World Economic News
IMF Reviews Second-Quarter Horror Show in World Economy
In its new "Global Financial Stability Report," the International Monetary Fund draws a comparison between the present situation and the days of the Long Term Capital Management (LTCM) disaster in autumn 1998, when, according to then-IMF head Michel Camdessus, we were on the brink of a "true world catastrophe." In the first chapter, the IMF reports states:
"During the period under review, a sharp erosion of investor confidence, heightened risk aversion, and growing concerns about the strength and durability of the global recovery and the pace and quality of corporate earnings had repercussions in all of the major equity, credit, and foreign exchange markets.
"Market adjustments occurred against the background of the bursting of the telecom, media, and technology (TMT) bubble, which exposed a culture of 'irrational exuberance,' and sometimes greed, among many buyers, sellers, and intermediaries, and most recently some senior executives who adopted business practices some unethical and illegal to boost their companies' share prices at any cost.
"First, major equity market indices declined significantly and by early August were near or below levels not seen since the autumn of 1998, when global markets were unsettled by Russia's default and the near-collapse of the global hedge fund, Long-Term Capital Management.
"Second, as U.S. corporate bankruptcies hit records, institutional investors and banks discriminated more clearly between classes of borrowers and reduced lending to high-risk borrowers. As a result, corporate credit spreads widened, and speculative grade borrowers faced dramatically higher borrowing costs. The credit deterioration also created a record number of 'fallen angels' whose outstanding bonds were downgraded from investment grade to junk status.
"Third, the dollar continued to depreciate against the other major currencies, reflecting reductions in foreign portfolio flows into U.S. equity markets and in foreign direct investment. The dollar's decline, together with the continuous stream of accounting irregularities in the United States and the relative absence of them elsewhere so far, intensified concerns about how much further the major currencies would be realigned and doubts about the sustainability of capital flows needed to finance the U.S. current account deficit."
Also in the report, the IMF points to "considerable downside risks" for the immediate future," including:
*"The possibility of further equity price declines, and in the worst-case scenario, panic selling by both institutional and retail investors;
*"A further weakening of financial institutions' balance sheets and profit outlooks, in particular among banks and insurers in Europe;
*"And an accelerating slowdown in net capital inflows to the United States and the associated potential for substantial exchange rate movements."
What's missing from this report? The solution. For which, see this week's INDEPTH feature on Lyndon LaRouche's international Webcast.
India Ready To Buy Natural Gas from Turkmenistan via Pakistan
According to The Nation of Islamabad Sept. 12, India is keen to buy gas from the Daulatabad Gas Reservoirs in Turkmenistan through an extension of the proposed Turkmen-Pak pipeline via Afghanistan. According to the initial plan, the 1,400-km pipeline will bring gas to Multan in Pakistan from Turkmenistan. The latest design shows the pipeline being extended to the Gwadar deep-sea port in Baluchistan. If India comes in as buyer in this multinational project, it would require an extension of over 500 km from Multan to New Delhi. The Asian Development Bank-led agencies have indicated their support to fund the project.
"We are keen to become a major buyer of gas from the planned Turkmen-Pakistan gas pipeline, especially when it is proceeding with leading support of institutions like the ADB," The Nation quotes the Indian Ambassador to Turkmenistan as saying.
The Committee of Pakistan, Afghanistan, and Turkmenistan steering committee's second meeting is scheduled to be held in Kabul on Sept. 16.
India Delays Deregulation of Power Sector Beyond 2012
India will not deregulate the power sector until at least 2012, Rediff.com reported Sept. 12. Union power secretary R.V. Shahi said India needs to regulate the power sector at this juncture and this regulation is likely to continue for at least another 10 years.
Citing a "massive mismatch in demand and supply of electricity," Shahi said that if the electricity is deregulated, they could end up with chaotic conditions in the system.
Taiwan Adopts Bank Plan for Non-Performing Loans
Taiwan plans to consolidate its banking sector to cope with a growing number of non-performing loans. The Ministry of Finance has proposed increasing its financial restructuring fund to more than NT$1 trillion (about $20 billion) to buy bad bank loans and encourage mergers among its banks. The Ministry hopes that within two years, the island's 52 banks will merge into 15.
It says that it will send the proposal to the Legislature, which convenes in less than two weeks, for approval. Taiwan's financial system, which has been in steady decline for five years, is in dire need of a bailout. The nation's non-performing-loan (NPL) ratio has doubled in the past two years, and continues to grow at a rate of over 1% per year, while loan growth has declined from about 4% in 1997, to negative growth from last year.
The island's leading five banks control less than 40% of the market share combined, while the smaller banks each take less than 1%. The average return on assets is around 0.4-0.6%. "We aim to buy out all the banks' NPLs within two years, relieving pressure so they can give loans to meet the needs of industry which will encourage them to invest," says Hsu Wei-wen, section chief of the Bureau of Monetary Affairs under the Finance Ministry.
Official NPL ratios stand at 10.5%, or NT$600 billion. Hsu says that within two years, the government hopes to bring that figure to under 5%. The other NT$450 billion the government is requesting will go toward bailing out insolvent institutions such as Chung Shing Bank and Kaohsiung Business Bank.
These two institutions have incurred combined credit losses of over NT$50 billion and repeated attempts to sell them have failed.
IMF Director: Japan Financial System Will Not Collapse Tomorrow
The Japanese financial system will not collapse tomorrow, declared IMF Managing Director Horst Koehler in an interview, after meeting Japan's Financial Systems Minister Hakuo Yanagisawa in Tokyo Sept. 9. Trying to sound reassuring, Koehler said, "Nobody should panic.... There are certainly problems. But it's not a situation that you should think tomorrow the Japanese financial sector will break down." Got that? He said, "Don't panic!"
Forecast of 'Massive Recession' Following Iraq War
The Economist Intelligence Unit has forecast that the world would suffer a "massive recession" if Iraq is attacked, according to the Chinese news agency Xinhua. Robin Bew, the Chief Economist of the EIU, told Xinhua in a written commentary Sept. 12, that the forecast assumes that, after a U.S.-led attack upon Iraq, Middle East oil producers would oppose the action, and unite to cut off oil production, thereby pushing oil to $70 per barrel or more.
Debt Collection Spreads Starvation Across Ibero-America
Across Ibero-America, governments are scrambling, hand-to-mouth, to keep alive the fiction that their nations' debts can be paid, and that they and their foreign creditors are not utterly bankrupt. The debts are so large, and the physical economies are so looted by 20 years of cannibalization to pay those debts, however, that none of their schemes is working.
Brazil, for example, despite the $30-billion bailout package announced by the International Monetary Fund on Aug. 7, is still headed straight towards an Argentine-style blowout of its almost $500 billion in government and corporate foreign debts. Since anyone with a brain knows this, capital is fleeing the country, and bankers are refusing to extend new loans, or roll over old ones as they come due. The Central Bank could not roll over $2.1 billion in dollar-linked debt and swaps which came due on Sept. 11, despite offering interest rates of over 30%, on paper coming due only months from now.
The demand for dollars to pay debts and to pull money out of Brazil, in turn, drives down the value of Brazil's currency, the real, and the real lost 5.5% of its value in the first week of September. Because 46% of the government's 1-trillion-plus "domestic" debt is indexed to the dollar, every drop in the real's value automatically increases the total country's dollar debt bringing on bankruptcy sooner.
Cut off from many of the foreign capital flows it had relied on, under IMF dictate, the government just announced that it would cut another $2.6 billion out of government expenditures, and use that money for debt payments. That strategy, too, only ensures more rapid bankruptcy. Among other things, a previous budget cut in 2002 forced 44,000 military recruits to be sent home without pay. The government has also slashed the number of priority infrastructure projects from 67 to 24 all that's left of 387 projects originally planned, leaving private contractors already working on the projects threatening to sue for breach of contract.
As Argentina proved in 2001, cutting government spending as a way to generate funds to pay the debt is insane. As government spending is cut, tax revenues from the economic activity sustained by that government spending also collapses, requiring even greater cuts, in an endless downward spiral.
Uruguayan Holocaust Next
Uruguay, which received a $3-billion bailout from the IMF in early August, may be forced to default on its debt even before Brazil does. The government denies it will ever default, but on Sept. 2, Finance Minister Alejandro Atchugarry announced that the government has insufficient funds to pay pensions, salaries, and state suppliers. The debt is sacrosanct, and wages and pensions will be paid for September, he insisted, but payments to suppliers will have to be reduced. What happens come October, is another story.
The Minister admitted that in the current crisis, it is impossible to impose new taxes. Official unemployment is at a record high of nearly 17%, while wages fell by 10% in the last three months alone. Industrial production collapsed by 11.3% in the first half of 2002; transport and communications by 5.8%; construction by 12.6%. Exports, measured in dollars, were 20% less than the same period a year ago, over the same time frame. Electricity usage (residential, industrial, and commercial) fell. Even consumption of potable water fell!
The social fabric of the country is at the point of unravelling. Strikes occur daily. A frantic President Jorge Batlle forbade a leading military figure, Col. Carlos Silva, from delivering a speech he had prepared for his retirement ceremony, declaring it "inconvenient for national interests,' but a national daily printed the speech anyway. In it, Silva warned that the country faces its worst crisis since its founding, because of economic policies imposed by "technocrats ... whose objective is to limit our sovereignty and independence to the maximum, transforming us into a mere supplier of cheap raw materials and consumer of [industrialized nations'] products." Uruguayans are being "enslaved ... to increase our immoral debt and colonial submission," he charged, and this must be resisted.
Eating Less and Less
The debt collection schemes will not stop default, but they are producing genocide. Take the case of Argentina, whose debt pyramid collapsed in December 2001. The country produces an average of two tons of grains per capita, per year, and yet its people, almost 60% of whom now live below the poverty line, are starving.
Just released official government statistics reveal a catastrophe: Argentines now consume 38% less pork, 29% less chicken, 20% fewer dairy products, and 7% fewer eggs, than they did a year ago. Officially, beef consumption has fallen by only 1%, but private economists estimate it has really fallen by 4% this year.
Argentina is not an isolated case. Across Ibero-America, food consumption has declined dramatically over the past year, as the economies collapse under the weight of debt payments.
In Mexico, 53.7% of the 100 million inhabitants are classified as poor, according to a recent study by the Ministry of Social Development. While the average daily wage for the poor is 34 pesos, or a little over $3, the study admitted that many people make much less than that, and are unable to purchase enough food to cover the most minimal caloric requirements. In 18.6% of households surveyed, the average daily wage is between 15 and 20 pesos ($1.50-$2.00), which the study recognized means they are "food-poor," i.e., without adequate food.
In Venezuela, a study by one private firm found that the average monthly family income fell by 67.5% in the first half of 2002 in a country where 80% of the population was already ranked as poor. On Sept. 2, the national supermarket association reported that supermarket sales in Venezuela had fallen by 12% this year, and they project they will fall 14-15% by the year's end. Food prices have risen some 20-25% since the currency, the bolivar, was allowed to float in February, leading to a 47% devaluation so far this year.
Living standards are about to fall even faster under the Chavez government's new austerity package, which went into effect Sept. 1. Its measures include a 16% tax on electricity and agricultural goods!
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