In this issue:

BIS: Derivatives Holdings Jump by One-Third in 12 Months

Mortgage Lenders Want European Fannie Mae/Freddie Mac

World Bank: Argentina Should Kill Off Workers to Pay Debt


From Volume 2, Issue Number 47 of Electronic Intelligence Weekly, Published Nov. 25, 2003

World Economic News

BIS: Derivatives Holdings Jump by One-Third in 12 Months

Derivatives holdings by financial institutions jumped by $41 trillion, or 33%, in the 12-month period ending June 30, 2003, the Bank for International Settlements (BIS) reported Nov. 12. The steep rise was "driven strongly" by increased use of derivatives by financial institutions with mortgage holdings (e.g., Fannie Mae and Freddie Mac). The notional value of the global over-the-counter (OTC) derivatives market, surged from $127.5 trillion at the end of June 2002, to $169.7 trillion at the end of June 2003—a staggering 33% increase, rising in all categories except gold.

In particular, there was "vigorous growth" in interest-rate swap contracts, the largest single group of derivatives, the BIS said. Foreign-exchange derivatives, "an area which had not seen double-digit growth since the BIS began collecting these statistics," shot up by 20% in the first half of 2003. Precious metals derivatives, a "normally quiet" category, jumped by 31% in notional value in the first six months of 2003.

Mortgage Lenders Want European Fannie Mae/Freddie Mac

Mortgage lenders are calling for setting up a European version of Fannie Mae and Freddie Mac, obviously, in order to prepare for a bailout by the taxpayers, once the European mortgage bubble bursts. The project for creating the "European Mortgage Finance Agency" (EMFA) is currently led by four European banks, which are heavily involved in mortgage loans: Credit Agricole (France), Banco Bilbao Vizcaya Argentaria (Spain), Life & Permanent (Ireland), and Banco Comercial Portugues (Portugal). Many other European financial institutions in Belgium, Britain, Denmark, Germany, Greece, Italy, and Sweden are also discussing the EMFA plan. The proposal for EMFA has been sent to members of the European Parliament, the European Commission, the European Central Bank. and the European Investment Bank.

The idea sounds nice at first glance: The banks themselves would deliver the core capital for the new mortgage agency, which would then help to create "a single European market for mortgage-backed securities." Like Fannie Mae and Freddie Mac in the U.S., EMFA would buy up mortgage loans from the private banks, and then re-sell the debt in the form of mortgage-backed securities or bonds. To be successful, EMFA is supposed to achieve a triple-A rating by the rating agencies. Therefore, the proponents of the project argue, EMFA should have at least an implicit financial guarantee by the European Union.

London's Financial Times on Nov. 18 ran an editorial on the subject, headlined "Euro Fannie Mae: No thanks. The EU should not underwrite the mortgage market." It emphasizes that the EMFA promoters don't want just a "sponsorship" for the mortgage market by the European Union. "The problem is that the EMFA wants the EU to go much further by providing sufficient implicit or explicit guarantees." "It proposes a special tax status, preferential status for EMFA debt and access to a European Central Bank credit line."

In several European countries, including Britain, Ireland, Spain, and the Netherlands, incredible mortgage bubbles have been built up in recent years, which, in proportion to the respective economies, are at least as explosive as that in the U.S. Long-term interest rates, after reaching historic lows in June 2003, have already started to rise. And in some countries, such as England, interest rates on mortgages are not fixed but automatically zoom up in line with market rates.

World Bank: Argentina Should Kill Off Workers to Pay Debt

A study issued by the World Bank insists, in genocidal tones, that the Argentine labor market is "distorted" by such things as "high non-salary costs"—benefits, health insurance, etc.—and that these make it much more expensive to hire workers, according to Clarin of Buenos Aires Nov. 13. Severance pay is too high, collective bargaining is a problem, and oh-so-many more "rigidities" are built into the system. More "flexibility" is needed, it demands, to get rid of all those nasty benefits.

Why reduce these unjustified expenses? Why, to pay the foreign debt, of course. The study, authored by American William Cline, demands that Argentina increase its primary budget surplus to 4.5% of GDP, rather than the current 3% figure. You'd think they were worried about the dead IMF financial system, since all this must be done, the study says, in order to pay the multilateral lending agencies the debt owed them. The Kirchner government's plan to restructure $94 billion in debt, should also be altered, the study demands, by reducing the size of the writedown, or "haircut," to 47% (instead of the current 75%).

Note that several Argentines collaborated with Cline in the study, all of whom are either associated with the Mont Pelerin think tank, FIEL, or are former employees of the IMF/World Bank, or Wall Street banks. Included on the list is the name of current Finance Minister, Roberto Lavagna.

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