In this issue:

Sakakibara Warns of Global Economic Crisis

Debt Crisis Looms Over Brazil; Investors Ready To Bail?

Mexican Agriculture Facing Disaster Under NAFTA; Protests Accelerate

Uruguayan Unemployment Hits Record 19.2%

Paraguay Heading Toward Debt Default

United Airlines' Cousin, Brazil's Varig, May Be Grounded


From Volume 1, Issue Number 40 of Electronic Intelligence Weekly, Published Dec. 9, 2002

WORLD ECONOMIC NEWS

Sakakibara Warns of Global Economic Crisis

Former Japanese Deputy Finance Minister Eisuke Sakakibara pointed to the threat of a global economic crisis, in an interview with the German news weekly Der Spiegel. Sakakibara, who was known as "Mr. Yen," notes that the usual monetary and fiscal measures are no longer sufficient to deal with mounting problems in the world economy. The example of the Bank of Japan shows that central banks have reached their limits and even "Greenspan's magic" is finally disappearing. Sakakibara adds: "The situation of the world economy is very serious. As Deputy Finance Minister, I was involved in fighting the global financial crises of 1997 and 1998. At that time, the origins of crisis were Asia, Russia, Brazil. Today, the situation is much more dangerous. Today, the centers of crisis are Japan, the United States, Germany. On top of this, there is an extremely dramatic situation in Latin America."

Spiegel asks whether we are heading into a "world economic crisis," to which Sakakibara responds, "This threat is real, indeed." Globally, stock markets have plunged, but have, by far, not reached their bottom. Meanwhile, banks in Japan and Germany, and also in the United States, are accumulating bad debt at an incredible speed. In spite of globalization, we lack "global financial institutions" that would be able "to control a worldwide financial crisis."

Debt Crisis Looms Over Brazil; Investors Ready To Bail?

Because of constant refinancing at shorter and shorter terms, Brazil is now expected to come up with $61 billion in debt repayments in the first half of 2003. Forty percent of domestic bonds mature in the next 12 months, up from 25.6% late last year. In April alone, about $11.4 billion in debt bonds must be repaid, or refinanced. Total foreign and domestic debt is officially estimated at $312 billion, accounting for a whopping 80% of Brazil's gross domestic product, up from 42% less than four years ago.

Notwithstanding all of President-elect Lula da Silva's pledges to keep the nation solvent, nerves are fraying throughout the financial establishment, and one investment house after another is warning that the risk of investing in Brazil is just too high. According to Michael Mussa, former IMF research director and now a senior fellow at the Institute for International Economics, "Unless there is a spontaneous substantial further recovery of market sentiment, or something dramatic is done to provoke such a recovery, the Brazilian authorities will soon run out of room for maneuver, and a deep crisis will ensue."

Right on cue, a report just issued by JP Morgan Chase & Co. says that the incoming Lula government may not be able to ram through promised austerity, and that investors should therefore start divesting themselves of bond holdings. This, the second-largest U.S. bank, changed its assessment of Brazilian bonds from "market weight" to "underweight," causing an immediate slide in the Brazilian currency, the real. In particular, the report suggests that Lula will face "resistance" from his own Workers Party (PT) in Congress on the pension cuts, more taxes, and spending reductions allegedly needed to prevent a debt default.

While Lula's near-term appointment of an economic team is being promoted as promising assurances to the market, JP Morgan Chase is less sanguine: "The likely composition of the Lula Administration provides insufficient reassurance regarding the policy orientation of the new government."

Mexican Agriculture Facing Disaster Under NAFTA; Protests Accelerate

More and more details are coming out regarding the tidal wave that will hit Mexico's agricultural sector come Jan. 1, when all restraints on NAFTA are lifted. Added to the crisis for the agricultural industry, is the impact on the estimated 27 million Mexicans who make their living in farming, 73% of whom are officially living under "extreme poverty," according to the World Bank. Eggs and chicken will be freely imported, immediately knocking out 30,000 of the 120,000 jobs directly dependent on the industry. Pig production will suffer as well, with a possible loss of 50,000 jobs directly, and another 250,000 indirectly linked to the industry. And the story is the same across the board. According to the Governor of Sinaloa, food imports into Mexico have already gone from 13% to 46% of total food supply between 1985 and 2002. By Jan. 1, what little is left of domestic production could disappear altogether.

Uruguayan Unemployment Hits Record 19.2%

Unemployment in Uruguay hit a record 19.2% for the three-month period ending Oct. 31. The tiny country, which is teetering on the brink of default, has seen its economy dissolve since the middle of this year, despite a hefty $3-billion IMF bailout. For the same period in 2001, unemployment was 15.2%. The current rate translates into 234,200 jobless in a workforce of 1.22 million.

Paraguay Heading Toward Debt Default

Last week, the Congress of Paraguay again failed to pass an austerity package demanded by the International Monetary Fund as a conditionality for a $200-million loan, provoking the resignation of both the Central Bank president and Finance Minister. Wracked by political chaos and economic dislocation, the country has absolutely no means to pay its $2.2-billion foreign debt--nor should it. But the IMF and the New York Times are gnashing their teeth over the country's "irresponsibility," with the Times complaining on Nov. 29 that Paraguay "passed up a chance to privatize the country's state-run telephone company," which supposedly would have provided it with lots of cash.

The IMF attacked the Congress for not wanting to raise taxes and cut expenditures, even when the government doesn't know how it will pay public employees, due to lack of revenues. According to the head of the IMF mission which was just in Asuncion, President Gonzalez Macchi "will have to choose at the end of the month who to pay and who not to pay." On Nov. 27, Standard & Poor's downgraded the country's credit rating to six levels beneath investment grade. The economy will shrink by 4.5% this year, and 2003 is expected to be even worse.

United Airlines' Cousin, Brazil's Varig, May Be Grounded

The Brazilian government's BNDES development bank refused to loan Varig Airlines $900 million urgently needed to continue operating, leading unnamed international creditors to activate a clause permitting them to seize Varig's credit-card ticket sales--which, in turn, may deprive Varig of the cash it needs to keep its planes in the air.

Varig is part of the Star Alliance, a passenger- and revenue-sharing network that includes United Airlines.

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