In this issue:

Credit Suisse Shows Record Third-Quarter Loss

French Prosecutor Recommends MultiMillion-Dollar Fine for Soros

Deutsche Telekom To Report Giant Losses for 2002

German Life Insurance Companies May Not Have Long To Live

Brazil Has Trouble Rolling Over Its Debt

Brazil Faces Inflation, Currency Depreciation; Lula Under Pressure


From Volume 1, Issue Number 37 of Electronic Intelligence Weekly, Published Monday, Nov. 18, 2002

WORLD ECONOMIC NEWS

Credit Suisse Shows Record Third-Quarter Loss

Credit Suisse, the second-largest Swiss Bank, reported a record $1.4-billion loss in the third quarter, blamed mainly on low investment income in its insurance business, which lost $937 million, as well as slumping revenue and credit provisions. The bank had injected $1.14 billion into its Winterthur insurance company earlier this year.

French Prosecutor Recommends MultiMillion-Dollar Fine for Soros

A French prosecutor recommended a $2.2-million fine for speculator and dope pusher George Soros, who is on trial for insider trading in connection with a stock purchase in Societe Generale in 1988, before an abortive takeover effort pushed up the stock price. Soros is accused of making $2.2 million on the deal. Also on trial is Jean-Charles Naouri, former head of the office of France's then-Finance Minister Pierre Beregovoy.

Deutsche Telekom To Report Giant Losses for 2002

Deutsche Telekom this year will have to report staggering losses of 28 billion euros—by far the biggest ever reported by a German corporation, according to the German economic daily Handelsblatt Nov. 11, quoting unnamed company sources. Already, in the first three quarters, Deutsche Telekom generated a 5-billion-euro operating loss, which is projected to reach 8 billion euros by the end of the year.

Furthermore, Deutsche Telekom will now have to write off huge investments that had been made during the telecom bubble years, such as the 8-billion-euro third-generation mobile-phone licenses, and the 35-billion-euro takeover of Voicestream in the United States. The value of those assets in the meantime has imploded, to just a small fraction of the transaction price. Combined with such write-offs in the range of 20 billion euros, the full-year loss will probably amount to 28 billion euros. The company was to release its third-quarter figures on Nov. 14.

German Life Insurance Companies May Not Have Long To Live

One-third of German life insurance companies might disappear in the next few years, according to a new study by the U.S. investment bank Goldman Sachs. Already now, says the study, about two dozen of the 118 German life insurance companies are struggling to meet reserve requirements set by law, after a large part of their reserves burned up in global stock markets. Goldman Sachs emphasizes that what contributed to the present drama is the fact that many German life insurance companies entered the stock market very late, that is, they were buying stocks in 1999 and 2000, at incredibly high prices.

Meanwhile, the German news weekly Der Spiegel on Nov. 11 previewed a study by the British credit rating agency Fitch, claiming that reserves at 18 German life insurance companies are so low, that these firms will not be able to maintain promised payments to clients over the next 18 months. Spiegel lists three such firms: Mannheimer Lebensversicherung, Familienfuersorge, and Oeffentliche Versicherung Braunschweig. Familienfuersorge already had to be taken over recently by HUK Coburg.

The federal association of German insurance companies GDV put out another one of the usual "there is no crisis" statements. But why then did the GDV establish this summer a federal emergency fund, known as Protector, to bail out life insurance companies that go under?

The Nov. 11 Financial Times, reporting on the Goldman Sachs study, sarcastically characterized the disaster among today's financial institutions: It noted that the crisis in the German life-insurance sector might actually be the only chance for many Goldman Sachs investment bankers to keep their jobs, as "the giant mergers & acquisitions departments are essentially without any orders for months." Therefore, a huge wave of emergency takeovers in the German insurance sector offers "a ray of hope" for the troubled investment bankers.

Brazil Has Trouble Rolling Over Its Debt

Brazil had trouble selling dollar-denominated domestic debt paper Nov. 12: Of $700 million being auctioned, only $174.8 million were sold. The $700 million was part of $1.8 billion which came due on Nov. 14, of which a little more than half has been rolled over. In the Nov. 12 sale, the Central Bank paid interest rates of between 37.4% and 38.25%, higher than last week's rate of 24%.

Added to problems rolling over debt, rising inflation and a weakening of the real, fueled speculation that the government may have to raise interest rates. The consumer-price index rose 1.31% in October. The price of wheat flour increased by 15%, while airfares rose 12%. Food prices overall rose 2.8%, the largest increase by category for the month.

Brazil Faces Inflation, Currency Depreciation; Lula Under Pressure

The Brazilian currency, the real, began to decline again over the several days leading up to Nov. 14, when $1.9 billion in dollar-linked debt and currency insurance came due. While investors were madly selling reals, the Central Bank was selling dollars on Nov. 13, in an attempt to prevent the currency from depreciating further—it fell by 1.3% on Nov. 13. As one currency broker described it, "it's a big dogfight today." On the same day, the Central Bank failed to roll over $300 million in dollar-linked debt, rejecting all offers at interest rates said to be in the 36% range. The Bank will have to buy back the debt notes it couldn't roll over, about 40% of the $1.9 billion.

Against this backdrop, Anglo-American media outlets also warn President Lula da Silva that a weaker currency, plus rising inflation, mean he'll have to compromise on his electoral promises of raising the minimum wage and combatting hunger and poverty. How Lula responds to social demands and the growth of inflation, will determine whether or not Brazil can avert default, Bloomberg warned Nov. 13, ignoring the reality that it will default anyway. Prices are rising rapidly, and the Central Bank has announced it won't meet its 5.5% target for this year's consumer price inflation.

Between July 1 and Nov. 12, the cost of the monthly market basket rose from 156.48 to 192.59 reals, an annualized rate of over 70%. In Goias, a western state, dramatic price increases for eggs, pasta, wheat flour, and soy oil, have sparked street protests. Corporate producers of bakery and food items, have jacked up their prices, to compensate for the high cost of flour, but others, fearing a social backlash, are refraining from increasing prices.

The message to Lula is that he'll have to raise interest rates, which were raised last month from 18% to 21%, in order to keep inflation in check, something he doesn't want to do. Bloomberg pointedly recalls that to tame a monthly inflation rate of 40% in 1994, Brazil imposed "spending and monetary controls." There is speculation that a rate increase may be announced next week, when the Central Bank's policy-making committee, Copom, meets. On the futures market Nov. 11, the indicative interest rate for January rose to 23.18%.

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