In this issue:

Corporate Bond Defaults Worldwide Vaulted to a New Record in 2002

Globalization's Tentacles Strangle Factories Throughout Europe

China, Russia, Eastern Europe Stabilize German Exports

London Housing Bubble Bursting for Upper-End Homes

The IMF Blinks; Argentina Clings to Rails of Titanic

Bankers Furious Over IMF-Argentina Agreement

Venezuela's Economy Is Disintegrating as Anti-Chavez Strike Continues

Brunei Unveils Port Development To Diversify Economy

Plans for an Asian Bond Market by Summer


From Volume 2, Issue Number 3 of Electronic Intelligence Weekly, Published Jan. 20, 2003

World Economic News

Corporate Bond Defaults Worldwide Vaulted to a New Record in 2002

Worldwide, 194 companies defaulted on a record $177.1 billion of debt—53% higher than the $115.4-billion default volume in 2001—led by WorldCom, and including Adelphia Communications and Global Crossing (telecom), according to the credit-rating agency Standard & Poor's. U.S. companies accounted for 106 of last year's defaults, with a total of $142.8 billion—more than 80% of the total volume worldwide.

Last year, S&P downgraded 1,123 companies and upgraded 266, a 4.2:1 downgrade-to-upgrade ratio; but the ratio fell to 5.9:1 in the fourth quarter. The agency also created a record 84 "fallen angels," companies that fell to junk status from investment-grade.

Globalization's Tentacles Strangle Factories Throughout Europe

Following the insane logic of globalization, another major electronics company has announced the closing of its production site in Hungary. In October, IBM closed its factory gates in Szekesfehervar, laying off 3,200 workers. In recent days, the Dutch company Philips, which is Europe's largest consumer electronics group, announced that it plans to move production of cathode ray tube monitors from Szombathely, Hungary to China, in order to cut costs. The move will lead to 500 job losses in Hungary.

China, Russia, Eastern Europe Stabilize German Exports

According to just-released figures by the Federal Statistical Office, German exports—especially automobiles, machines, and chemical products—in 2002, hit a new all-time high of 647 billion euros. The share of exports in the overall Gross Domestic Product thereby increased to 35%. So much for the good news.

How was this possible, when German exports to the other G-7 countries declined? Export figures by country are only available for the first 10 months of 2002, but the message is very clear: European Union, -0.4%; U.S., -3.0%; Japan -8.3%. In contrast, German exports rose sharply to the larger economies in the East (except Japan): China, +18.7%; Russia, +13.8%; Central and Eastern Europe, +7.9%. German exports to Southeast Asia were up markedly as well, although precise figures were not reported.

At the same time, shrinking domestic demand—most visible in the construction and retail sectors—caused a 4% decline of German imports to just 520 billion euros, dragging down the rest of the European economies. Never in German postwar history, had imports been so far below exports. Both the construction sector, in part due to collapsing infrastructure investments, and the retail sector are speaking of their worst crisis in 50 years. Every single day, about 100 German firms go bankrupt. Total bankruptcies last year amounted to 37,700, an all-time high and more than one-third above the already extremely high level of the years 1996-2000. As a direct consequence of last year's bankruptcies in Germany, 590,000 jobs were eliminated and 38.4 billion euros of liabilities were turned into bad debt. The official unemployment at the end of 2002 reached 4.2 million, a quarter-million more than a year earlier.

London Housing Bubble Bursting for Upper-End Homes

Asking prices for London homes priced at more than $1.6 million have fallen by at least 10%, as bankers lose jobs and see their bonuses cut. Prices will drop another 20%, warn real-estate agents, in districts such as Kensington (favored by investment bankers) and Chelsea—where four-bedroom homes that in mid-2001 sold for $4 million, are being marked down as much as 15%.

British home prices jumped 26.4% in the fourth quarter of 2002, the fastest pace in 14 years.

"It's a classic sign of a bubble bursting," said an analyst at Merrill Lynch.

The IMF Blinks; Argentina Clings to Rails of Titanic

On Jan. 16, one day before the deadline by which Argentina was required to pay $1 billion to the International Monetary Fund, the IMF and Argentina's Duhalde government announced that a transitional agreement had been reached to roll over a total of $16.1 billion in debt, through Aug. 31 of this year. After a year of negotiations, in which the IMF's top leadership—Horst Koehler, Anne Krueger, and Western Hemisphere Division chief Anoop Singh—refused to make any concessions to Argentina, pressure from the G-7 countries succeeded in forcing through the agreement. The G-7 clearly didn't want a showdown at this time, undoubtedly fearful of what that would mean for Argentina's highly unstable neighbors—Brazil in particular.

The rollover includes $6.6 billion owed the Fund, $4.4 billion to the World Bank and IADB, as well as $5.1 billion already refinanced during 2002. Despite claims by Chief of Cabinet Alfredo Atanasof that "now we are a serious country," and that "this is an agreement that can pull the country out of crisis," this is hardly a victory. Argentina didn't break with the IMF—it's still clinging for dear life to the rails of the Titanic. And Argentina did indeed pay $1 billion to the Fund on Jan. 16. The payment was made immediately after the Fund announced that an agreement had been reached.

The agreement is a political one, more than anything else, as it will get the country through the April 27 Presidential elections, with a new government taking office May 25. There are no conditionalities demanding structural reforms in the accord, but austerity is the watchword, in a country where 57% of the population is officially poor. The government promises not to increase spending, or lower taxes. The VAT tax in fact was just increased from 19% to 21%, under IMF pressure. Provinces are prohibited from issuing any "quasi" money—i.e., provincial bonds—which, for many, is the only way they have been able to pay wages and pensions.

Bankers Furious Over IMF-Argentina Agreement

Grumbling over the IMF agreement reached with Argentina could be heard from Credit Suisse-First Boston executive Lacey Gallagher, who complained that Argentina hadn't offered a "sustainable program.... I don't think it helps the Fund or Argentina, to get a program without a clear purpose other than to roll over the Fund's own credits." Earlier this week, the Wall Street Journal attacked "another billion-dollar bailout" of Argentina that would be granted without demanding implementation of necessary economic reforms. Most hysterical is the column in the Jan. 17 Journal by Mont Pelerinite madwoman Mary Anastasia O'Grady, who griped that Argentina has "cheated" the system, broken "the rule of law," and "jerked around" the IMF. Until it follows the "rules"—agreeing to kill more people, no doubt—Argentina "is doomed to underdeveloped-country mediocrity."

Venezuela's Economy Is Disintegrating as Anti-Chavez Strike Continues

A briefing put out by London's Economist Intelligence Unit Jan. 8 aptly characterizes the situation in Venezuela as a race for which breaks down first—the public or the private sector—should the anti-government strike continue beyond the opposition's Feb. 2 target date for a "consultative referendum" on whether President Hugo Chavez should stay or go. The Venezuelan-American Chamber of Commerce projects the government will run out of revenues by mid-February, and if oil exports have not recovered, it will then face fiscal collapse. But the Economist notes that the private sector has less access to resources than the public sector.

The head of the Federation of Venezuelan Industries estimates that, if the strike continues into February, more than 25,000 companies will go under in the next six months, leaving 200,000 Argentines without jobs. The combination of fuel scarcity, disrupted supply chains, reduced or no sales, and, last week, two days of bank closures, has hit everyone. Many big companies are granting "collective vacations" for employees, since their sales are down, in some cases, to zero. (Ford Motor Co., for example, sold no cars in Venezuela in December.) Other companies are enforcing unpaid vacations and reduced work hours, to stall on massive layoffs.

Banks fear a massive withdrawal of deposits. The bolivar has lost 90% of its value since Jan. 1, 2002 (the Economist's calculation), 22% since the start of the strike Dec. 2. To save something, Venezuelans are pulling out their bolivar savings to convert them into dollars, which wealthier citizens then send out of the country. Currency controls are widely anticipated.

The potential of long-term damage to the oil industry grows each day the strike continues. Government efforts to restart El Palito refinery have sent black smoke billowing out (it can be seen for miles), but have so far been unsuccessful. Other news sources reported last week that the Governor of Zulia (who is with the opposition to Chavez) declared a state of emergency, after at least 33 accidents had occurred in Lake Maracaibo, due to the lack of experience of workers sent by the government has to restart the industry. Bloomberg reported Jan. 10 that some government officials said that full production is unlikely to resume before May.

Although the awful disintegration in Venezuela is ostensibly being driven by different mechanisms than those that are tearing apart Argentina, both cases are in fact but particular manifestations of the general breakdown of the "post-industrial" system globally—exactly as Lyndon LaRouche warned would happen, years ago.

Brunei Unveils Port Development To Diversify Economy

The Sultanate of Brunei has unveiled an ambitious five-year, $4.5-billion plan to build a huge port and power plant, as part of a move to diversify its economy, and to provide 6,000 jobs. Up until now, the Sultanate has relied almost exclusively on its offshore oil, but the 1997 collapse and $16 billion in bad investments by Prince Jefri's firm have taken a toll.

The development plan includes a "global megaport hub" for container shipping in Pulau Muara Besar, and tapping gas reserves to develop downstream and manufacturing industries, and to build a 500-megawatt power plant and other infrastructure.

A feasibility study on the port should be completed within six months. The development board hopes foreign direct investment will provide half of the $1.5 billion required, and is looking for 90% of the cost of the $3-billion power plant at Sungai Liang. The board wants final decisions by the end of this year so that the projects can be fully operational by 2008.

The head of Brunei's Economic Development Board pointed out that China's rapid growth provides an opportunity for Brunei to reposition itself, given its "natural assets and strategic location."

Plans for an Asian Bond Market by Summer

Plans for an Asian bond market, which, it is hoped, will lessen dependence on international lending institutions, are coming together for later this year, according to leading newspapers in Malaysia and Thailand Jan. 12. In two separate meetings in the week ending Jan. 11, one between Malaysia's Dr. Mahathir and Japanese Finance Minister Masajuro Shiokawa in Kuala Lumpur, and another between Thailand's Thaksin Shinawatra and Singapore's Goh Chok Tong in Phuket, the plan for an Asian Bond market was agreed upon. The Thai Central Bank will have a final proposal ready by March, and formal discussions can begin as soon as June. At first, 1% of the reserves of the participating nations—hopefully all of the ASEAN+3 nations—will be placed in bonds which will be available for use by any nation in crisis.

Dr. Mahathir and Shiokawa were reported to have focussed their discussions on "ASEAN+3, the "Look East Policy," the Asian Bond market, and Vision 2020."

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