In this issue:

Allianz Insurance Posts First-Ever Loss Since 1945

Dresdner Bank CEO Resigns Amid Failed Mergers

Deutsche Bank CEO Warns German Government To Prepare for 'Worst Case'

Financial Scandal Rips Chile; FinMin Attempts to Calm Wall Street

Uruguay Restructures $3 Billion in Debt; Moves Closer to Default

Japanese Creditors to Argentina: Sell Land To Pay Debt

Asian, European Central Banks Ready To Flood Banking Systems with Liquidity

Corporate Failures Hit Postwar High in Japan

Nikkei Losses Hit Japanese Industry Hard

Citibank Downgrades Japan, Closes Major Operations


From Volume 2, Issue Number 12 of Electronic Intelligence Weekly, Published Mar. 24, 2003

World Economic News

Allianz Insurance Posts First-Ever Loss Since 1945

Europe's biggest insurer, Allianz AG, announced a 1.2-billion-euro annual loss on March 20—the first in nearly 60 years—following a series of financial disasters in both the banking and insurance sectors. In April 2000, Allianz bought up Dresdner Bank for $20 billion. At that time, the market capitalization of Allianz amounted to 110 billion euros. Today, the market capitalization of Allianz, including Dresdner Bank, has imploded to 16 billion euros. The chief executive of Allianz was forced to resign at the end of last year; the head of Dresdner Bank was fired/resigned on March 19. In order to meet financial obligations to clients, Allianz has decided to sell 5 billion euros of new bonds and stocks, despite the present extremely ugly market conditions. Even after Allianz stocks plunged 78% last year alone, the management is expected to offer the new stocks at a 50% discount, compared to the present market price, to attract enough buyers.

Dresdner Bank CEO Resigns Amid Failed Mergers

Bernd Fahrholz, who took over as CEO of Frankfurt-based Dresdner Bank three years ago, resigned March 19, to be replaced by a senior manager from Deutsche Bank, Herbert Walter. Fahrholz, who had taken the job after his predecessor failed in an attempt to merge Dresdner into Deutsche Bank, himself failed in an attempt to merge Dresdner with Commerzbank, and wound up selling the bank to German insurance giant Allianz for $25.5 billion in July 2001. Allianz chief Henning Schulte-Noelle, who negotiated the deal with Fahrholz, is stepping down in April (see previous item for more on Allianz).

Deutsche Bank CEO Warns German Government To Prepare for 'Worst Case'

The CEO of Deutsche Bank warned the German government "to be prepared for the worst case"—the failure of a major bank. Josef Ackermann, chief executive of the German central bank, in an interview with the Wall Street Journal March 17 urged the German government "to be prepared for the worst case"—the failure of a major bank—and to make plans for a bailout. One possible plan, which Ackermann raised in February at a bankers' meeting in Berlin with Chancellor Gerhard Schroeder, would be the creation of a state-backed entity to take over the bad loans on the failed bank's books.

Financial Scandal Rips Chile; FinMin Attempts to Calm Wall Street

Chile's Finance Minister Ricardo Eyzaguirre had to publicly assure Wall Street that his country would have no problem paying its debt, in the wake of a financial scandal which has rocked the government of President Ricardo Lagos, and raised doubts about the "credibility" of free-market bastion Chile as a "safe" investment haven.

What El Mercurio described as a "political earthquake," erupted March 10, when it was discovered that an officer at the state-run Production Development Corporation (Corfo) had illegally transferred $106 million in certificates of deposit to the Inverlink financial holding company, which in turn put them on the market to raise desperately needed cash. When the theft became known, President Lagos initially announced that Corfo would not pay the individuals who eventually ended up holding the stolen CDs, even if they had purchased them in good faith. This caused pandemonium on the financial markets, and a run on mutual funds to the tune of $500 million, forcing the central bank to pour more liquidity into the financial system. The panic was such that Lagos had to later reverse himself, in what some called the biggest financial upheaval since the 1982 banking crisis.

The scandal touches Lagos directly, as Corfo's executive director is his son-in-law Gonzalo Rivas, who has now resigned. The Corfo-Inverlink mess is one of a number of scandals which have recently involved Lagos's inner circle of close friends and political collaborators.

Following Fitch rating agency's recent downgrade of Chile's peso-denominated debt, there is fear that a downgrade in debt denominated in foreign currencies, as well as a higher "country risk" rate, may well follow. Economics Minister Jorge Rodriguez has offered to resign, and calls are circulating for the resignation of Central Bank President Carlos Massad, over a scandal also involving Inverlink and the Bank.

Uruguay Restructures $3 Billion in Debt; Moves Closer to Default

In a March 11 press conference, Uruguay's Finance Minister Alejandro Atchugarry announced the government would engage in a "voluntary" swap of $3 billion worth of bonds, for new bonds with longer maturities. Although Atchugarry and Central Bank President Julio de Brun emphasized that the operation would be purely voluntary, and carried out in a "friendly" environment with creditors, Fitch rating agency immediately cut Uruguay's credit rating two notches, charging that the debt swap was tantamount to a default.

"The debt exchange is likely to imply net present value losses to bond investors, which would be considered a default," the agency said. Another Wall Street shark worried, "It may well start as voluntary but could spiral into a distressed one.... Everyone looks at Argentina and realizes these swaps are rarely successful."

The tiny country is in dire straits—it cannot pay its debt—and its current attempt to impose an IMF-dictated austerity program, will only guarantee its financial implosion.

Japanese Creditors to Argentina: Sell Land To Pay Debt

Argentine Deputy Finance Minister Guillermo Nielsen was reportedly astonished when Japanese holders of private debt on which Argentina defaulted in 2001, told him that Argentina should sell some of its land "as Russia did with Alaska," to pay off its debts. The 1,300 creditors attending a meeting with Nielsen in Tokyo also pointed to "Japan's efforts after World War II," adding that Argentina should imitate Korea, "where [people] sold their jewels to pay." Eighty percent of the creditors at the meeting were retirees, who had invested their savings to purchase the yen-denominated "Samurai bonds" which the Argentines had placed on the market in 1999 and 2000. A rattled Nielsen expects to face some even tougher audiences in Europe, as he continues his tour, especially in Italy, where a sizable number of people hold bonds on which Argentina defaulted.

Asian, European Central Banks Ready To Flood Banking Systems with Liquidity

The Bank of Japan pumped 1 trillion yen ($8.3 billion) into the nation's banking system week before last, and will monitor "the additional provision of liquidity in order to ensure financial market stability," said Toshihiko Fukui, the bank's new governor. The Bank of Korea set up an emergency committee to monitor and stabilize financial markets, and indicated it would "seek stability in the financial markets by injecting more liquidity."

At the same time, the European Central Bank said it "stands ready to act if necessary," and that "financial markets can rely on the provision of sufficient liquidity even under exceptional circumstances," according to a statement issued after a meeting of its governing council in Frankfurt March 20.

Corporate Failures Hit Postwar High in Japan

February 2003 was disastrous for Japanese firms as corporate bankruptcies marked a postwar high in terms of combined liabilities and the fifth-highest number of companies on record failed, Tokyo Shoko Research reported March 14. A total of 1,454 companies, with debts of 10 million yen or more, went under, with combined liabilities up 20.2% to 1.5 trillion yen (about $13 billion).

Nikkei Losses Hit Japanese Industry Hard

"Industry Trembles as Nikkei Dips Below 7,900," blared the headline in Japan's Nikkei News March 14, over losses suffered by major Japanese industries, which still hold cross-shares in the other industrial companies and banks once part of the same "keiretsu" (corporate family) industrial group. Daiwa Institute estimates non-bank industrial companies on the Tokyo Stock Exchange, which did not have much in net share losses as of six months ago, now have over $30 billion in share losses projected for the period ending March 31. Japan's $600 billion corporate pension funds have lost 11-12% of their value in this fiscal year, and now have losses of $90 billion.

Bank stocks have lost 60% of their value in FY April 2002 to March 2003, and so the industrial companies holding those shares—giants such as Toyota, Fujitsu, and other heavy industries—are taking major hits. "The devaluation of bank shares we hold will likely lead us to record losses, at just over 1 billion yen. We have set aside funds to cover this several times, but it is not enough," said president Kyoji Takenaka of Fuji Heavy Industries.

Falling share prices are wiping away profits made in the core industrial businesses. "We didn't expect a non-production operation to hurt our books this much," said Toyota's president, after the auto company's portfolio of UFJ Bank stock lost 60% of its value year, handing Toyota a 20-billion-yen loss. Nippon Steel also expects a stock portfolio loss in Mizuho and Sumitomo Bank groups of 42 billion yen, forcing the entire company into the red for the year.

"This is worse than the worst-case scenario we drew up at the beginning of the year," says Senior Managing Director Nobuo Katsumata of Marubeni. The Nikkei average Marubeni projected for the end of this fiscal year was 8,700-8,800 yen, with 8,200 its worst case. "No one imagined price levels this low," he said. "There appears to be no end in sight for the downturn."

Citibank Downgrades Japan, Closes Major Operations

Citigroup has put Japan on a "watch list," downgraded its internal rating for Japan to "below investment grade," and is about to shut 500 of its 800 branches in Japan hit by the consumer-credit bubble, Nikkei reported March 14. Nikkei was conveniently leaked a "document distributed among senior Citigroup officials" so as to spread panic in Tokyo over this. "Citigroup intends to jettison some 2,000 jobs in its local consumer-credit operations, or some 33% of the total staff," they write. "The latest move by Citigroup highlights the extent to which the prolonged recession in Japan is harming foreign investment."

As of the end of March last year, Citigroup's outstanding balance of uncollateralized consumer loans in Japan totalled $13 billion, the third highest in Japan. Citigroup earlier began reducing the number of bank branches it operates in Japan because its non-consumer banking business here faces even bleaker prospects.

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