WORLD ECONOMIC NEWS
Derivative Trading Surges as Markets Crash
While investors are dumping stocks and corporate bonds, and IPOs (initial public offerings), mergers and aquisitions, and takeover businesses have collapsed, there is one financial sector where trading activity is at record highs: derivatives, according to the Swiss daily Neue Zürcher Zeiting Aug. 7.
In particular, the betting on stock-index futures is now breaking all previous records. The Eurex futures exchange just reported an historic turnover record for the month of July, when 77 million contracts were traded, 62% more than in the month before. Most spectacular was the 366% year-on-year increase of Eurex contracts related to bets on the Dow Jones Euro-Stoxx-50-Index.
Swiss Financial System Was 'Close to a Heart Attack'
As the new issue of the Swiss Facts weekly of Aug. 8 reveals, Switzerland was very close to a crash, during the worst market turbulences the previous week. A foreign banker is quoted, anonymously, as saying that the entire Swiss financial market was "close to a heart attack." Only emergency intervention by the Swiss central bank prevented an instant collapse of the financial markets.
Nominally, the crisis emerged around the big losses, in the second quarter, of the investment funds empire of Martin Ebner, who two years ago operated a bubble of 30 billion Swiss francs but ended up with more than 3.2 billion francs of losses and a pile of 10 billion francs of unpaid debt. But the Ebner crisis was, in reality, a crisis at Credit Suisse, the nation's second-largest bank, in which Ebner held many shares. A default of CS was to be feared, and with it, of the rest of the financial market in Switzerland, because of the over-leveraged structures. Ebner was just one big spider in the net his business partners included murky figures like the fugitive financier Marc Rich, as well as more "legitimate," but secretive, leading bankers of the Swiss financial world.
Therefore, as Facts writes, the Swiss Banking Commission (EBK) and National Bank (SNB) and the top bankers got together for an emergency crisis session, and resolved that Ebner had to be prevented from holding a fire sale of his CS assets to cover his losses. A deal was struck whereby his finances would be stabilized, and he would sell his share packages, notably those at CS. These were then redistributed among various Swiss banks, in such as way as to hide the losses and protect Credit Suisse.
Because of the role of Switzerland as an international safe haven for financial flows, a default of CS could have been the much-referenced scenario for the "collapse of one big bank" that had unleashed a much bigger crash in Europe, and beyond.
Italian Economic Daily: 'The Party's Over; Back to Production'
"The party of speculative finance is over; let us go back to production," proposes a long commentary in the Italian economic daily Il Sole 24 Ore Aug. 3. Author Nicola Cacace compares the current crisis to the situation in 1929, when, "from 1922 to 1929, ... national wealth moved toward the 20% richest families, subtracted from the poor and less-wealthy families." Today, similar policies have ensured that "the superpaid one-third of the population makes irresponsible investments in real estate and stocks (Greenspan's slot machine) which produce financial bubbles and serious market distortions, while the underpaid two-thirds of the population determine, in the long term, the plunge of the aggregated demand, which is the real danger underlying the ongoing stock market crises."
"What to do?" asks the article. "To avoid the risks of contagion from the stock market crisis to the economy, we should quickly start policies which have the clear trademark that 'the party of speculative finance is over,' and that we intend to go back to the era where production and productive work played the central role they deserve."
Brazil Needs Capital Controls Now!
Capital is being sucked out of Brazil at an accelerating rate, as everyone tries to "get theirs out," before the inevitable default hits. The capital flight has become a self-feeding mechanism, as it drives the value of the Brazilian real down, bringing bankruptcy on that much sooner.
Folha de Sao Paulo reported Aug. 4 that in June, Brazil's financial accounts balance came in at negative US$4.2 billion. That is, $4.2 billion more left the country, through debt payments and profit remittances, than entered as loans, foreign investment, etc. This does not include trade. This was the worst month for the financial balance since January 1999, when a net US$6.7 billion left the country, during the crash that forced the government to float the real. The figures for July when the capital flight was much worse are not yet in.
Folha reviewed how the problem is escalating in several categories of capital flows:
1. The closing off of any foreign credit for Brazil is decisive to the drain of resources, because Brazilian-based companies, domestic and foreign-owned, could not roll over more than 22% of their debts in June, and therefore were forced to come up with dollars to pay them off when they came due. The paper notes that foreign creditors are also offering discounts to companies which pay their debts off early.
2. The multinationals are not reinvesting, but pulling any and all profits out. O Estado de Sao Paulo reported that profit remittances in May-June of 2002 were 140% greater than in May-June 2001. In dollar terms, $1.2 billion left in those months this year, as compared to $500 million in the same period last year. O Estado points out that because of the devaluation, the drain was even bigger when calculated in reals (which is what most companies' revenues are in) at R$3.1 billion's worth. O Estado reports that foreign companies are encouraging future expected profits be sent out early! (The gigantic increase in profit remittances out of Brazil over recent years is another example of how privatization is looting; the sell-off of once state-owned companies to foreign interests, means their profits leave the country.)
3. Capital is also leaving in increasing amounts through the so-called CC-5 accounts, which permit foreign residents and companies, and Brazilians with alleged activities abroad, to ship money out of the country. (The CC-5s have long functioned as Brazil's classic money-laundering/capital flight mechanism.) In June, US$605 million left the country through the CC-5s; but $690 million already left through this window in the first 12 days of July, alone.
Bank of Japan Doubts U.S. 'Recovery,' as Nikkei Tanks
Tokyo's Nikkei stock index ended Aug. 6 barely above the critical 9,500 level at 9,501, down almost 25% from April. Any further fall could lead the Nikkei back below 9,400, its lowest level in 19 years, since December 1983. Whereas last spring, there was a lot of shorting and gambling-type speculation by Anglo-American firms in Tokyo, now the Americans, in particular, are simply desperate "to cash in any asset they have and repatriate the proceeds to their home countries," Nikkei reports.
Several statements by "an official of the Bank of Japan (BOJ) "to Nikkei this week warned that the BOJ questions "whether the U.S. economy is truly on the mend," as Nikkei puts it. These "anonymous" statements by are growing by the day. The BOJ believes, that since U.S. consumer spending "is based on rising home prices, its sustainability remains uncertain," Nikkei reported today; i.e., the BOJ is warning that the crash of the U.S. housing bubble could crash all markets in the world. "Also, some BOJ officials are questioning whether U.S. firms are not overly indebted," they add. "If another company is discovered to have shady accounting practices, there is a possibility that U.S. share prices will continue to fall without bottom," one official said.
The market ignored a new move today by Japan's Financial Services Agency to further tighten regulations against short selling in margin trading. Similar regulations helped stop a Nikkei slide just before the March 31 bank book closing. "The FSA is trying to do what in did in March, this time for [Japan's] Sept. 30 book closing," said one trader. "But this time it's not foreigners shorting the Tokyo market. This time it's foreigners taking any cash they can get out of Tokyo because they are desperate for cash."
"Market participants are also jittery about a U.S. military campaign against Iraq, the possibility of new terrorist attacks, and Bush's 'new world order,' among other things," Nikkei also reports. Whenever there is a war in the OPEC region, because oil price hikes then depress production in Japan, there is a run on Japanese markets.
Leaders of Malaysia, Thailand, Indonesia Hold Economic Talks
Malaysia's Dr. Mahathir Mohamad, Thailand's Thaksin Shinawatra, and Indonesia's Megawati Sukarnoputri were to meet in Bali, Indonesia Aug. 8, where the three leaders will witness the first delivery of natural gas from Indonesia's state oil company, Pertamina, to Malaysia's counterpart, Petronas. Thailand will also be receiving gas from the new pipeline from the Indonesian oil fields to Malaysia.
The three will also form a rubber cartel (although carefully not called a cartel). The International Tripartite Rubber Company between the world's three largest rubber producers, will reduce total production by 4% and exports by 10% in order to raise prices for the 10 million small rubber plantation holders.
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