In this issue:

Hedge Funds Shift to Gold as Dollar Dives

Bank of England 'Very Alarmed' Over UK Financial Crisis

British Housing Bubble Ready To Pop

UK Trade Deficit Highest Ever

Brazil Must Pay $150 Billion in Debt in 2003

Mexican Peso Falls to Record Low Against U.S. Dollar

Uruguay Expected To Restructure Debt To Avoid Default

Bankers, Energy Pirates Demand More Looting Rights in Argentina

China To Build Huge Container Shipping Port on Bohai Bay

China Will Emphasize Job Creation as Unemployment Rises

Household Savings in China Reach Record High


From Volume 2, Issue Number 7 of Electronic Intelligence Weekly, Published Feb.19, 2003

World Economic News

Hedge Funds Shift to Gold as Dollar Dives

Richard Wachman wrote in the London Observer Feb. 9 that U.S., European, and Japanese hedge funds are investing in gold because of the collapsing U.S. dollar and equity markets. He suggests that a "gold bubble" might be in the offing. Wachman reminds his readers that in the 1980s, gold was selling at $800 an ounce until the equity markets became fashionable. He cites sources saying gold could once again reach anywhere from $420 to $1,000.

The rise has nothing to do with Iraq war fears, but the collapse of the dollar and U.S. economy, Wachman said, quoting Michael Temple of Gold Investments that the "performance of gold is linked to the decline of the dollar. The greenback has been hit by fears of the conflict in the Middle East, doubts about the underlying strength of the U.S. economy and fears over America's yawning current account deficit.... The dollar/gold connection should not be underestimated."

Temple adds, "gold should be treated as a safe haven currency, and one that comes to the fore when the dollar is under siege, as it is now. The euro may have strengthened as a result of the greenback's woes, but much less so than gold."

Bank of England 'Very Alarmed' Over UK Financial Crisis

"I can assure you, the highest levels at the Bank of England find the situation very alarming," a senior City of London source told EIR, referring to the crisis in the insurance sector. "Despite the fact that the situation for Britain's life-assurance firms was made easier last week, by the government decision to lift solvency requirements that had recently been imposed," the source continued, "a half-dozen leading life-assurance officials visited the Bank of England last week, to plead for help, and for the Bank of England to cut interest rates, or else, they warned, they would be under water, because of what is happening in the housing market. So," he explained, "the Bank of England obliged, with a rate cut that was widely proclaimed to be a surprise, but was actually not a surprise at all, given how serious the situation here really is."

The City of London source insisted that further dangers lurk on the equities market in Britain, because if the FTSE stock index goes below 3400, "This will undermine life assurance firms' solvency, whatever other measures there are. The FTSE was at 3600 at the close on Feb. 13. "Keep a watch on this," he advised.

British Housing Bubble Ready To Pop

Sharply contradictory headlines concerning the housing bubble in Britain appeared in the financial media Feb. 10. While Bloomberg's wire was headlined "UK House Prices Accelerate at Record Pace in Fourth Quarter," the Independent ran a prominent headline, "Sharp Fall in London House Prices Alarms Analysts." How is this possible? The source for both stories is the very same report on the fourth-quarter housing market put out by the government-linked Land Registry! It states that average prices of homes in England and Wales, during the fourth quarter 2002, were 22% higher than 12 months before. That was the biggest year-on-year increase since Land Registry started to report these figures in 1995.

However, as the Land Registry report shows, the rise in housing prices that has continued over several years in Britain, and was still very strong in the first half of 2002, came to a sudden end in late autumn. In Greater London, which sets the pace for housing markets in the rest of the country, average home prices were actually down 3% in January 2003 compared to three months earlier.

UK Trade Deficit Highest Ever

Britain's global trade gap reached 34.2 billion pounds ($54.9 billion) in 2002, the highest ever, as exports fell 2.5% to the lowest volume since 1999, according to government figures released Feb. 10. Exports to non-European Union countries shrank by 4.5%, as Britain has a much greater export dependency on U.S. markets (15% of all exports) than the average European Union country. Manufacturing in Britain fell 4% in 2002, the biggest slide since 1991. Industrial employment in Britain also has plunged to the lowest level since the Second World War.

Brazil Must Pay $150 Billion in Debt in 2003

Half of Brazil's public debt comes due in 2003: a staggering $150 billion worth of domestic and foreign debt, give or take a few billion, according to Bloomberg wire service Feb. 5, citing the Central Bank and Finance Ministry. Some $50 billion comes due between now and July, and another $100 billion in the second half of the year.

Given that reality, Finance Minister Antonio Palocci's announcement Feb. 7 that the government of President Lula da Silva intends to run a primary budget surplus (surplus before paying debts) of 4.25% of GDP in 2003, in order to guarantee that Brazil's debt is "sustainable," is not credible. This is more than the former Cardoso government stripped out of the budget in 2002 (4.06%), and more than the IMF accord officially requires (3.75%). The Workers Party (PT) Finance Minister made an ass of himself, asserting that the decision was taken on the basis of the country's necessities, and not based on the IMF accord, so therefore, "we made clear our autonomy in fiscal and monetary goals."

An IMF mission arrived in Brazil on Feb. 10.

Palocci said the government calculates they will generate a surplus of 68 billion reals—nearly $19 billion dollars—to pay debts. That $19 billion could set into motion great infrastructure projects, if invested in the physical economy, but spent on debt payments, they are worth a bucket of water in the ocean. (For more on Brazil, see IBERO-AMERICAN DIGEST.)

Mexican Peso Falls to Record Low Against U.S. Dollar

Mexico's peso fell to a record low against the (also falling) U.S. dollar on Feb. 7, losing 1% of its value, to close at 11.098. The Central Bank cut its lending to private banks midday (its way of trying to drive up interest rates, and attract capital)—the third time in two months it has done so, but the peso continued to fall. Private companies in Mexico are getting nervous about the effect the devaluation will have on their ability to pay their debts, which are in dollars.

So, of course, are the government's foreign debts.

Uruguay Expected To Restructure Debt To Avoid Default

Uruguay is reportedly close to announcing plans to restructure $5.3 billion in public debt to avoid a default, various news media reported Feb. 11. On Feb. 10, the government paid $151.7 million in capital and interest on a bond that came due Feb. 9, but is said to have agreed to a plan devised by a foreign consulting firm, by which it will "stretch out" payments due this year, without any writedown of the amount. Reports have circulated for some time that the IMF was pressuring Uruguay to restructure its debt, something the government of President Jorge Batlle was reluctant to do, as it undermined the country's reputation as a stable financial market for investors, and a country which "always" paid its foreign debt.

But there was great uncertainty as to whether the government would even make the Feb. 10 payment. It is currently involved in intense negotiations with the IMF, to produce a 2003 economic program whose austerity guidelines can convince the Fund that the foreign debt is "sustainable." The situation is desperate. The IMF did not disburse a $380 million tranche of a standby loan last December, claiming that the government hadn't met fiscal targets, and is still not satisfied with its projections on revenue and budget cuts for 2003. According to Argentina's La Nacion, meetings between IMF and government officials extended into the early morning hours of Feb. 10, to discuss only two topics: debt restructuring and the 2003 economic program.

Bankers, Energy Pirates Demand More Looting Rights in Argentina

Foreign utility companies are howling that the Argentine government may reverse some privatizations of former state-owned utility and service companies, citing deteriorating infrastructure and poor service, according to Bloomberg Feb. 10 and 11. Charles Dallara, managing director of the bankers' cartel, the Institute of International Finance, protested to Bloomberg that the Duhalde government is adding to investors' "anxiety" by suggesting that privatization contracts may be rescinded. "Argentina has given another black mark to Latin America," he blustered, warning that the "damage" it has done, will turn investors away for years to come.

Foreign-owned utilities have been demanding that the government allow them to raise rates frozen in January 2002, arguing that their inability to do so is the reason for poor service and collapsing infrastructure. They whine that the government didn't respect their contracts and "the rule of law," when it refused allow them to increase rates after the peso was devalued a year ago, thus, they say, forcing many of them into default.

Now, energy pirate AES Corp., together with CMS Energy Corp., and LG&E Energy Corp., have filed complaints with the World Bank-linked International Center for Investment Disputes, demanding $1 billion in compensation for their losses. Bloomberg admits that the energy pirates "were drawn to Argentina by the prospect of charging rates that were effectively higher than in home markets." Last week, consumer advocate Eduardo Mondino pointed to the "calamitous" state of privatized railroads and other services, and called on the government to rescind contracts.

China To Build Huge Container Shipping Port on Bohai Bay

China is building its largest container shipping port complex on the Bohai Bay, a region close to Russia, North and South Korea, and Japan. This "is also the starting point of the Eurasia Continental Bridge," noted Xinhua Feb. 9.

The ports of Dalian, Tianjin, Qingdao in Shandong, and the Beijing-Tanggu port area, are all in or near the Bohai Bay. Together they handle 3 million TEUs (20 foot equivalent units) a year.

This big container base is the result of northern China's booming foreign trade in this economically active region of northeast Asia. This region is becoming the "third economic belt" in China, after the South (Pearl River Delta) and East (Yangtze Delta).

The Ministry of Railways is now working with Tianjin Port, to build two railways to ship still-containerized goods, from these four ports directly to cities in central and western China.

Landlocked Mongolia has designated Tianjin its "outlet to the sea" for imports from the United States, South Korea, and Japan. The volume of freight between Tianjin and Mongolia was more than 9,000 TEUs last year.

Also, half of China's expressways are linked with areas around the Bohai Bay. Some 30 container transport companies have been set up to ship goods to other parts of China.

China Will Emphasize Job Creation as Unemployment Rises

With a real unemployment rate greater than the official figure of 4% for 2002, China is considering more comprehensive measures to create jobs. Beijing has pledged to keep the registered unemployment rate below 4.5%, and create 9.5 million jobs, according to China Daily Feb. 12.

Li Peilin, vice-president of the Sociology Institute of the Chinese Academy of Social Sciences, told China Daily that the official figure only counted those unemployed registered in urban areas. According to the Ministry of Labor and Social Security, there are about 7.5 million registered urban jobless.

In addition, official statistics do not count the 120-150 million surplus rural laborers, many of whom work in temporary jobs in cities, or some 700,000 unemployed college graduates. A full 10 million additional workers have been laid off by state-owned enterprises, but are still on labor contracts.

By the end of 2002, China had its highest unemployment rate in three years; it had been 3.1% in 2000 and 3.6% in 2001. In China, every 1% increase in the unemployment rate means that an estimated 1 million people have lost their jobs. For these workers to find jobs, "the possibilities have gradually dimmed in recent years," Vice-Minister of Labor and Social Security Zhang Xiaojian stated to China Daily. In 1998, over 50% of laid-off workers found new jobs, but in 2002, only 9% were re-employed. Zhang Xiaojian said that China's official "jobless rate in fact only reflects China's employment situation in urban areas."

He said he has "serious concern" about employment in China, where the population is rising to more than 1.29 billion. "China has a huge workforce, with about 60% of laborers in rural areas, but unemployment problems are evident and urgent."

However, in the long run, China has good prospects for employing its population, Zhang said.

Household Savings in China Reach Record High

National household savings in China have risen to a record high—the equivalent of $1.1 trillion by the end of January. This is an increase of almost 20% since beginning 2002. China's population traditionally reacts to any increasing uncertainties—such as rising unemployment levels—by saving money.

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