The developed nations riddled with high debt problems have been looking for a proper solution to confront the issue. The G-20 ministerial meet in South Korea too focused on this problem. Several leaders believed that banks should be taxed for funding future bailouts if any. They stressed that such a measure would help in keeping a ready war chest to fund the ‘Too Big To Fail’ types.
It thus seems that the victims of the debt crisis have not taken home any learning. On the contrary they wish to repeat the mistake. By taxing all banks for future bailouts, they will only encourage excessive risk taking. The ‘Too Big To Fail’ will survive at the cost of smaller and healthier entities. Just that the latter will bleed their profits to keep the big ones going.
More often than not India has opposed such suicidal financial reforms. This time too our Finance Minister, Mr Pranab Mukherjee, gave it its due discredit. He rejected the proposal of bank tax and instead suggested the economies take learnings from Indian banks, citing the examples of CRR and SLR in India The cash reserve ratio (CRR) and statutory liquidity ratio (SLR) mandated for every banking company in India ensures that they cannot take too much risk even if they wish too. On the other hand, the depositors’ money also remains safe in the form of these reserves.
The Finance Minister has also advised the bank regulators in the US and EU to adopt a stricter approach to regulating the sector. Following the footsteps of their Indian counterpart could help them evade the debt problems. We hope the Indian banks live up to their reputation. And some good sense prevails with those in the developed world!
Neither a lender nor a borrower be...
These words of Shakespeare form the essence of the latest investment outlook note of Bill Gross of Pimco. The manager of the world's largest bond fund manager is concerned over the US' ability to fund its massive debt. One which is expected to exceed its GDP in a couple of years. As a percentage of GDP, US debt has already crossed the figure touched during the Great Depression.
In a note to Pimco's investors, he asks - "The immediate question is who is going to buy all of this debt? It is obvious that the Chinese and other surplus nations cannot fund the deficit even if they were fully on board - which they are not. Someone else has got to write cheques for additional Treasury notes and bonds."
He also negates the assumption that cutting down fiscal deficits is the solution to the debt crisis. "Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!"
These stern words from Gross, show the little faith that he has on the US and European nations’ plans to cut down spending. He instead believes that investors in these economies should be content with the new normal growth rates that will grossly underperform the ones in emerging markets. With such predicaments, surplus foreign funds flowing into high growth economies like India is but a given.