the banks weren't going to be paid for what was fraudulent, rating agencies would have to lower their ratings on the banks, Guarco said, because they would suddenly become under-capitalized.
Mexico's Treasury Department, headed by University of Chicago boy Francisco Gil Diaz, has no intention of harming foreign banks, and argues that this is a Constitutional issue of separation of powers. The Executive branch intends to pay, and the Congress should have no say in the matter.
New Argentine Government Won't Promise All IMF Demands
Argentine Finance Minister Roberto Lavagna suggested that the Kirchner government, which assumed office on May 25, may only sign a short-term agreement with the IMF, since the current political situation won't permit imposition of the harsh reforms the Fund is demanding, Clarin reported on June 1. Everything will depend on the conditions the IMF sets down, Lavagna said, warning, "There is full agreement in the government on one concrete thing: We won't do anything in which we don't firmly believe." The current agreement with the Fund expires in August.
On May 29, U.S. Treasury official Heidi Cruz, in charge of Latin America and the Caribbean, presented a list of structural reforms she said are "absolutely imperative" for Argentina to impose, and complained that "performance has lagged" in dealing with "banking and rule-of-law issues." She also said there could be two IMF agreements, one short-term and another long-term. Fernando Losada, an analyst with ABN Amro, predicted that talks between the Kirchner government and the Fund would be "rocky" and "convoluted."
Lavagna was angry in his Clarin interview over IMF criticism of the Argentine Congress's recent passage of legislation postponing mortgage foreclosures for 90 days. He emphasized that the timing on specific structural reforms would be determined by President Nestor Kirchner, adding that "all options are open" as to the kind of agreement that might be reached with the IMF. "Structural reforms should be done when they can be done," he said.
The IMF will not be pleased, either, with Lavagna's assertion that public-sector banking is "here to stay, and [will] be strengthened." Lavagna noted that state-sector banks "will have a central role to play in the process of Argentine development," although he added that public banks will have "to adapt to modern times to compete." Banco de la Nacion and Banco de la Provincia de Buenos Aires are targetted for privatization by the IMF, as part of the "financial restructuring" it is demanding from Argentina.
In the past, while serving in the previous Duhalde government, Lavagna had favored schemes for partial privatization of these banks, but his public statements June 2 would appear to reflect a different stance of the new Kirchner government.
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