In this issue:

Reinsurance Sector Could Trigger 'Doomsday Scenario'

Malaysia Tells IMF: Hands Off Gold Dinar

Brazil's Embraer To Sign Joint Venture with China Aviation


From Volume1, Issue Number 39 of Electronic Intelligence Weekly, Published Dec. 2, 2002

WORLD ECONOMIC NEWS

Reinsurance Sector Could Trigger 'Doomsday Scenario'

The reinsurance sector could trigger a "doomsday scenario" of "major meltdown" of world's financial system, warned the Wall Street Journal in its lead editorial Nov. 29. The scenario starts with the troubled reinsurance sector in Europe (where more than half the sector is based), and then spreads to U.S. insurers, who rely heavily on reinsurers to spread credit risks. European reinsurers have had a grim year--bearing the brunt of financial losses from terrorist attacks and flooding in Europe, as well as being hit by the crashing stock markets, with their own stock down by almost two-thirds.

What's worse, "Both American and European insurers are exposed to a variety of risks in the credit market" as the corporate credit market implodes. For example, insurers hold massive amounts of corporate bonds amid rising defaults.

More important, many insurers have become "rather aggressive players" in the credit-derivatives market--even though the market is only five years old--by selling credit-default swaps (guaranteeing the debt of other entities), along with guaranteeing and investing in collateralized debt obligations (pools of corporate debt and individual credit-default swaps).

The anxiety is, credit-derivative risk "has become re-concentrated or migrated" to the portfolios of reinsurance companies (who entered the market late).

And "nobody knows for sure how serious the problems are," because balance-sheet disclosure is inadequate and transparency is "best described as exceedingly opaque."

Reinsurers supply risk capital to life, property, and casualty insurers.

Malaysia Tells IMF: Hands Off Gold Dinar

Malaysia told the IMF it has no veto power over the gold dinar and related bilateral and multilateral payments agreements. Since the 1980s, Malaysia has signed Bilateral Payments Agreements (BPA) with 24 countries, allowing trade settlement directly between central banks, bypassing London, New York, etc. The IMF protested, and when Malaysia and its allies moved to set up multilateral deals, the IMF declared it illegal under the IMF rules, and succeeded in stopping it. Now, with the Gold Dinar policy extending the BPA idea both bilaterally and multilaterally, IMF opposition will not be countenanced, according to Malaysian Prime Minister Dr. Mahathir: "They said it was against the rules when we introduced our bilateral payments arrangements. We are still using these, and our trade with such countries has increased by 400%. The IMF can say what they like. They have no say in this country. They need to seek our permission to come here."

Brazil's Embraer To Sign Joint Venture with China Aviation

Brazil's leading aircraft company, Embraer, will sign the final agreement on its joint venture with China Aviation Industry Corp. II (AVIC-2), by early December, to produce Brazilian airplanes in China, Brazilian Development Minister Sergio Amaral announced in Sao Paulo on Nov. 25. Amaral said all details had been finalized. The Minister did not know when Embraer's planned factory in China would begin producing planes, but he said Brazil's and China's national economic development banks would be supporting the project. The plan is for the plant to rapidly reach an annual production of 24 airplanes a year, of Embraer's ERJ-145 model. With Chinese domestic airlines expected to buy between 110 and 140 regional airplanes a year between now and 2005, this represents a giant market for the kind of regional planes in which Embraer specializes. China is likewise eager to have Embraer's technology to improve its own aircraft production capabilities.

The announcement coincided with the opening of the Brazil-China Business Council meeting in Sao Paulo, and the "Chinese Exposition of Engineering, Technology and Complete Equipment" which the Council is sponsoring.

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