In this issue:

German Government Fears Large Insurance Bankruptcy

Derivative Trading Soars; Pension Funds Threatened

Global Interest-Rate Derivatives Top $140 Trillion

Energy Crisis Will Deepen Argentina Economic Woes

Saudi Oil Minister: Speculation Is Behind Oil-Price Hike

Even Maquiladora Employment Falling


From Volume 3, Issue Number 14 of Electronic Intelligence Weekly, Published Apr. 6, 2004

World Economic News

German Government Fears Large Insurance Bankruptcy

In a press briefing by Deputy Finance Minister Barbara Hendricks on March 26, the German government announced it is currently working on new legislation for the insurance sector that will focus on stricter regulation, as well as the establishment of a new rescue fund for failing insurance firms. All German life and health insurers will be forced to contribute to the rescue fund, Handelsblatt reported March 30.

Already, in autumn 2002, after the stock-market crash had devastated the capital of banks and insurance firms, the German insurance sector, on its own, established the 5-billion-euro Protector Lebensversicherung AG (life insurance fund), for the same purpose. However, even the bankruptcy of the mid-sized Mannheimer Lebensversicherung in 2003 was almost too much for this private-run scheme, as payments to Protector are not mandatory.

Hendricks emphasized that Protector would certainly not be sufficient to deal with the collapse of a large insurance firm and, therefore, the new mandatory system will have to be implemented. Should an insurance firm go under, she said, the consequences for its clients would be much more serious than in the case of a banking collapse. Private households in Germany are now paying about 70 billion euros per year for their life insurance contracts, which is the most commonly used private pension scheme in Germany. The total number of German life-insurance contracts is 93 million, more than the German population.

The new rescue fund will have a fund of 600 million Euro. All of these resources have to be made available by the insurance sector itself, not by taxpayer money. Should a bankruptcy require larger funds, which is likely, every German insurance firm will be required to come up with an additional contribution.

The German government is presenting these new plans in order to "restore confidence" in private pension schemes. Last week, the OECD's "Financial Market Trends" report had called for increased efforts by governments and central banks to prepare for financial emergency situations, in particular concerning the worldwide insurance sector.

Derivative Trading Soars; Pension Funds Threatened

Derivatives trades have hit an all-time peak in trading volume in March 2004, and are expected to hit the roof after the crucial announcement from the European Central Bank on April 1 and further important announcements April 2, the Financial Times reported March 31.

Three of the world's four biggest derivatives-trading companies experienced their highest ever one-day figures on March 5, when U.S. jobs data were weaker than expected.

The Frankfurt-based Eurex is heading for a total of 120 million contracts in March 2004, beating the record of 106 million set in March 2003. The trends are the same on the other side of the Atlantic. The Chicago Board of Trade traded 3.8 million contracts on March 5, hard on the heels of a record set only a week earlier.

An interesting and alarming news item is that pension funds increasingly use derivatives to protect their portfolios, enhance yields, and better match their liabilities with their assets. As analyst Mamoun Tazi at Bears Sterns states: "Volatility has shot up."

Global Interest-Rate Derivatives Top $140 Trillion

Global interest-rate derivatives topped $140 trillion in the second half of 2003. According to the International Swaps and Derivatives Association's Year-End 2003 Market Survey of privately negotiated derivatives, volumes of both credit derivatives and equity derivatives grew "significantly faster" in the second half of 2003, than in the preceding six months. Interest-rate derivatives also continued strong growth.

Credit derivatives shot up 33% during the last six months of 2003, compared to 25% in the first half. Notional amounts now stand at $3.58 trillion, up 29% from a year earlier. Equity derivatives jumped by 24% in the second half, compared to 14%; notional amounts have hit $3.44 trillion, up 21% over the year. Interest-rate derivatives grew by 15% to a whopping $142.31 trillion.

Energy Crisis Will Deepen Argentina Economic Woes

A shortage of natural gas, and inadequate electricity-generating capacity, will result in energy rationing and reduction or cut-off of energy exports to countries bordering Argentina, starting in early April. This comes at a bad time: The country is moving into autumn and winter, and predictions of power outages and rationing are affecting the market and "country risk" rate. There is fear that the "incipient recovery," on which the government is counting, will be severely affected.

President Nestor Kirchner has blamed utility companies for the problem, charging, correctly, that they have failed to make investments in infrastructure over the past several years. Low rainfall has also affected hydroelectric capabilities. Even though Kirchner has vowed that there will be no rationing, the regulatory agency Camessa already began making sporadic power cuts to 31 major companies in mid-March. The government is desperately trying to prevent authorities from shutting down the Embalse nuclear plant, which has to have a routine maintenance check, so as not to lose the 700 MW of electricity Embalse generates. But the maintenance shutdown has already been delayed one week, and to do so for another week, could be courting major problems.

On March 26, the government passed a resolution restricting natural gas exports to neighboring countries, to ensure that domestic needs are met first. Gas exports to Uruguay have already been cut off. This action provoked panic in Chile, which purchases 90% of Argentina's natural gas exports. Chilean Finance Minister Jorge Rodriguez traveled on an emergency basis to Buenos Aires on March 27, to urge Kirchner to honor the contracts both countries have signed. Ali Rodriguez, head of the Venezuelan oil company PDVSA who is visiting Argentina, is offering to ship oil to Argentina, Uruguay and Chile, to ease energy shortages in those countries.

Saudi Oil Minister: Speculation Is Behind Oil-Price Hike

Saudi Arabia's Oil Minister Ali al-Naimi hit financial speculators as being responsible for the oil-price rise, countering the supply-and-demand explanation. "The price today has nothing to do with supply and demand," Naimi told reporters March 30 in Vienna. "People in power know that crude [oil] supplies have nothing to do with the current gasoline prices in the U.S.," he added. Naimi, and the Algerian oil minister, said that a flurry of speculative activity in commodity markets, rather than a shortage of OPEC crude, was the reason behind the recent spike in oil prices. Hedge fund managers and other speculators sharply raised their bets in New York crude-oil futures and options last week, to the highest level in at least nine years. OPEC agreed March 31 to cut oil production quotas by 2.5 million barrels per day, as of April 1.

Even Maquiladora Employment Falling

Mexico's slave-labor maquiladora employment has fallen by 16% since 2000, reflecting continued globalization, under conditions of the U.S.A.'s economic breakdown. The factories, which ship duty-free exports to the U.S., employed 1,060,880 people in January, having slashed about 200,000 jobs since their peak in 2000, as many companies have moved production to countries with even cheaper labor, such as China, Reuters reported March 30.

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