Beware, many more Cypruses in the making!
In this issue:
» Is the BRIC story fizzling out?
» A bank for emerging economies may not be feasible
» US loses millions of clerical jobs
» Wage rises in Asia make high inflation the new normal
» ...and more!
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Cyprus' bailout may not have caused too many creases on the global economic landscape. However, it was a notable one. It was the first time the euro zone penalized bank depositors for the government's poor fiscal management. To put things in perspective, consider these statistics. Cyprus had fiscal deficit of 4.9% and bank assets comprised 716% of its GDP in 2012. But don't make the mistake of thinking that Cyprus is a one-off case! There are many others, big and small economies, whose economic profile is as delicately balanced as in the case of Cyprus. Fingers are already being pointed at Luxemburg, Malta, Estonia, Slovenia and Slovakia. As seen in the chart, the first two have bank assets that are ridiculously higher than GDP. For Luxemburg, the bank assets are 2107% of GDP! The risk of a country's growing dependence on bank debt is that it becomes more vulnerable to economic and financial shocks. An economy with higher leverage is likely to see more business failures and loan defaults in a recession or steep rise in interest rates, all else remaining same. Slovenia and Slovakia are also on red alert as their fiscal deficits are 4.2% and 4.8% respectively.
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Data source: World Bank, WSJ, IBT, Equitymaster |
That makes us wonder how safe is India with fiscal deficit of 5.2% in FY13. Or for that matter, Ireland, Japan, US and China that have bank assets at 718%, 341%, 235% and 146% respectively. India' bank assets at just 75% of GDP assuage some concerns. For China too the robust fiscal position makes things look brighter. But the Cyprus debacle is a warning for every nation, big and small, to pay heed to. Unless the governments put their fiscal management in order and curb indiscriminate bank lending, a much bigger global crisis cannot be ruled out.
Do you think countries like the Ireland, Japan, US and India could also head Cyprus way? Please share your comments or post them on our Facebook page / Google+ page
01:35 | Chart of the day | |
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Data source: Banks, Equitymaster |
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But this belief is now being put to one of its toughest tests. As per reports, the stock markets in the BRIC group of countries peaked in 2007 but after that, it has underperformed the US markets by a huge margin. What more, shares of developing countries have even underperformed their developed counterparts during a global market rally, a first in 15 years!
So, is the BRIC story fizzling out or it is going through a temporary lull that will pass sooner than later. While we cannot speak for other countries, we are of the view that India's problems are of its own making. And once it fixes issues like governance and poor infrastructure, it can make a roaring comeback we believe.
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The first reason is the dissimilarities between the 5 countries. They may have commonalities but in essence they have different political structures. They even have different underlying macroeconomic conditions. To add to this is the problem of size that would determine the voting power of each nation. Let's face it, China is much larger than the other countries. So it is natural that it may prefer to have larger control in the bank. But given its strained political relations with India and Russia, such a control may not be agreeable by them. Then there are also issues like staffing, decision making, etc. unless these are agreed upon, the bank cannot be a success. We do agree with what FT has to say. Unless the finer points are worked out, such a bank may not really see the light of the day. And if it is set up without resolving these issues, it would be a failure. Hopefully the BRICS leaders will think these things through before rushing to set up the bank.
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What does this lead to? Increasing income inequality! Median household incomes in the US have fallen 5.6% since June 2009 to US$ 51,404. This was despite the fact that the economy has witnessed some recovery since the worst phase of the crisis. This is another worry that US policy makers have to now grapple.
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We cannot help but find similarities between the power sector situation in Japan and India. The high power tariffs (India has amongst the highest power tariffs in the world) are common to both economies. The urgent need of an overhaul within the sector - more so after the grid collapse last year. However, the need for overhaul in India's case seems more urgent and wider given the issues related with delays in decision making by the government; mining related issues; high T&D losses; power theft; poor financial conditions of SEBs; fuel supply related issues; amongst many others.
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04:50 | Today's investing mantra |
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1 Responses to "Beware, many more Cypruses in the making!"
loungani
Apr 3, 2013Will look forward for some more of this material before giving any comments...