World Economic News
Argentina Blows Historic Opportunity: Capitulates to IMF
Instead of sinking the IMF, as it was situated to do, the Argentine government of Nestor Kirchner capitulated on Sept. 10, signing a deal and paying what it owed. Only the day before, Argentina had failed to make a $2.9-billion payment due the IMF on Sept. 9, when the government refused to use its reserves to make the payment, "because we are not objectively able to do so," in the words of Interior Minister Alberto Fernandez. President Kirchner called upon the country to "believe in ourselves. If we join together, we can dream of a different Argentina, but we must stand in solidarity with ourselves."
The Argentine default was, as the Financial Times acknowledged, "the biggest single non-performing credit in the Fund's history." Had Argentina's default continued past 30 days, rating agencies would have to lower the IMF's credit rating, thus throwing into question its very ability to raise money for loans to other nations, too.
Late on the night of Sept. 10, however, President Kirchner announced that Argentina and the IMF had reached an agreement on a letter of intent. By Sept. 11, the deal was signed, and Argentina had used a quarter of its reserves to make the $2.9 billion payment due on Sept. 9. The government now hopes to start negotiating a "restructuring" of the $95 billion in bonds which it defaulted on in December 2001, so that it can "re-establish its credit."
The cock-and-bull story being put out universally in the media, citing numerous financiers and bankers, is that it was the IMF who "blinked," and caved in to Argentina, because the letter of intent does not specify every conditionality the IMF had been demanding. The reality is otherwise: Argentina owed the IMF, the World Bank, and the Inter-American Development Bank $21 billion, $14 billion of it to the IMF. If it had stuck to its guns and not paid, all three institutions would have had to declare that debt non-performingi.e., worthlessand it would have been clear that it is the IMF system itself which is bankrupt. The reality is, that Argentina cannot pay its debts, and the Kirchner government's attempt to keep up the charade that it can, will only destroy the nation faster.
Central Bankers Act Like Goethe 'Sorcerer's Apprentice'
Central bankers have acted like Goethe's Sorcerer's Apprentice, and now they can't get rid of "the ghosts they once invoked," writes Joachim Fels of Morgan Stanley in a column for the German daily Frankfurter Allgemeine Zeitung Sept. 8. These ghosts, according to the FAZ, in terms of present financial markets, are the excessive amounts of liquidity that central bankers have pumped into the markets in the recent decade, Fels says. By doing this, central bankers created "one financial bubble after the other." One of the most severe consequences of this policy is the "rapidly rising indebtedness of private households and corporations on both sides of the Atlantic." The debt of euro-zone corporations has gone from 60% to 77% of Gross Domestic Product (GDP) since 1995. It has reached 68% in the U.S. But the world record is held by Britain, where corporate debt already exceeds 100% of GDP. Private household debt has risen dramatically as well, since the mid-1990s: to 57% of GDP in the euro-zone; to 80% of GDP in the U.S.; and, to a staggering 88% of GDP in Britain.
The most important factors for this debt explosion are "the inflation of financial asset prices and the crash of interest rates." In view of the giant bubblesfirst on stock markets, then on real-estate marketsprivate households were lured into taking on more debt, especially as interest rates sunk to extreme lows.
But now the central bankers have became "prisoners of their own creation," Fels writes. They can't get rid of the liquidity, which they themselves have created, and which is still driving bubbles and the excessive debt growth. Should they now increase interest rates to stem this liquidity, they would bankrupt over-indebted households and corporations, and thereby trigger "a deep recession." There seems to be only one alternative, he claims: that we are heading into a period with very strong inflation.
BIS Quarterly Report Highlights Bond Market Turmoil
"A sell-off in global bond markets" is the headline the Bank for International Settlements (BIS) chose for its latest overview of international financial markets, released Sept 8. The BIS quarterly report starts off: "In late June and July, global bond markets suffered their largest sell-off since 1994. U.S dollar, yen, and euro yields all increased sharplydollar yields by as much as 140 basis points." From a low of 3.11% on 13 June, 10-year U.S. Treasury yields jumped above 4.40% by the end of July. Over the same period, 10-year Japanese government bond (JGB) yields rose by 50 basis points to 0.93%, and German bond yields by 70 basis points to 4.19%. In the U.S., the Treasury sell-off was exacerbated by similar events in the giant mortgage-backed securities (MBS) market. Furthermore, the bonds of Fannie Mae and Freddie Mac were hit massively.
The BIS separates "four distinct phases" in the recent bond market turmoil: "During the first phase, from 13 to 24 June, the Japanese market sold off most sharply. The second phase lasted from 25 June to 14 July and saw all of the major markets sell off. The third phase, from 15 July to early August, saw dollar yields continue to rise. In the final phase, from early August to the end of the month, Japanese yields again moved up." Important triggers for these events, according to the BIS report, were the extremely weak Japanese government bond auctions in mid-June, the June 25 decision by Federal Reserve Chairman Alan Greenspan to cut rates by just 25, rather than the expected 50 basis points, and the July 15 Greenspan testimony to U.S. Congress, in which he suddenly played down the deflation risk.
"Long-term yields had not risen so sharply in such a short period since 1994," states the BIS report. "Then, over the eight weeks beginning in early February 1994, 10-year U.S. Treasury yields surged by approximately 130 basis points, bond yields by 80 basis points and JGB yields by 35 basis points." While at that time, the global financial system managed to adjust to the rapid rise of bond yields, "some strains did emerge. The Orange County municipal investment pool, with $7 billion in investments, failed in December 1994, and the Mexican crisis broke out later that month."
London Gold Price Jumps to Seven-Year High; Other Metals Also Rise Sharply
Gold for immediate delivery on Sept. 9 rose by $7.50 to $383.55 an ounce in London, the highest, compared with closing prices, since Nov. 13, 1996. On Feb. 5, when Colin Powell was speaking at the UN Security Council, gold reached an intra-day price of $389.05, but fell sharply later that day. At the Comex division of the New York Mercantile Exchange, gold for December delivery in early trading on Sept. 9 rose by $8.60 to $384.80 an ounce. According to Bloomberg, hedge funds and other speculators raised their gold holdings to 122,847 contracts in the week ending Sept. 2, from 100,227 contracts the previous week. This is the largest number of outstanding gold contracts since at least February 1983. Gold traders are quoted as saying, "there is a new constituency of buyers, funds, and investors in the New York Market who haven't been seen before. It's not only gold. It's platinum, zinc, nickelthe buying has been across a broad spread of commodities and particularly enthusiastically into gold." A City of London financial insider emphasized that the Japanese and Chinese central banks are right now buying gold, while the European Central Banks are reducing their gold sales.
In recent days, the price of platinum reached its highest level since 1983: some $715 per ounce, compared to about $400 per ounce in late 2001. The palladium price, after a giant speculative roller-coaster in recent years, has recovered from $140 in April to $225 an ounce last week. On Sept. 9, the palladium price gained another $8, hitting $234.50 an ounce. The silver price for immediately delivery hit $5.27 an ounce on the same day in London, the highest in more than three years.
|