In this issue:

IMF: Terror Threatens Financial Stability

Brazil Financial Minister Disputes IMF Caution on Interest Rates

Mexican Consul: Unemployment Signals Death of U.S. Economy

From Volume 3, Issue Number 15 of Electronic Intelligence Weekly, Published Apr. 13, 2004

World Economic News

IMF: Terror Threatens Financial Stability

In their latest "Global Financial Stability Report" for April 2004, the International Monetary Fund warned that the terrorism threatens international financial markets. More attacks like the Madrid bombing could destabilize global markets and pose a significant threat to what they call "an otherwise stable recovery."

According to Reuters April 6, markets are also vulnerable to higher interest rates and shocks from global imbalances like the gaping U.S. current account deficit.

More incidents along the lines of the Madrid bombing, could have an impact on the real economy and on consumer confidence, worries Gerd Haeusler, IMF Director of International Capital Markets.

The IMF warned that global imbalances needed attention, with markets focussing on huge capital flows to the U.S., as Asian central banks intervene in foreign-exchange markets to buy dollars. The Fund also called for more and better auditing procedures to scrutinize complex companies, naming the Parmalat case as a leading example.

Brazil Financial Minister Disputes IMF Caution on Interest Rates

According to an April 6 Bloomberg News Service wire, the IMF's latest semi-annual report on global financial stability warns that when U.S. interest rates rise, as they must, and if the dollar collapses, as is likely, the last two years of renewed lending to "emerging market nations" which have kept up their debt bubbles will come to an abrupt end.

In IMF language: "Interest rates in the U.S. and other major markets are low and will eventually need to rise." This could have "broader ramifications, including increased bond market volatility, if investors were to revise their rate outlook abruptly." Likewise, the U.S. current account deficit is a risk for "emerging markets." The U.S. has been able to attract enough capital to finance its deficit, but "if this delicate balance were to be impaired, leading to a reduction of the official and private inflows, the dollar could weaken more pronouncedly.... At any sign of that risk materializing, foreign investors could demand a risk premium on dollar assets—including pushing bond yields higher and with more volatility than current market expectations."

As such warnings from the IMF alone could will trigger capital flight out of countries such as Brazil, that country's Finance Minister Antonio Palocci made an absolute fool of himself, telling reporters in Paris, where he is attending an international conference on debt sustainability, that he disagrees with the IMF. We're not heading into any kind of world crisis, Palocci insisted. "This is a year of world growth. It is a good year. The situation is calm. I am totally calm and optimistic." After all, any change in the situation would not come about brusquely, but be well-announced in advance," Palocci claimed.

Mexican Consul: Unemployment Signals Death of U.S. Economy

The Mexican Consul in Detroit has warned his countrymen to prepare for a crisis, as growing unemployment in Michigan signals that the U.S. economy cannot hold up much longer. "To read the Detroit newspapers these days could be masochism or morbidity: It is to learn which company is going to announce its closing or reducing its workforce.... [S]ince the beginning of the recession, the closing, shrinking operations, or their transfer to somewhere else is the news of the day. In 2003 alone, the state of Michigan lost 83,000 manufacturing jobs," Antonio Meza Estrada informed readers back home, in an article published by the national daily El Financiero.

He cited the examples of Steelcase, which is cutting 640 industrial and 130 administrative jobs in the coming months, because their sales have fallen by 35% since 2001; and Kraft, cutting 6,000 industrial jobs in the next three months, as it closes operations in 20 plants; Electrolux, which announced that it will shut down its vacuum cleaner and refrigerator plant which employed 2,700 people, and will move it to northern Mexico. The union, at the last minute, agreed to reduce their average wage from $13 to $6 an hour, and still, the company decided to move.

Jobs keep moving out of the United States. "What is doubtful, is how long this will last, because without jobs or purchasing power, who will the Americans be? Who is going to buy the imported products? My grandmother used to say: 'When you see your neighbor's house on fire....' " He left the rest to his readers' imaginations.

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