World Economic News
Run on Brazilian Debt Begins: Watch Out!
Brazil's phony financial stability came to an end this past week, as foreign capital, preparing for rising U.S. interest rates, leaves the country, driving the currency down, and interest rates and country-risk up. Despite record payments on its debt in 2003, under favorable refinancing terms, Brazil's total debt grew. Now that those favorable international conditions have ended, Brazil's debt becomes unpayable. Forget the chatter about Brazil's debt profile being improved; the process underway will, inexorably, and more likely sooner rather than later, lead to a blowout of Brazil's $500 billion in foreign obligations, exactly as EIR warned would happen. (See "Brazil's Choice in 2004 Is Mexico's of 1982," in EIW Indepth, #8).
The run out of Brazil has been growing since April 2, but it took off in a major way midweek last week. By mid-morning on May 7, the real had fallen to 3.027 to the dollar, a 1% rise in the value of the dollar that morning alone, coming on top of the rise of almost 1.5% the day before. The run on the real would have been greater, were it not for the continuing influx of dollars from Brazil's record trade surpluses. Each fall of the real increases Brazil's public debt load, 17% of which is tied to the dollar.
Brazil's country-risk rating, which determines how much more than the yield of U.S. Treasury bills a country has to pay to roll over its debts, hit 7.52% on the morning of May 7a jump of 5.6% that morning alone. At its low, earlier in 2004, the country-risk was below 4%.
On May 5, the Treasury Ministry suspended a planned sale of long-term debt, because "the market" was demanding unacceptably high interest rates, even though the bonds offered carried floating interest rates. By the next day, however, Treasury retreated, selling some R$ 1 billion in debt at the higher rates demanded by the markets. The "excellent" debt profile is already going down the tubes.
Argentine President Sticks to His Policy: The Nation Comes Before the Debt
On the eve of celebrating his first year in office, President Nestor Kirchner raised state-sector wages and pensions, in defiance of ultimatums from the International Monetary Fund (IMF) that any and all "extra" monies available be handed over to the nation's foreign creditors. The funding for the wage increase will come from increased tax revenues and primary budget surplus, which the IMF demanded be used for debt payment. The wage increase, the first in 13 years (!), will be for all employees who make less than 1,000 pesos a month, to bring them up to the 1,000-peso level, while retirees will see their pensions increase from 240 to 260 pesos a month. The move will benefit 100,000 state employees, 1.7 million retirees, and 62,000 members of the Armed Forces and security personnel.
The Association of State Sector Workers, ATE, which had intended to go on strike May 13, hailed the move and cancelled its strike. In the May 3 press conference announcing the increases, Kirchner's Chief of Staff, Alberto Fernandez, suggested that more increases would be forthcoming. For now, the pension increase only affects those receiving the lowest minimum pension, for the purpose of initially lifting those individuals above the poverty line. In September, another pension increase is planned, which will affect a broader group of retirees. The wage increase does not apply to state workers employed by provincial governments, and there will likely be pressure from this sector to be included as well.
Kirchner, meanwhile, also made clear he does not intend to put through the revenue-sharing bill with provincial governments, which the IMF had demanded in its most recent accord. The Fund had wanted 90% of the provinces to agree to a different scheme of revenue-sharing, which would imply greater "fiscal restraint" on their part. But Kirchner has shelved plans to put this through, and told advisors May 4 that "there can't be a [revenue-sharing] law, and certainly not one promoted by the Fund, which would undo Argentina's fiscal goals."
Then, visiting New York City May 4-6, Kirchner told a meeting at the Council of the Americas that his government has no plans to increase the amount it is willing to pay on its defaulted bonds, when it presents its final debt-restructuring offer in June. The government plan will be done "in the framework of the philosophy of Dubai"; that is, that it will stick to the proposed 75% writedown of the defaulted debt which it first offered in Dubai months ago. This is not what the 300-person audience of Wall Street bankers and businessmen wanted to hear, as Council of the Americas vice president Susan Purcell noted. Kirchner's speech was very articulate, and a good defense of his policies, "but it didn't satisfy the Wall Street representatives present, who had hoped to hear something that went beyond the announcement made in Dubai last year on the debt."
Bank of England Raises Interest Rates Again
The Bank of England raised interest rates May 6 for the third time since November 2003, to 4.25%. Given the ever-expanding real estate and debt bubble in Britain, the interest rate increase was expected.
The Bank of England's monetary policy committee (MPC) increased rates by a quarter-point, claiming that it did so because the "global economic upswing has been maintained," and the economy would continue to "strengthen." However, the MPC statement noted the severe problem in the British economy: "Retail spending continues to be robust, underpinned by income growth and unexpectedly strong house price inflation."
British house prices are soaring out of sight. Yesterday, a key mortgage lender, the Halifax Bank, reported that house prices had risen by 1.8% in April alone. This is a 19.1% year-on-year price inflation, the fastest such rise since August 2003. At this point, British house prices are soaring by almost 100 pounds a day, or about 3,000 pounds a month.
The Bank of England earlier in the week had released a report showing a 9.3-billion-pound jump in mortgage lending in March, a record 15.2% year-on-year rise.
In comparison to soaring house prices, which are now rising by 33,540 pounds a year, the average British worker earns just 28,065 pounds a yearless than the price increase.
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