28 i chronicle
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Transcript of 28 i chronicle
ISSUE
VOLUME
Stats Watch .......
Falling connection-GSM subscriber
Open Forum…….
Policy Rate Hike
Cover Story .......
Eurozone in Intensive care
News ……
News on Industry and Emerging Markets
In Focus
It takes 32 Rs. to cross
poverty line!
Investeurs Chronicles
Outlook
Onshore Yuan
September 2011, Volume: 28
Figure Facts
Forex
Forward Rates against INR as on 23rdSeptember, 2011
Spot Rate 1 mth 3 mth 6 mth US 49.63 49.88 50.3 50.56 Euro 66.8 67.12 67.68 68.06 Sterling 76.52 76.88 77.49 77.84 Yen 65.11 65.47 66.08 66.53 Swiss Franc
54.43 54.75 55.32 55.79
Source: Hindu BusinessLine
Libor Rates
Libor % 1 mth 3 mth 6 mth 12 mth
US 0.23 0.36 0.54 0.84 Euro 1.29 1.48 1.69 2.03 Sterling 0.68 0.93 1.21 1.69 Yen 0.14 0.19 0.33 0.55 Swiss Franc 0.003 0.010 0.057 0.29
Forward Cover
1 mth 3 mth 6 mth
US 6.13% 5.47% 3.80% Euro 5.83% 5.34% 3.82% Sterling 5.72% 5.14% 3.50% Yen 6.73% 6.04% 4.42% Swiss Franc 7.15% 6.63% 5.07% as on 23rd September, 2011 Source: Hindu BusinessLine
Commodities
Aluminum (1 kg) 108.65
Copper (1 Kg) 397.40
Zinc (1 kg) 96.75
Steel L(1000kg) 31800
As on 23rd September 2011
Call Rates as on 23rd September 2011
6.50% - 8.35%
Sensex Nifty
16501.74
16162
4946.8 4867.75
Gold (10 gm) Silver (1 KG)
28134
27271
64681
58801
Crude Oil (per barrel) Dollar
110.9
104.08 45.35
50.01
Data from 12th
September to 23rd
September
YEAR
Falling Connections- GSM subscribers
Onshore Yuan
For more than a decade, economists and officials in other countries have charged that
the Chinese government has kept the value of its currency artificially low to make the
country's exports more affordable. China’s currency started appreciating in July 2005,
remained stagnant from July 2008 till May 2010 and started appreciating again in June
2010.
Spot Yuan (USD/ CNY) was at 6.3832 on 16 Sept, 2011. Though it was below its all time
high of 6.3705 on Aug 30, it has risen 3.24% so far this year and 6.94% since its de-
pegging in June 2010.
Currently, inflation is the biggest threat faced by Chinese administration. Hence, China
continues to focus on curbing inflation and to reduce the economy’s reliance on exports
and Yuan appreciation is one of the tools to achieve that. China’s economic outlook is
rosier compared with developed countries, that helps stimulate demand for the
currency. The Yuan is expected to strengthen and rise 4% to around 6.115 by the end of
this year as the government uses it to reduce the nation’s inflationary pressure and help
its overheating economy,
“Dumping”
The practice of selling goods outside of the usual distribution channels, often
a foreign market, for a lower than normal price.
StatsWatch
Outlook -Coal
Gloss
Almost every day, warnings come thick and fast that the euro currency club cannot
survive the ongoing Greek crisis. A wide range of policy makers and analysts are
convinced the eurozone will be torn apart by the wrangling over how much cash to
loan the Greeks and how much of the country's debt to write off. The government at
the heart of concerns, Greece, risks being unable to pay wages and pensions, if the
funds (8 billion euros) are not released in next two weeks. Panicked officials are racing
to plug a gaping hole in the budget and accelerate reforms to evade such a possibility.
A hastily announced property tax which should raise about €2 billion, to keep the
budget deficit below 9% of GDP this year, is a shot at pleasing international lenders.
A €13 bn bond-buying spree in the mid of September, by the European Central Bank
(ECB) has compounded the controversy. The purchase of Italian and Spanish
government debt led to the resignation of Jürgen Stark, the ECB's hardline chief
economist, who argued that Rome and Madrid should be prevented from accessing
ECB funds before instituting further austerity measures.
The problem is that although a beefed-up EFSF (European Financial Stability Fund)
will be able to cope with the smaller peripherals, it is unable to support the
refinancing needs of an economy as big as Italy. At an auction of Italian five-year bonds
on September 13th its borrowing costs jumped to 5.6%, up from 4.9% at a similar
auction in July. Another problem is that the pressure on European banks is increasing.
Again, the real last resort is the ECB, which could relieve the pressures on the system
by being prepared to buy without limit the bonds of solvent euro-zone countries. But
the ECB is itself divided by disagreement.
Fiscal policy in a debt crisis attracts two divergent views: one, austerity never works;
two, you don’t get out of debt by taking on more debt. Neither is necessarily true. But
the problem right now is that the first holds in Greece, where policy is based on
ignoring it, and the second fails to hold in Germany, the US and UK, where policy is
based on accepting it!
Cover Story
Eurozone in Intensive Care
Further, the first view ignores the successful use of fiscal tightening to escape debt
crises in, for example, Brazil and Turkey in the early 2000s as well as the oft-cited
examples of simultaneous austerity and expansion of Canada and Sweden in the
1990s. But they had the benefits of a rapidly recovering global economy to export
into as also had the ability to depreciate their currencies. Greece has neither. It
cannot escape its predicament using fiscal policy. It needs a debt restructuring.
The second myth involves a willful or ignorant confusion of short-run stimulus and
long-run solvency. The irony is that, assuming growth in their economies will
materialize despite short-run fiscal tightening; the US, the UK and Germany are
jeopardizing the attempts of others to do the same. What those three countries
think will reassure the markets about solvency will in fact scare them about
growth.
Meanwhile, the source of much of this tension – the eurozone’s painfully slow and
disunited approach to resolving the Greek crisis – continues.
The fine print of the fuss
For the uninitiated, the obvious solution to the problem may be Greece exiting
eurozone. After all, it is the proverbial Achilles’ heel here. However, it is easier
thought of than done. Adopting the euro was designed to be irrevocable, and
European Union treaties don't contain provisions that would permit a country to
leave. Amending the treaties could take years and requires unanimous
agreement—including that of any country threatened with expulsion. That means
Greece can't be pushed out against its will. But fellow members could make life so
difficult for Greece that is has no choice. After all, Greece depends almost entirely
on loans from the euro zone and International Monetary Fund while the European
Central Bank is providing badly needed liquidity to Greece's enfeebled banks.
Those faucets could be shut off.
Run up to our cover story “The crisis Continues-European Union” published 0n 6th June 2011
But such an action would be hugely costly. It would leave Greece with little or no
ability and incentive to service its euro denominated bonds. Remember, banks
across Europe hold Greek bonds and they would suffer giant losses. During
subprime crisis, toxic debt was hidden in ‘derivatives,’ and kept off balance-sheet.
Now instead of sub-prime property loans, the banks across America and Europe
are hiding toxic Greek debt in their assets: Thus even small exposures – US banks
hold only $1.5bn (€1.1bn) in Greek debt, and British banks are on the hook for
$3.4bn (€2.5bn) – could be masking considerably larger off-balance sheet risks.
Besides the American and British exposure, the direct impact list include: Japanese
banks holding $432m (€316m) in Greek debt, Turkey $30.4bn (€22bn), Poland
$8bn (€5.8bn), Croatia, Hungary and the Czech Republic combined are exposed to
some $460m (€336m) – and on through Bulgaria, Serbia, and Romania.
A Banking Crisis
No wonder then that the sovereign debt crisis has transformed into a ‘Banking
Sector Crisis’.
Greek default can lead to a severe liquidity crunch and flight to safety of deposits
from not only Greek and euro area banks, but from a number of closely inter-
connected banking systems, especially those with close trading and investment
links to the European Economic Community. This is bound to induce contagion
across the entire euro area and spill over to euro area banks’ cross-links to Eastern
and Central Europe and beyond.
Already, credit-default-swap spreads for European banks, a measure of how costly
it is to buy insurance against their default, are at record highs. The rates that banks
charge each other for loans in the interbank market are rising, too. Banks are
finding it hard to issue longer-term debt, too. The market for unsecured bonds has
been closed for weeks, leaving banks with no option but to sell covered bonds at
usurious interest rates that will challenge their profitability.
Commotion Continues
Even if the bank's exposure to Greece was minimized and their position
consolidated, there still are a couple of reasons that will keep the threat of a
broader collapse alive.
The first is that market pressures will move on to the next most likely "candidate"
to follow the path of Greece; Ireland and Portugal who have also received bailouts.
There will most probably be speculation regarding the future of Spain and Italy.
The second issue is that if Greece eventually defaults, it will most probably re-
adopt its national currency, the drachma, which implies that inflation will sharply
rise leading to hyperinflation. This means that Greece will have absolutely no
capacity to trade with its European partners under free market conditions, since
she will have to impose protectionist measures in an attempt to safeguard
whatever is left of her economy.
note that its debt is far higher, so the ripple effects could be more serious.
Total Greek public debt is about 370 billion euros, or $500 billion. By comparison,
Argentina's debt was $82 billion when it defaulted in 2001; when Russia defaulted, in
1998, its debt was $79 billion.
At its heart, the eurozone's problems remain rooted in the banking sector. A decision
by the French and German parliaments to underwrite their biggest at-risk banks
would take the problem off the table for now. But policymakers remain in denial and
prevarication among politicians dumps the problem back in the ECB's lap. In
particular, work on transforming Europe's main financial rescue vehicle, the proposed
440 billion euro European Financial Stability Facility, would have to be fast tracked so
that it would be in a position to buy European bonds and, crucially, provide emergency
loans to countries that need to inject money into capital starved banks.
Rising government credit risks, including recent Italy’s downgrade, shaky asset
markets, weakening growth: the makers of the horror movie of 2008 are clearly
contemplating a sequel – “Lehman Brothers II: This Time its Sovereign”.
The protectionist measures, together with the massive depreciation of the Greek
currency, will have two effects: (a) Greek exports will become very cheap and
therefore will be preferred over the equivalent products of Greece's competitors,
who are also part of the Euro (b) Greece will act like a black hole that will absorb
all the money that is thrown her way without giving anything away (since she will
mostly export and not import). This will understandably destabilize trade, which
again will have negative implications for the rest as it will as well lead to a vicious
cycle.
At any rate the catastrophic implications of a Greek exit or default are such that
will force European leaders to devise any sort of action that will prevent them.
Eurobond
With the European Union (EU) on the brink, the world is hoping that the political
leadership in eurozone agrees to plans for a common euro zone sovereign bond
that could avert Europe’s “Lehman moment”, and the prospect of fresh financial
contagion. Although such a bond cannot address the deeper structural issues that
the euro zone faces, of slow growth and political asymmetries, this joint debt issue
will go some way towards easing the impending credit crunch by lowering the cost
of borrowing for debt-ridden countries and, as important, sending signals to the
investor community that Europe’s strong economies are – finally – ready to take
some responsibility for the smaller and weaker states. A euro-bond issue will also
give Europe the breather it needs to redefine the contours of the monetary union.
One sticking point about the euro bond is that it is likely to come with stricter and
more intrusive financial oversight, at which member countries may baulk.
Conclusion
While other countries have defaulted on their sovereign debt in recent times
without causing systemic contagion, analysts weighing the numbers on Greece
Everonn to sell 12% stake to Dubai-based GEMS
Education for Rs 138 crore
Embattled Chennai-based Company Everonn Education,
whose founder is in jail, will sell a 12% stake for Rs 138
crore to Dubai-based GEMS Education via a preferential
allotment of shares. Each share will cost GEMS 528, an
over 40% premium to Tuesday's (20th September 2011)
closing price. GEMS belongs to the Varkey Group, founded
by Padmashri Award recipient and Dubai-based NRI
entrepreneur Sunny Varkey.
Desktops won't die so soon
In the April-June quarter, desktop PCs accounted for 61
per cent of the total market size of 2.5 million PC units
sold (the installed base is estimated at around 53 million
units), according to Gartner. In 2011, while the growth of
desktops is expected to rise 10 per cent to 6.74 million
units, the share of desktops as a percentage of total PC
shipments is expected to fall marginally to 60 per cent. In
2012, desktops are estimated to grow by 11.9 per cent
(7.54 million units).
12th rate hike by RBI; loans to cost more
Concerned over high inflation, the Reserve Bank on 16th
September 2011 raised key interest rates by 25 basis
points, its 12th such hike since March, 2010, making auto,
home and other loans more expensive. Following the
increase, the short-term lending (repo) rate stands at 8.25
per cent and the short-term borrowing rate (reverse
repo) is 7.25 per cent.
The RBI, while announcing its mid-term review of the
Contracts for 7,300 km roads to be awarded by
March-end: Joshi
The government today said contracts for laying over
7,300 km roads will be awarded by the end of current
financial year."...Before the year ends, we will award
concessions for over 7,300 km (roads). This will harness
private investment of over Rs 50,000 crore," Road,
Transport & Highways Minister C P Joshi said at the
'Conference on Public Private Partnership (PPP) in
National Highways: Challenges & Opportunities. He said
that out of India's highways network of 71,000 km, up
gradation projects for about 16,000 km have been
completed, while about 15,000 km are in different
stages of implementation of being awarded.
12th rate hike by RBI; loans to cost more
Concerned over high inflation, the Reserve Bank on 16th
September 2011 raised key interest rates by 25 basis
points, its 12th such hike since March, 2010, making auto,
home and other loans more expensive. Following the
increase, the short-term lending (repo) rate stands at 8.25
per cent and the short-term borrowing rate (reverse
repo) is 7.25 per cent. The RBI, while announcing its mid-
term review of the monetary policy, kept all other rates
and ratios unchanged
Consumer Price Index up 1.18% in Aug; food and
clothing dearer
Expensive food and clothing pushed up the Consumer
Price Index (CPI) by 1.18 per cent in August vis-a-vis the
previous month, but experts said too much should not be
read into the numbers, as the data on retail prices is yet to
stabilise. The CPI based on retail prices stood at 111.7
points in August, compared to 110.4 points in July, as per
data released by the government. The main increase was
seen in the prices of vegetables, with the index rising by
4.61 per cent month-on-month to 113.4 points, while the
indices for milk and milk products and fruits went up by
over 1 per cent each.
Emerging Markets
Indonesia: Coal production may reach 370 million
tons this year
Given current production trends, Indonesian coal output
may reach 370 million tons by the end of this year, if
rainfall is not too excessive during the final three months,
the Indonesian Coal Mining Association (APBI)
announced. The association said that from January to
August, the country’s coal production had already
reached 235 million tons. Earlier estimates had targeted
this year’s coal production to between 340 million and
360 million tons. In 2011, Bob predicted that around 65
million tons of coal would be sold to the domestic market
through the domestic market obligation (DMO)
regulation, which requires coal producers to sell a part of
their production to local buyers.In 2012, he estimated
that 75 million tons of coal would be allocated for the
country’s coal users.
Thailand: Thai tech companies draw global
interest
Competition in the local online business is heating up
with some global companies exploring opportunities to
buy or form partnerships with Thai online firms to
provide services here. Baidu, a Chinese search engine
operator, is in talks to invest in some Thai websites with
strong customer bases such as Mthai and Kapook, said an
industry source. Earlier, Living Social, a US online
discount-deals operator, acquired Ensogo, a Thai
company operating the same business, while Rakuten, a
Japanese e- commerce company, bought Tarad.com, a
Thai online market. The two global players came to
Thailand as they are looking to expand to the fast-
growing, less-crowded Asian market.
Egypt asks U.S. business for help, urges investment
Badly in need of cash flow, Egypt appealed to the U.S.
business community to help the country rebuild following
street protests that pushed its president out in February.
The Egyptian government has forecast growth of
somewhere between 3 to 3.5 percent in the current fiscal
year ending June and has narrowed its budget deficit to
8.6 percent of gross domestic product
Singapore jobless rate up slightly in Q2
Singapore's final unemployment rate increased slightly in
the second quarter, but is lower than the preliminary
figure of 2.2 per cent reported in July. According to the
Ministry of Manpower (MOM), the overall unemployment
rate increased from a seasonally adjusted 1.9 per cent in
March 2011 to 2.1 per cent in June 2011 with the slower
unemployment growth. Services continued to generate
the bulk of the employment gains, adding 20,200 workers
in the second quarter. Construction expanded by 3,600,
higher while manufacturing rose by 800, up from the flat
gains (100) in the previous quarter.
South Africa: No surprise as rates held steady
The Reserve Bank has left the repo rate unchanged at
5.5%, as widely forecast. Although economic data out
this week sent mixed signals about the state of the
South African economy, the dovish stance of the
monetary policy committee (MPC) after its three-day
meeting was no surprise. Money markets factored in
a small chance of a repo rate cut late this year or
early next year, but the steep rand depreciation may
limit further monetary loosening.
Indonesia: Rupiah drops to lowest rate this
year
The rupiah dropped to 9,367 per US dollar at
opening time on 22nd September morning, its lowest
position since May last year. Commonwealth Bank
currency analyst Mika Martumpal said the rupiah
depreciation had followed the falling stock and
commodity markets. He said many investors had let
go of stocks and bonds and shifted to dollars, further
pressuring the rupiah.“The market [situation] has
been triggered by the Greek default risk and the
decision of the [US] Federal Reserve, announced last
night,” Mika said.
POLICY RATE HIKE: The other side of Discussion All I Said Was Don’t Ignore Turkey Rate Cuts & Fall in Inflation: Basu
In the run up to the monetary policy review on September 16,
chief economic advisor Kaushik Basu said he did not favour an interest rate increase. The
RBI lifted the key policy rate 25 basis points.
Contrary to what you were advising, the RBI has raised rates. Does this show a
conflict among the decision-makers?
Not at all. Let me first clarify that what I advised RBI was to “consider” not raising the
interest rate. Turkey, despite high inflation, began lowering interest rates from the
middle of last year. Critics were fully braced for further inflation. What happened was
interesting. Turkey’s growth rate rose—as expected; Turkey now stands with China at
the top of the league among G20 nations. The surprise was in the inflation. Far from
rising it came down from over 10% in April 2010 to around 6%. I am fully aware that
nations have their own idiosyncracies; but we must not dismiss other nations’
experiences out of hand. I used the Turkish experience—and some of Brazil—and also
some economic theory to argue that it is no longer obvious that India should continue to
raise interest rates. I urged the RBI to think out of the box and then act. It is my job as an
economic adviser to float new ideas and not simply parrot the majority opinion. And I
am glad that India’s policy cycle is robust enough that we can openly discuss different
ideas. It is RBI’s job to take a final call. I like to believe that it did consider my views and
then took the decision. The Reserve Bank is a thinking organization and I have great
respect for those at its helm. But that does not mean that we will all reach the same
conclusion. Total coincidence of opinions is not a sign of good government but of a bad
totalitarian state.
Open Forum
InFocus
It takes 32 Rs. to cross poverty line!
If a person is spending more than Rs.32 a day in urban India, is he poor? No.
Atleast the Planning Commission thinks so! According to a reply submitted by the
Planning Commission to the Supreme Court, anyone spending more than Rs 965
per month in urban India and Rs 781 in rural India will be deemed to be not poor.
This effectively means that those spending in excess of Rs 32 a day in urban areas
or Rs 26 a day in villages would no longer be eligible to draw benefits of central
and state government welfare schemes for those living below the poverty line.
Not surprisingly, it has created outrage among activists who feel it’s a ploy to
artificially depress the number of poor in India. However, commission maintains
that these were provisional figures based on the Tendulkar committee report
updated for current prices by taking account of the Consumer Price Index for
Industrial and Agricultural workers.
Practically applying this idea of Planning Commission would yield following
picture according to prices in the national capital:
The Turkish Central Bank lowered interest rates not to control inflation but to counter capital inflows?
You are right about that. But the reason for which Turkey did this is of no interest to me. Turkey’s action has thrown up evidence that is of interest. Fleming did not discover
penicillin because he was looking for it; it was a by-product of other activity. It is entirely possible that after studying this serendipitous experiment we will conclude that it is
unlikely to be repeated in India. I am fine with that. But we must have the openness to examine it.
Do you believe, as some have argued, that to control inflation India has to keep its growth down to below 8%?
No I don’t. The kind of research which leads to such a belief entails statistically extending a nation’s past experience to create a potential growth path. For a dynamic nation on
a take-off path, such as India, such projections are deeply misleading. There are many economies in early stages that have grown consistently beyond what would have been
considered their capacity growth by this calculation. From 1966 to the end of the 70s, South Korea grew at astonishing rates, often above 10% per annum. This was also a
period when it had high inflation. In fact, barring one year, it had double-digit inflation for this entire 14-year stretch. It is important to see that neither of these two trends got
in the way of the other. It would have been a mistake if Korea had cut its growth back during this vital period in the belief that it was performing above capacity.
Are inflation and slowdown signs of the government running out of ideas and the Indian miracle coming to an end?
The inflation situation and the slowdown in growth are indeed a matter of concern, but let us not get things out of proportion. A growth rate of 7.7%—the figure India
achieved in the first quarter of 2011-12—is disappointing compared to what we have achieved in recent times. But by any international comparison it is remarkable
performance. The fact that it disappoints us shows more than anything else how our yardstick has changed. We are demanding of India, which is a good sign. As for inflation,
9.8% is unacceptably high and we have to work to bring it down. But once again we have to recognize that there are nations—industrialized and emerging-—that have had
inflation many times more than that. Further, India’s nominal income is growing by roughly 18% per annum. So even if inflation takes away 10 of those percentage points,
people have more real goods and services to consume each year by a hefty 8%. This is no mean achievement.
Should we accept high inflation and press full throttle on growth?
We should not accept it and we press full throttle. Let me explain. I have argued elsewhere that it is natural to get an additional 2 percentage points of inflation during a
nation’s rapid growth phase. If in addition we treat up to 2 or 3 inflation as standard as many central banks do, even then we are talking of an inflation of less than 5%. I am in
favor of using such a target. I don’t think that just because we are in a high growth phase we have to inflate faster. At times, in rapidly growing economies such as ours or
Korea’s in the seventies, there is so much change that inflation goes up as happened in Korea and is happening here. But there is no “has to” about this. We simply need to find
the new policy rules, for a new and changing economy.
TeamChronicle
Bhavna Goal [email protected]
Akanksha Srivastva [email protected]
Disclaimer: Investeurs Chronicles is prepared by Research & Analysis Team of Investeurs Consulting Private Limited to provide the recipient with relevant information pertaining to the world economy. The
information contained in the document is based on the releases made by various newspaper & publications; hence, we are not responsible for any inaccuracies in the information provided.
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