This economy is giving Greece serious competition! - The 5 Minute WrapUp by Equitymaster
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This economy is giving Greece serious competition!

May 18, 2010

In this issue:
» ECBs are becoming popular in India
» Promoters are releasing their pledged shares
» India has ambitious plans for power in FY11
» DoT may reject TRAI's proposal
» ...and more!

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00:00
 
Europe is currently undergoing one of its worst crises ever. Few months back when the global financial crisis was at its peak, the US dollar was at the receiving end. To such an extent that some even began predicting the demise of the dollar. Today, the Euro is finding itself in a similar position led by the gargantuan debt that some of its member countries namely Greece, Spain, Portugal and Italy have amassed.

But if you thought that the debt problems have worsened only in Europe, think again! The IMF has predicted in a new report that US' national debt will soon reach 100% of GDP by 2015 as against 87.3% at the end of first quarter of 2010. That is not all. The IMF predicts that the US would need to reduce its structural deficit by the equivalent of 12% of GDP. This is a much larger portion than any other country analyzed except Japan. Greece, which is deep in a debt crisis, surprisingly needs to reduce its structural deficit by just 9% of GDP.

And so, the US may have bailed out large financial institutions, pumped money into its economy to tide over the financial crisis. But these measures will have a positive impact only for a brief period. In the longer term the US certainly seems to be sitting on a bigger time bomb. And if that explodes, the repercussions would be far more serious than what the Eurozone is facing at present.

01:14
 Chart of the day
 
Things are certainly not looking to good for the Euro area. Many countries in this region were already bruised and battered by the global financial crisis. And that problem has escalated into a more serious one namely the sovereign debt crisis. Greece has led the pack and many others such as Portugal, Spain and Italy are likely to follow suit. The crisis deepened so much that the status of the Euro was threatened and propelled European policymakers to announce a massive loan package for the region. This package will also be backed by the IMF. As today's chart of the day shows, among all the loan packages that IMF has doled out to various countries so far, the one announced for the Euro zone is by far the largest. And that too by a mile.

*Proposed
Data Source: The Economist

01:51
 
Funding options for Indian companies are set to get expensive. Bank borrowings are getting dearer. The government's borrowing programme is crowding out private issues. In such a scenario, benign interest rate overseas is luring Indian businesses. The Greek crisis has also infact been a boon in disguise. It has forced central banks in developed economies to keep interest rates low for an extended period. Thus, it is advantage ECBs (external commercial borrowings)! These overseas fund raising instruments are getting increasingly popular in India. Foreign investors too see these as an ideal medium to park funds in high return economies. These funds could be well utilized to suffice India's long term funding needs. However, their impact on forex volatility could be a challenge for the central bank.

02:24
 
There are many ways in which a company promoter loses control of his company. But nothing could be worse than losing it for being unable to cough up margin money on pledged shares. And this has already happened recently in India with a gentleman named Vijay Seth and the company that he promoted, Great Offshore. Other promoters seemed to have taken note of this rather seriously. What else would explain the fact that out of around 1,000 companies analyzed by a leading daily, close to 450 companies have released their pledged shares, either fully or partly, from the clutches of financiers.

It isn't that they will never think of pledging their shares again in future. They certainly would. But why take the risk when you have financial resources at hand and are very capable of getting back the pledged shares. And this is exactly what most companies seem to be doing. Thanks to the economic buoyancy, cash has started trickling in and other resources of financing have also cropped up. The promoters are thus making use of this newfound wealth in winning the family silver back. After all, one doesn't let go of the baby that one has taken so much pain to nurture, that easily.

03:01
 
A leading business daily recently quoted 'a top adviser' as saying that India plans to add about 20,000 MW of power capacity in FY11. But what may initially sound as a piece of good news, may not really be so. India's power capacity 'plans' as such have so far been nothing but a mockery. Plans and targets have over the year been continually set and consistently missed. Sometimes to an embarrassing extent. Looking at the pace of power addition in recent years, there is nothing to believe that such an amount of capacity addition will happen. That too in just one year. Targets and actual results on the ground seem to have become things completely unrelated to each other. Meanwhile, China continues to add 100,000 MW every year.

03:37
 
There is no dearth of experts who roundly pan the US Dollar. The US fiscal deficit is too high, they say. It will stoke unprecedented inflation and eat away into the value of the greenback. Maybe. But that's not showing the demand for the Dollar denominated assets. If anything, it is going up. As per Bloomberg, the European fiscal crisis may be beginning to translate into increased demand for dollar assets. Purchases of US equities, notes and bonds totaled US$ 141 bn in March. And guess who was the largest buyer? China. In our view, this reflects the desire for diversification away from the Euro. The Euro is under greater stress after sovereign debt crisis in Europe. So, despite all the macro economic worries in the US, for the time being at least, the world's premier economy still has its share of buyers.

04:04
 
The Telecom Regulatory Authority of India's (TRAI) recent proposals stirred up quite a controversy last week. Out of all the proposals, a key one was that of asking telecom operators to shell out a one-time fee on the excess 2G spectrum that they hold. This fee would be based on the price that 3G spectrum is garnering. However, since these were only proposals it was up to the higher authorities to pass them. A leading business daily has reported that the Department of Telecommunications (DoT) has taken a rational approach to the same and may reject the proposal. The basis of this rejection would be quite simple and logical - The efficiency of 3G spectrum is three times more than that of 2G spectrum. As such, 2G spectrum has to be therefore accordingly priced. It is further reported that the DoT is planning to work on a new formula based on the efficiency of the spectrum. This would be a relief on the incumbent telecom operators as the overall one-time fee would be much lower than what was anticipated earlier.

04:46
 
In a volatile trading session, Indian stock market began on a weak not but strong buying activity in the ensuing hours pushed them well above the dotted line. At the time of writing, the BSE-Sensex was trading higher by about 107 points (0.6%). Most Asian indices were trading mixed. The European indices have opened on a firm note. Barring metals, gains were seen in stocks across sectors.

04:57
 Today's investing mantra
"Absent a lot of surprises, stocks are relatively predictable over twenty years. As to whether they're going to be higher or lower in two to three years, you might as well flip a coin to decide." - Peter Lynch

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3 Responses to "This economy is giving Greece serious competition!"

Devang Gardi

May 18, 2010

Again, a case of bad analysis. At the height of the financial crisis, the US Dollar had strengthened. The US has the ability to print money and monetize its debt, something which Greece does not have. Now a quick trivia: is this the largest debt (as a percentage of GDP) accumulated by the US or UK? The answer is NO. Both the US and UK have accumulated and paid back substantial debt over their respective history. That is the primary reason why they are still rated AAA.

Let's look at India's situation in contrast. Her current fiscal deficit (incl. state, off-balance sheet and PSU) is already close to 10% GDP. This is in a country that did not avoid the financial crisis. Albeit most of India's debt is held locally, but with a Public Debt / GDP ratio of 80% and a massive current account deficit it may be India that may turn out to be Asia's Greece.

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Suryanarayan

May 18, 2010

Adding 20000MW of power in 2011 will be the joke of the century with the kind of governance we have and the lackadaisical approach we have to any thing and everything under the sun. Our past record speaks for itself. I think we will simply drift into a third rate economy slowly.

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Gurumani

May 18, 2010

Ref your item on India's power problems and planned capacity additions, there is no way any of these plans will fructify. We have one of the most invisible, low profile, low energy, namby pamby ministers in charge of power. Isnt it time that he is moved out as a Governor to one of the states, rather than dragging down one of the most crucial ministries? Someone like Kamal Nath is who is required for power.

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