World Economic News
Citigroup Cashes In on '98 Asia Crisis
"Citigroup Devours Korea's Lucrative Market," was the Nov. 9 headline of the Korea Times business section, after Citigroup surprised Korean observers Nov. 8 by announcing its intention to take over Korea's largest Internet backbone operator Thrunet, now under court receivership. If this deal goes through, Citibank will have demonstrated precisely "cui bono" from the 1998 "Asia" Crisis, as it will have gained an investment of almost $11 billion in South Korean banking, electronics, and computers, including large units of Samsung and Hyundai which had to be sold at distress prices of 10 cents on the dollar.
Citigroup bought KorAm Bank, the nation's seventh-largest lender as part of the crisis. Earlier in July, Citigroup Venture Capital bought the world's second-largest chipmaker Hynix's integrated-chip unit for $830 million. Citibank is today the biggest shareholder of Korea's flagship firm Samsung Electronics with 12.09%, almost twice the 6.26% held by second-largest shareholder Samsung Life Insurance. A Samsung spokesman said the stocks are worth more than 8 trillion won ($7.24 billion).
China Moves To Control 'Speculative Bubbles'
China is taking financial measures, including a possible second interest-rate hike, to bring "speculative bubbles" in real estate and in forex flows under better control, Xinhua reported Nov. 10. The State Administration of Foreign Exchange (SAFE) has taken four measures to tighten forex inflow, to control the entry of speculative capital into China.
Measures to balance forex inflow and outflow will be undertaken, to weed out speculative capital inflows. Also, due to the faster growth of China's short-term foreign debt, measures are being taken to increase supervision of foreign-funded banks' and enterprises' lending policies.
Xinhua also quoted economist Yi Xianrong, head of the Financial Development Division of the Chinese Academy of Social Sciences, that domestic interest rates could well continue to rise, to help curb real estate speculation and curb outflows of deposits from commercial banks. On Oct. 28, the Peoples Bank of China raised interest rates for the first time in nine years. Though the increase was just a quarter point, Yi said this indicated "a significant change in interest rate policy."
Yi warned that inflation in China is actually greater than reported in the CPI, which ignores real estate. House prices rose 13% so far this year, due to "speculative demands that will likely drive property prices to new highs in a short period of time."
Chinese Industrial Output Slows
Chinese industrial production growth was at the lowest rate in three months in October, Xinhua reported Nov. 10. Lending restrictions have affected automobile sales, among other things, Xinhua said. Industrial production rose 15.7% year-on-year, to 490 billion yuan (US$59 billion), led by steel and household appliances. Production growth peaked this year at 23.2% in February, and has declined since.
Bank of England Alarmed Over Liquidity Problems
Liquidity problems at mega-banks could lead to "imminent threat to financial stability," wrote Bank of England (BoE) deputy governor Andrew Large, in an editorial for London's Financial Times Nov. 11, headlined "Why we should worry about liquidity." He notes that central banks and supervision agencies in recent years were addressing "key potential threats to financial stability," such as the "dramatic increase in financial transactions" and the potential "failure of key infrastructureparticularly payment, clearing and settlements systems."
"But there is another critical aspect of financial resilience where progress has been less markedliquidity. Liquidity problems, which may be triggered by insufficient capital or insufficient liquid assets can also lead to insolvency and can be an immediate threat to financial stability." A particular problem here is the concentration process in the banking sector which has led to the "evolution of a relatively small number of very large institutions." Worse, these "mega-institutions" are often using the same modelling techniques, use the same risk-management standards and work on similar assumptions. All of this might exacerbate market movements. Furthermore, there has been the "search for yield" in financial markets recently, where institutions were trying to boost profits "by taking on higher risks." In part by using hedge funds as "alternative investment vehicles," institutions went into everything, "from mortgage-backed securities to high yield debt, from oil to real estate."
Public authorities should therefore urgently deal with the issue of providing liquidity support to "large complex financial institutions" in times of emergencies. "Useful work is being done in many of these areas but there would be a real merit in encouraging a broader focus on liquidity issues. This would help to underpin confidence in markets, at a time when monetary policy internationally has become less accommodating and geopolitical shocks cannot be ruled out."
Personal Bankruptcies at Record High in England and Wales
In the third quarter of 2004, personal bankruptcies rose to 9,156, up 4% from the previous quarter, and up 28.8% from the same period in 2003. Small businesses and the self-employed are in trouble. Insolvencies in the self-employed sector rose by 130% year-on-year, according to the Department of Trade and Industry.
Another 2,811 people applied to "freeze" the interest on their debts in exchange for continued payments, a step short of bankruptcy. This was a record rise of 13.6% on the last quarter, the highest ever recorded, and 40.6% year on year.
The government Insolvency Service warned that the number of bankruptcies and people struggling to pay debts is likely to rise. Also, more people are volunteering to declare bankruptcy, which can be "discharged" in about six months, although some take three or more years.
Big company liquidations are falling, however, by 12% year on year, and the third-quarter increase, of 2,975 companies, was the lowest increase on record.
Queasy Feeling in Britain Over Personal Bankruptcies
The only signs of real financial distress at the moment are the record levels of personal bankruptcies and mortgage foreclosures which are being reported now," a City of London source told EIR Nov. 9. "This is more remarkable, because interest rates are just not that high now. People are overburdened with debt, and are having more trouble making their mortgage payments."
As to all the talk of "off-shoreing" low-skilled jobs and replacing them with "graduate" level jobs, that just will not work. "Where are all the wonderfully educated British workers to fill these jobs?" the source asked.
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