Gerhard Schroeder's High-Stakes Gamble

0 Comments | Insight on the News, Nov 10, 2003

Byline: Jamie Dettmer, INSIGHT

LONDON - Gerhard Schroeder's High-Stakes Gamble

German Chancellor Gerhard Schroeder has taken the gamble of his political life by ordering the first cut in pension benefits in postwar German history. The cut one of five cost-saving measures designed to plug a budget shortfall likely will make his government or break it. The move could alienate large sections of his Social Democratic Party and may, if it fails and is beaten in Parliament, scuttle his ambitious structural-reform package, which is designed to stimulate employment by lowering nonwage labor costs.

Schroeder is under pressure to jump-start an ailing economy that is flirting with recession and has grown a paltry 1.3 percent annually, on average, during the last decade. Germany's poor economic performance during the last 10 years partly can be traced to the aftereffects of German reunification the mistaken decision to equalize Western and Eastern wages and benefits at the start has meant German public subsidies have been soaked up, dragging down the country's competitiveness and growth.

But the rigidities of the labor market and the cost of the welfare state also are to blame. High taxes and social-security contributions have deterred companies from hiring and put off foreign investors. Until Germany gets its economic house in order, experts say, the euro area will continue to underperform as well.

Forgive Iraq's Debt?

The debate continues about what to do with Iraq's massive Saddam-era debts. Should creditors forgive them or insist on payment? In October the South Korean firm Hyundai Motor Co. announced that it is organizing a coalition of companies to seek repayment of more than $10 billion in such debts.

U.S. officials fear the debt issue will undermine efforts to secure major foreign donations for the rebuilding of Iraq. Some officials argue there is a good case in terms of justice and economic expediency to write off most of Iraq's $350 billion debt. They say German debt largely was forgiven in 1945 and that the burden of the debt will cripple Iraq for decades.

But the argument is unlikely to sway creditors, who no doubt will allow a rescheduling and writing down of the debts but not a write-off. The main argument? It would set an awful precedent and allow countries that move to democracy or just change regimes to walk away from debts.

Buffett Backs Hunt For Natural Gas

Billionaire investor Warren Buffett has teamed up with a veteran gas hunter to prospect for natural gas in Poland, the business has learned. So far, more than 15 sites have been drilled and the company Buffett is backing, FX Energy, has hopes of making a significant commercial find soon. FX Energy is concentrating its search on an area covering 265,000 acres between the towns of Poznan and Wroclaw. A couple of miles below the surface where the company is drilling could be the largest field of natural gas to be discovered in Europe for more than 15 years, some experts believe.

Buffett, head of Berkshire Hathaway, which owns Cal Energy Gas, signed a partnership with FX Energy in the summer after Richard Hardman, the gas hunter responsible for much of Britain's natural-gas finds in the North Sea, came on board. Hardman reportedly has a hunch there will be a big find in Poland. Seeking to avoid criticizing the state-owned gas company, Hardman remarked: "It may be that in Poland they have not been looking for a big gas field and that is why they have not found one yet. There have been major finds, but the best is yet to come."

According to some experts the geophysical structures in western Poland are similar to those in the North Sea. Several U.S. investment houses, including Potomac Capital Management, quietly have been buying FX Energy stock, prompted by the involvement of Buffett, a man who normally backs winners.

BP Secures Stake in Russian Oil Producer

According to British Petroleum (BP) Chief Executive John Browne, Russia is a "country that has come so far so fast that there is no going back." And he has put his money where his mouth is by finalizing an $8 billion deal with the Russian oil producer TNK.

While the deal by industry standards is not massive BP's acquisition of Amoco cost $62 billion the TNK tie-up marks the first time that a Western company has secured an equity stake in a Russian oil producer. It holds out the prospect of rival companies, such as Royal Dutch-Shell Group and Exxon Mobil, scrambling to follow. "This is an opportunity with very long legs," Browne said. Exxon now is in negotiations with Russia's Yukos-Sibneft Oil Co., which also is being courted by ChevronTexaco. And ConocoPhillips is talking with Russia's Lukoil.

Browne has a history as a leader in the field of the oil giants. His acquisition five years ago of Amoco forced BP's rivals to start merging and to search for new partners. His deal with TNK is seen similarly as a major groundbreaking event in the oil world. The lure is Russia's oil and gas reserves, equivalent to more than 360 billion barrels of oil. Russia's oil production is comparable to Saudi Arabia's and is growing by about 9 percent a year.