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Country Risk: In search of a safe haven

Merrill Lynch Mercury Asset Management reports that UK FTSE 350 companies, excluding banks, are sitting on £65 billion ($108 billion) of cash, most of it placed on deposit in the interbank market. It further estimates that European corporations, insurance companies and pension funds are together rolling over some $561 billion of liquidity, mainly through interbank deposits. Corporates account for some 70% of that liquidity. These companies haggle with their banks to cut liability costs by a few basis points. They should ask themselves whether they are also earning a competitive return on their cash assets.

The comparison between poacher and gamekeeper was inevitable from the moment the Brazilian government put forward Armínio Fraga Neto's name as the new central bank president in February. In a matter of weeks Fraga has gone from star Wall Street investor to stout defender of the real, a currency tattered by repeated attacks from traders.

For this, our 27th ranking of the world's countries by creditworthiness, we have altered the scoring slightly. We have included a measure of per capita income into the score given for economic performance. This has boosted the ranking of a number of countries - especially smaller ones -which were previously penalized because little data was available on their economic performance (see methodology).

Oman has recently opened the first interbank repo market in the Gulf and East African region. One of the quietest success stories in the world, this small Gulf country is helping to ensure future growth by the establishment of a modern financial and banking system.

The euro will fall by a further 10% against the dollar and reach parity with the US currency within a year.

There is a growing backlash - academic and political - against privatization. Influential figures have even argued for re-nationalization. But given the wealth of evidence in favour of privatization, this would be a disaster, argues James Smalhout.

The euro is expected to speed the growth of a US-style market in local-authority bonds. In euroland, nations now matter less: cities and regions are becoming economic and financial actors in their own right. Banks are fighting hard to woo them as clients. But would-be investors aren't happy with the poor liquidity. What does this fast-growing market need to succeed? Marcus Walker reports.

Edited by Peter Lee

The launch of the euro seems to have strengthened German banks' competitive advantage, rather than undermining it as some had expected. Despite increased competition, the capital market is going from strength to strength. And feeding on this growth is Frankfurt - home to the European Central Bank - fast becoming the financial epicentre of euroland. Is this all too good to last? Laura Covill reports.

Edited by Peter Lee

It's not a new idea, but aficionados say it was never more relevant than today. To reduce the gross settlement exposures in the $1.2 trillion a day foreign exchange market a handful of banks and brokers have been working on a new way to trade the rates without having to send over the gross amount. They just settle the difference between the spot rate at the time the transaction was agreed, and the rate at delivery.