World Economic News
Derivatives, Solvency Problems Plague Insurance Sector
In what they said was a safe way to make money, insurance and reinsurance companies jumped into the credit derivatives business in the late 1990s, but the bursting of the bubble has saddled them with big losses on those deals, at the same time that the stock market is plunging, and big post-9/11 payouts are required. UnumProvident is the latest big insurer to oust its CEO in an attempt to pacify the markets, while the crippled British life insurer Equitable Life insists that it remains "solvent" and "gradually coming out of intensive care." Munich Re stock fell as much as 10% March 31, on fears it may have to shore up its capital. Japanese insurers had an awful fiscal year, with a 28% drop in the Nikkei, to 7,972, leaving several majors in precarious positions; if the Nikkei falls below 7,500, Ashai Mutual and Mitsui Mutual are in trouble.
British Rail Maintenance Costs Double, After Years of Neglect
The cost of maintaining Britain's dilapidated and accident-prone privatized rail network has doubled, following many years of neglect and under-funding, the group charged with running the system admitted recently. Annual spending on the rail system, originally budgeted at 3 billion pounds ($4.7 billion) would now be more than 6 billion, Network Rail said in a new business plan.
The firm blamed "a huge legacy of under-investment" in Britain's railways for the parlous state of the network. "We have a fragile network that has been starved of a steady rate of renewals for many years, resulting in poor performing infrastructure that needs more maintenance to carry ever more traffic," Network Rail chairman Ian McAllister said. Over the past 12 years, a backlog of around 6,400 kilometers of track maintenance had built up, Network Rail said. "We are determined to turn this problem around, but it will take time, and, although we have an unwavering commitment to driving down costs, the network simply needs large-scale investment to replace worn-out assets," he warned.
The report is yet more bad news for a rail system which has seen six fatal crashes since privatization in 1996, a tally that has left 60 dead and led to criticism that safety has come second to profits. In the most recent disaster, last May, seven people were killed and 70 injured when the rear of a high-speed passenger train derailed and careened onto the platform of Potters Bar station, just north of London.
Financial Times: 'Take the Money and RunOut of Brazil'
London's Financial Times March 28 said, "Take the money and runout of Brazil." This blunt call for capital flight out of the country was the headline on the "Strategies" column, by the Times' John Dizard.
President Lula da Silva and his team have done a good job so far, "but that job is going to get harder," wrote this London lizard. Dizard gloated that the only capital going into the country since Lula's election, has been foreign money, while the "locals" leave theirs parked in the offshore islands. Lula does not have control of his party, he continued, and its base is really the middle class, in any case, who consider the IMF-demanded reform of the pension system "a life-threatening challenge." Nor has the IMF crowd succeeded in breaking the state governors' control over their "patronage machines," i.e., public services.
The Financial Times followed up with a lead editorial March 31, specifying the austerity demands that Brazil must meet, if it is to win the approval of the Times editorial board. "Although Brazil is on the right track, Mr. Lula da Silva must press ahead quickly to consolidate progress," the Times threatened. "Lula da Silva now needs to push through promised social security and tax reforms." Lula and his Workers Party know what needs to be done. "They must now begin to deliver."
EIR warned just after Lula took office on Jan. 1, that his "honeymoon" with Brazil's creditors would not last past May-June. It looks as if someone in London is preparing a showdown for Brazil, right on schedule.
Facing Default, Venezuela Transfers Reserves to BIS
As default looms, the Venezuelan government has transferred some of its reserves to the Bank for International Settlements (BIS) in Basel, where they cannot be seized by foreign creditors, the Financial Times reported April 2. Large payments are due in June on a portion of the country's $22.4-billion foreign debt, and because the government is suffering from a cash shortage, the Finance Ministry is trying to arrange a swap of the amount that comes due in June. The only reason foreign reserves haven't dropped, is that there has been almost no foreign-currency trading since January.
Economists told the Financial Times that the only way Venezuela will avoid default is if oil prices remain high, and this will depend on how long the Iraq war lasts. Poor maintenance of oil wells16,000 workers from the state oil firm PDVSA have been firedcould also affect output. In the meantime, Finance Ministry analysts have prepared an internal report for Minister Tobias Nobrega on the repercussions of a default.
ASEAN Should Boost Trade, Says German Minister
German Economics and Labor Minister Wolfgang Clement urged ASEAN countries to speed up economic integration to boost their overall trade and investment, according to a statement released April 1, ahead of the launch of the Thai-German Joint Economic Committee. According to the statement, Clement said German and foreign investors look forward to access to a market with 500 million consumers.
Clement met with Thai Prime Minister Thaksin Shinawatra on March 31, and the German Minister said he would extend an invitation from Chancellor Gerhard Schroeder to visit Germany. In addition to launching the bilateral committee, Clement oversaw the signing of an agreement under which Germany's public sector bank Kreditanstalt fuer Wiederaufbau will provide advice on developing Thailand's small and medium-size business sector.
IMF Worried Over Philippines' Contingent Liabilities
The IMF is concerned about the Philippines' contingent liabilities, now estimated at a whopping $47 billion. These liabilities stem primarily from sweetheart contracts with foreign banks and power companies, and foreign exchange cover and full backing of borrowings by state-owned companies such as the National Power Corporation (Napocor). "Contingent liabilities would become actual obligations of the government should government-owned and -controlled corporations and even government financial institutions fail to meet their obligations," Business World said March 31.
"As a result, it becomes an additional financial burden to the already saddled financial position of the government." The IMF has cited the case of the recently deregulated and cash-strapped Napocor, which has government backing for its foreign borrowings, which were passed on to the government in the course of its financial restructuring under deregulation.
Arab Investors May Withdraw Funds from Foreign Banks
According to the leading Arab news agency Zawya, "Arab investors might withdraw their money from foreign banks out of the fear that it will be frozen due to the war in Iraq." The wire continues: "Dr. Mabib Ali Al Jarhi, Director of Islamic Research and Training Institute (RTI) of the Islamic Development Bank (IDB), said the U.S.-led invasion of Iraq could push many regional investors to withdraw their money from the U.S. and other Western banks, which hold a large part of the overseas Arab money, estimated at $700 billion to $1.5 trillion. Al Jarhi was speaking at a Conference on Financial Development in the Arab World, organized by the UAE University's Colleges of Business and Economics and the IDB. Speaking to reporters, Al Jarhi said some of Arab foreign investment has already been routed either to some European countries or the Far East."
Asked about the impact of war on the financial stability of the region, Al Jarhi said, "We must be ready to meet the negative impact of the war on the economy. People will be worried about their money, which may lead to withdrawals and conversion to other currencies."
Experts Estimate Egyptian Economy Will Lose Billions
The Egyptian economy will lose $6-8 billion as a result of the Iraq war, according to the Egyptian Information Service April 2. Sectors affected will be Egyptian exports to Iraq, tourism, petroleum, Suez Canal tolls, remittances by Egyptians working abroad, and high costs of imports and exports.
Egyptian exports to Iraq, which amounted to $2.5 billion before the war, are not expected to find other markets. The experts said the most important thing now is how to run the Egyptian economy in a time of crisis, given the fact that figures show that Egypt would face a shortage of foreign-exchange resources up to $2-8 billion.
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