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EMERGING MARKETS

  More Indicators Surface Hinting at a Global Financial Crisis

The Great Asian Bailout

Slaying the "Russian Bear" to Feed the "Asian Tigers?"

Denials, denials... These days, "everybody" seems to be denying publicly that a global financial crisis may be looming. Just as Charles Keating did right up until just before his savings and loans empire collapsed - the most spectacular failure of the U.S. savings and loans fiasco in the late 1980s.

Yet despite the denials, every day or two, a new story pops up here and there around the world which points in the direction of a downward spiral. Here's a sampling of such reports...

JAPAN/GLOBAL. In the Truth in Media Global Watch Bulletin 97/11-8 (11/09/97), we wrote about a "truly world class banking crisis" looming in Japan. In the Truth in Media Global Watch Bulletin 97/11-9 (11/10/97), Michel Chossudovsky, a Canadian economist, predicted a global financial crisis.

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On November 13, the New York Times published excerpts from a private letter from the U.S. Treasury Secretary, Robert Rubin, to his Japanese counterpart, warning that the health of Japan's banking system "was deeply imperiled." (What arrogance! As if the Japanese don't already know that themselves.).

The U.S. Treasury Secretary also warned the Japanese officials that they "should not be tempted to export their way out of their troubles." Which is kind of like telling a drowning victim to keep gulping water instead of swimming.

That's because one effect of the industrial globalization has been a huge U.S. trade deficit, which stood at $192 billion in 1996. And if current trends continue, America's trade deficit with the rest of the world could expand to $250 billion to $300 billion by early 1999, according to David Hale, a leading trade economist with Zurich Insurance Group.

So Rubin's remark seems to have been driven by a parochial American industry's concern - losing market share to low priced imports from Japan (and other Asian countries). Yet those are precisely the benefits to consumers which the globalists have hailed during the recent debate on "fast track" trade legislation.

It is interesting, therefore, that the "free trade" advocates, such as Rubin, have no trouble talking out of both sides of their mouth. Guess that's the one trademark (pun intended) by which the members of the Clinton administration will be remembered.

ASIA. Meanwhile, Business Week has come out in its November 17 issue with a cover story ("Rescuing Asia") which not only confirmed what we said about Japan, but also provided additional information about the problems in the rest of the Asian countries (more on this later in this Annex Bulletin).

FRANCE. On November 12, the Associated Press reported from Paris that two judges and the officers from the French financial police arrived with search warrants at the offices of Credit Lyonnais, a state-owned banking giant which the French government was forced to bail out in 1995 to prevent its bankruptcy.

RUSSIA. Meanwhile, Russia's central bank angrily denied rumors that Russian banks faced bankruptcy due to the recent turmoil in the market, Reuters reported on November 12. The bank was reacting to statements by London-based traders that concern about the ability of some Russian banks to withstand the recent turmoil had added to pressure on Russian debt prices.

But a top bank official did say that several major Western institutions had reneged on deals with Russian banks by failing to deliver securities the Russians had paid for. "I promise there won't be any bankruptcies, but I promise a scandal," first deputy chairman Sergei Aleksashenko told Reuters.

Some Western banks and investment institutions have not fulfilled their obligations on delivering securities to Russian banks. "If this situation does not improve in the next day or two, the central bank will publish the list of these Western banks who are not fulfilling their obligations on delivering papers to Russian banks."

Illustrating his complaint with an example, he said a Russian bank might have bought MinFin bonds at low prices from a Western bank, which then said it did not have paper to deliver immediately, but refused to return the money already paid.

Ed. If a consumer were to have written a check on an account with insufficient funds, he/she could be hauled off to jail. But when a bank sells the securities it does not own to another bank, it seems like "business as usual." A double standard, or what? (See the P.S. for an update).

ISRAEL. In Israel, the government is speeding up its program for privatization of the major banks. Reuters wire reported on Nov. 12 that Israel has decided to put its second largest bank, Leumi, on the auction block next year. Currently, the government holds 63.5% of Leumi, 51.5% of Discount, 46% of United Mizrahi Bank and 23% of Union Bank, and 12.3% of Hapoalim bank.

Ed. Is the Israeli government trying to bail out of the banking business while the going is still good?

What Does It All Mean?

What does it all mean? Well, one thing it means is that the bankers have made a whole bunch of bad loans, especially in what used to be the globalists' darling market - Asia. Now they are desperately trying to launch, what Business Week calls, the Great Asian Bailout: "It's not a single grand scheme put in place by the IMF (International Monetary Fund) and orchestrated by a few technocrats. Instead, it's the most complex financial reorganization ever, involving the IMF, the World Bank, the U.S. Treasury, the Asian nations themselves, and a host of private investment bankers and big multinational banks."

It sounds like the financial equivalent of putting together the Gulf War coalition. With one big difference - no Saddam Hussein! The bogey is us, in this case. Which unfortunately also means you and I, the U.S. taxpayers, not just Wall Street bankers. Bill Clinton, Rubin, a former Wall Street executive, and their Republican counterparts, such as Newt Gingrich, will see to it that they scratch the backs of the people who helped put them in office, not those who actually punched the holes in a ballot boxes in 1992 and 1996. And who contribute the lion's share of the funds in the U.S. Treasury.

The Washington politicians have proven that their first loyalty is to the financial elite, not to the U.S. taxpayers. In early 1995, they bailed out the Wall Street banks in Mexico with over $20 billion of the U.S. taxpayers' money. And this was in addition to the $18 billion IMF loan, the biggest ever at that time, of which the U.S. taxpayer is by far the biggest guarantor.

On Oct. 30, Rubin called the top Treasury and White House officials to tell them that he had agreed to contribute $3 billion of U.S. taxpayers' money to the IMF bailout of Indonesian banks.

Note the fact that the Treasury Secretary told the President what sort of a deal he had worked out with his banking pals. This kind of sums up who is really running this country. Which is why we should brace ourselves for the bankers helping themselves to the U.S. Treasury till a few more times for a few more (tens of?) billions of dollars before the Great Asian Bailout is over.

You've already seen from our Nov. 9 report that the bailout of the Japanese banks alone may require some $500 billion. The amount of money needed to resuscitate other Asian countries could amount to more than $100 billion, double the Mexican rescue of 1995, according to the Business Week report.

The potential price tag involves not only the $40 billion commitment to Indonesia, but an additional $23 billion to Thailand and the Philippines. Financial markets are now betting that Korea, where debt-choked companies have also triggered a banking crisis, and the government is running low on foreign reserves, will need as much as $40 billion to clean up its mess.

ASIAN OR PAPER TIGERS?

And suddenly, the much ballyhooed "Asian tigers" are starting to look like paper tigers - the paper being unfortunately our greenbacks painted over with red ink.

Six of the top 30 corporations have filed for bankruptcy in Korea this year alone. If all of the bad loans were written off, the entire equity of Seoul's commercial banks would disappear.

But not just the Korean banks. The Japanese banks are on the hook to the "Asian tigers" for some $263 billion; the European banks for about $155 billion, while the American banks have lent them some $55 billion, Business Week estimates.

One Jardine Fleming report suggested that the non-performing loans held by the Japanese banks could account for almost 23% of Japan's gross domestic product - a level surpassing even Thailand's failures (13% of GDP).

And then there's China. It's the last high-growth economy in the region, yet its top banks also have about $90 billion in problem loans, according to Business Week. The country is wallowing in excess manufacturing capacity, and real estate in Shanghai and Beijing has been over-built. A British reader, who has recently returned from a trip to China, wrote to us on Nov. 6 that a member of the Shanghai Real Estate Board enthusiastically proclaimed: "Shanghai property is hot." To which our reader replied: "No, Shanghai property is empty." The newly built malls and commercial buildings which our reader had visited "were all eerily empty."

So again, what does it all mean?

It means that the bankers have talked themselves into lending tens of billions of dollars against the grossly inflated economic growth numbers in certain countries, most notably in Asia. And the local chieftains have talked themselves into believing that they can build economic prosperity on borrowed money. Yet both the gullible bankers and the politicians could have checked the history books to see how Tito also managed to destroy the former Yugoslavia, for example, on billions of dollars of borrowed Western money.

Slaying the "Russian Bear" to Feed the "Asian Tigers?"

MOSCOW - Well, the situation "did not improve," as the Russian banking official said (see page 3 of this story), and on Friday, Nov. 14, Russia's Central Bank did name 11 leading Western banks which it said had failed to carry out their side of securities deals. 

"The Bank of Russia states officially that it will refrain from conducting any kind of financial operation with the above organizations and recommends Russian financial structures to take into consideration the particularities of the business behavior of the above organizations," Sergei Aleksashenko said in a statement sent to Reuters said.

Which means that the above banks (and their customers?) are not be welcome to do business in Russia anymore?

This banking skirmish, if not an outright war yet, started when some London banking sources fueled speculation that recent market turmoil had left many Russian banks over-exposed and that some faced bankruptcy. The speculation added to pressure on Russian debt prices this week.

Talk about an underhanded squeeze! But was it done deliberately? Or to cut the Western banks' losses short? Consider the following two scenarios...

SCENARIO 1: WESTERN BANKERS ARE KLUTZY!

Western bankers sell to the Russians some securities in the wake of the Oct. 29 stockmarket crash, figuring to sucker in the "naive" Russians. But when the market rebounds, and the Russian bankers start to look like savvy traders, while their Western colleagues look like bungling idiots. So the Western bankers renege on the deal, having kept the Russians' money.

SCENARIO 2: WESTERN BANKERS ARE DEVIOUS MONSTERS!

Western bankers agree to sell to the Russians some securities which they have no intention of delivering. They are hoping to sucker in the "naive" Russians and crash the Russian market at the same time - just as the bankers and speculators did in Southeast Asia.

At roughly the same time (coincidentally?), the International Monetary Fund (IMF -a Western GOVERNMENTS (!)-controlled entity of which the U.S. is by far the largest shareholder) suspends disbursements to Russia under a $10 billion loan, alleging supposedly lax tax collections as the reason. Stanley Fischer, first deputy managing director of the IMF, said in Moscow on Nov. 10 that the IMF will wait until early next year (most likely February) to pass final judgment on the Russian government's actions to improve tax collections.

It so happens that the Western multinationals have tossed Russia only a few bones during the 1990s, while showering the Asian countries with billions of dollars of investments (see "Russia is still the bogey!" - Annex Bulletin 97-38, 10/16/97).

And now, regardless of whether you believe in Scenario 1 or Scenario 2 above, considering the debacle which they have suffered in Asia, they seem to be trying to take away the bones, too.

Arnab Das, a J.P. Morgan emerging market strategist, told Barrons (Nov. 17) that foreign investors were looking to exit Russia. Which has created a temporary demand for the one-month Russian government securities.

"Our sense is the potential outflows could be substantial. I don't have any direct evidence yet," he told Barrons. "But if material outflows do occur, Russia could have to raise interest rates to attract capital, which could hurt the country's fiscal position and potentially dampen economic growth. It looks like the fun in Russia, anyway, may just be starting."

"Fun in Russia?" That's how Wall Street sees the Western bankers' underhanded attack on a country which is barely trying to pull itself up by its bootstraps, after 70+ years of communism. And which followed to a "T" (and to the chagrin of its own people) the Western bankers' advice about how to do it.

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Volume XIII, No. 97-43
November 14, 1997

Editor: Bob Djurdjevic
Published by Annex Research;
e-mail: annex@djurdjevic.com

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