World Economic News
Will Argentinaor the IMFLose the Coming Showdown
Should Argentina default to the IMF, "who would be the big loser, Argentina or the IMF?" The Argentine daily Clarin asks exactly the right question in its Feb. 5 edition, and implies that the answer isn't necessarily Argentina. As the thuggery against the country intensifies, with new threats that Argentina must be cut off from all credit, IMF and World Bank included, unless it bows to the creditors, President Nestor Kirchner is holding his ground.
Why are the bondholders so hysterical? he asked on Feb. 3. "They went to the casino; things went all right for them for a while. They bet on the risk, so there's now no reason why Argentines should have to pay for the interest rates that some irresponsible officials agreed to at that time [in the 1990sed]. Nobody is innocent here." He added, "Argentina will continue to grow, even if there is no agreement with creditors." Interior Minister Anibal Fernandez said on the same day that bondholders "will suffer big losses, and they deserve it."
Immediately at issue is the $3-billion payment due to the IMF on March 9. The Kirchner government has said that it will pay it, but only if the IMF disburses an equivalent amount in new monies, which requires that the IMF certify that Argentina is meeting its conditionalities. A loud chorus has arisen since the end of January, from the Wall Street Journal, the Financial Times, G-7 and IMF officials, and purported "experts," insisting that the IMF refuse to approve Argentina, until the country negotiates in good faith with its private creditors, permits the foreign companies running privatized utilities to raise their rates, and President Kirchner stops his "insults" and "offensive" rhetoric.
Wall Street Journal Americas editor Mary Anastasia O'Grady complained on Jan. 30 that "gunboat diplomacy" is no longer deemed acceptable, but, thank God, the "financial community" is uniting around the need for the IMF to take action against Argentina. The Financial Times, in FT correspondent Martin Wolf's prominent Jan. 28 column and in a Feb. 2 lead editorial, called for the IMF to "stand up to the blackmailer," and cut Argentina off. To ensure the IMF survived an Argentine default, however, the FT editorial suggested the Group of 7 had better put together a credible financing plan, so that the IMF itself wouldn't end up in bankruptcy.
On the eve of the Feb. 6 Group of Seven Finance Ministers meeting, French Treasury Secretary Jean-Pierre Jouyet, speaking in the name of the G-7, told Argentina it must begin "a constructive dialogue in good faith" with bondholders, adding that at its Boca Raton meeting, the G-7 will order Kirchner to "maintain the confidence of international investors."
Financial Markets Headed Toward 'High Noon'
Global financial markets are heading towards "High Noon," warned Bill Gross Feb. 3, head of Pacific Investment Management Company (PIMCO), the largest bond-trading investment fund in the world. Echoing Lyndon LaRouche, Gross writes in his latest monthly "Investment Outlook," that "Greenspan's economy is a completely different one" from the days of Paul Volcker's stint at the Fed (1979-87). "Greenspan's economy is a globalized economy," based on the "substitution of cheap Asian and Latin American labor for workers here at home." He adds, sarcastically, "It is an economy full of technological wonders such as the Net, cell phones, high-speed data transmission, and the like. We may not be able to go to the Moon any more, but things down here on mother Earth are certainly movin' and shakin'.
"The most critical reformation in the past 20 years since Volcker's prime has been the transition of the U.S. from a manufacturing, to a service, to a finance-based economy within the span of two decades." General Electric is exemplary of this transition. "In 1980, [some] 92% of its reported profits came from its manufacturing subsidiaries. In 2003, nearly 50% of earnings were supplied by financing subsidiaries highly dependent on leverage, the cost of that leverage, and the ability to maneuver through the swaps market."
Gross then warns: "But folks, all blame aside, I must tell you in advance that this story or movie does not have a happy ending. In terms of timing it may not be high noon, but High Noon it will be in terms of an ultimate outcome.
"Debt as a percentage of GDP [gross domestic product] has skyrocketed over the past 20 years and is now at historically high levels approached only briefly during the depression of the 1930s.... What's wrong with 400% of GDP or 500% of GDP? What's wrong with dropping it from helicopters if we have to, as good Ben Bernanke has suggested?
"My point is that at some point on this seemingly never ending ascent of debt/GDP, someone will say 'no mas.'... I'm telling you it'll happen, helicopter or no helicopter, and with it will come an economic slowdown/recession unseen since at least the early 1980s when Volcker began his vigil. High noon."
Parmalat Derivatives Exposure Raised by Creditor
"What worries me is the derivatives aspect of the Parmalat default," Rainer Masera, head of SanPaolo-Imi, one of Parmalat's Italian creditor banks, said on a talk show on Italy's RAI-TV Feb. 2. Masera added that "for each bond there are ten derivatives" out there, so-called "credit default swaps," hinting that this larger bubble could explode as a consequence of the Parmalat bankruptcy. When asked to explain what a derivative is, Masera was unable to do so.
Japan Issues, then Downplays, Threat To Shift Into Gold
When asked Jan. 27 how Japan should handle its giant $673.53-billion foreign reserves, Japanese Finance Minister Sadakazu Tanigaki suggested that he felt it necessary to study the future composition of national reserves, and "this might include a review of bringing Japan's modest gold reserves into line with much higher levels elsewhere," Business Times of Singapore Japan correspondent Anthony Rowland reported Feb. 2. "The impact of such a move on the dollar would be severe. And as Japan has a third of total U.S. Treasury securities held outside the U.S., the impact on the bond market would also be severe."
Japanese Foreign Ministry officials confirmed Tanigaki's statement to EIR, but strongly downplayed any immediate intent to act, as they did in an interview with Rowland in a second column he wrote next day, Feb. 3. "It doesn't make any sense right now to even think that Japan would sell dollars for gold," one Tokyo official told EIR, "when we have just spent a record 20 trillion yen ($189 billion) to buy dollars, to prop up the dollar in 2003, and another 7.15 trillion yen ($67 billion) between Dec. 27 and Jan. 28, a record intervention figure for a single month! And as far as I know, BOJ interventions have continued to buy up dollars at a very heavy rate this week. We are eager to stabilize the markets before the G-7 meeting this weekend."
Rowland wrote that foreign exchange and commodity markets have been "set alight" by Tanigaki's gold comments, but in fact, there has been almost no mention of it, especially in the Japanese press. However, the official told EIR, "Problems did arise for the dollar, when Mr. Tanigaki also Jan. 27, defended our intervention, by saying it was 'only designed to control speculative moves or wild fluctuations in the market.' Foreign exchange markets are so volatile now, that Tokyo traders took this as a threat that Japan would stop trying to support the basic dollar rate, but only smooth out erratic movements. The dollar promptly fell from Y106 to Y105, so we had to intervene heavily to clean up the misunderstanding."
Such speculation, of course, is yet another way for the U.S. Treasury to obtain large amounts of dollars from the BOJ, to keep Greenspan's ponzi game going.
Dollar Situation 'Untenable'; Sakakibara Calls for 'Exit Strategy'
Expect sheer madness at the G-7 Finance Ministers summit in Florida Feb. 6-7, Tokyo financial sources told EIR. While Japan is, in the short term, desperate for a communiqué from the meeting saying the dollar's fall can't be allowed to continue, it's not likely to happen, officials say. This situation is becoming "untenable," one Finance Ministry man admitted under EIR questioning.
"The dollar could fall from its present Y106 level, to below Y100, and no one in Washington would mind or even worry," an outraged Japanese Finance Ministry source told EIR. "The Bush Administration is so eager to get a weaker dollar right now, to export its economic problems, that they don't even realize whose problem it is, that the dollar is so seriously weak."
"Concerns about the dollar's rate of decline probably will not even be raised in the G-7 joint statement, so the dollar will probably keep losing ground toward 100 yen," Eisuke Sakakibara, former Vice Minister of Finance for International Affairs, said in an interview with the Japan Times Feb. 3. "It is true that Japan and the EU are concerned about the current weakness of the dollar. But the U.S. is quite satisfied with it," Sakakibara complained.
Sakakibara said that the dollar could fall to 100 yen or dip briefly to 90 yen soon, which, by itself, would not be a death blow to Japan's economy. However, he said, Japan "will not be able to maintain the same level of intervention for a few more years, although these operations have had limited success in slowing the yen's rise against the dollar. Japanese financial authorities would eventually have to think about how to exit from such a strategy," he said.
The four top Asian nations alone already are stuck with a combined $1.44 trillion in pretty much useless U.S. dollar reserves, as EIR reminded one Japanese Finance Ministry official: Japan with $673.5 billion, China with $403.3 billion, Taiwan with $206.6 billion, and even South Korea, which reached $157.4 billion at the end of January. The reserves of these four have been growing at a combined rate of almost $300 billion a year. That was when the official was forced to admit this is ultimately "untenable."
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