End of the line?

11 FEBRUARY 2012

Approaching the end of the moving walkway at Suvarnabhumi Airport in Bangkok, one hears a nasal intonation of the warning 'end of the line', alerting passengers to step off. It seems as if this is the end of the line for the current rally and it may be time for investors to step off.

What can cause the rally to abort? The most likely issue would be Greece, where a tragedy is unfolding in slow motion. Dig deep down and the efforts to prevent Greece from being declared in default of its debt obligations (which would trigger payments on the credit default swaps, or CDSs) is to save American banks which are believed to hold 95% of CDS. CDSs have been issued also to those not holding Greek (or other sovereign) bonds, i.e. to those who do not have insurable interest. So the amount of CDSs outstanding could be a far higher than the actual debts owed and can cause a financial panic if they are triggered for payment.

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The ECB is thus putting pressure on the Greek political parties to agree to tough terms to qualify for a further payment of loans, which would help Greece meet its obligations which are due on March 20. The terms include cutting minimum wages by 20%, reducing the Government workforce and cutting pension payments. All this has to be cleared by the Greek Parliament by Sunday Feb 12, as time is running out to put things in place before the March 20 deadline.

In essence, the ECB is loaning more money to Greece, which it expects will be repaid in future from a reduced GDP (the austerity measures insisted upon will reduce Greek GDP). This can't work.

The Greek unions are objecting to the concessions already agreed upon by the political parties and threatening to go on strike. But even if the political parties brave the labour unrest, its almost impossible for them to stick to the terms agreed upon and yet grow their economy enough to service the debt. So ultimately, the Greek tragedy would require the Eurozone to be broken up.

The Greek tragedy is heading to a denouement, perhaps next week, and it could trigger an end to the ongoing rally, as investors would once again flee to safety.

In domestic factors, the GDP is expected to grow by less than 7% this year, and the index of industrial production growth has fallen in December to just 1.8%. GDP growth would be less in 2012-13, as no capital investment has taken place this year due to high interest rates and policy paralysis and flip flops. And, although our Metereological Department is confident, the US and Japan have warned of a poor monsoon in India.

Added to that is the rising fiscal deficit, caused largely by the burgeoning bill on various subsidies, which the Finance Minister, Pranab Mukherjee, has stated cause him sleepless nights. He would try and cure his insomnia by passing it on to his taxpayers, on March 16, when the Union Budget would be presented. There is no fiscal elbow room to expect that the Budget would be a friendly one. Any tinkering with direct or indirect tax rates in order to raise tax revenue with the sugar coated homily to 'kindly bear with us' would quickly end the rally. Of course, March 16 is more than a month away.

Another domestic factor which would influence the market are the election results, especially in UP, India's largest state contributing the most MPs in the Lok Sabha. These would be out March 15. If the Congress, together with Samajwadi party, were to be able to form a Government, the reciprocal kinsmanship could be extended to the Centre, thus reducing the Government's dependence on mercurial Mamata Banerjee. The stock market would view such a development favourably.

The recent Supreme Court judgement in the 2G Telecom case, whilst it curbed political arbitrariness in decision making, is throwing up a lot of complications. The DoT is seeking legal opinion on whether the Rs 9500 crores it collected for the cancelled 122 licences has to be repaid (but of course it has to, if the licences have been cancelled, duh!), and this would add to the FMs insomnia.

The foreign Governments of Norway (for Telenor), Russia (for Sistema) and Dubai (for Etilisat) are leaning on ours on behalf of their companies. If the matter goes to international arbitration the Government may be in a tight spot as its own minister had issued the licences. The Tata group is threatening to sue, for it believes it has obtained its licences fairly, and ought not to be punished, in the 'throwing the baby out with the bathwater' type of cancellation of all licences en masse. All future invitations to foreigners to invest in any field would be viewed with suspicion, since any and every body has the power to review decisions and cancel permissions retrospectively.

Airlines have been granted permission to import aviation fuel which can theoretically cut costs by 25%. The permission is going to be tough to translate into action, since there is no infrastructure at Indian ports to store the fuel and then to transport it to the airports, where it is needed. Meanwhile, this may well be the last nail on the coffins of OMCs (oil marketing companies such as IOC, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corporation Ltd. (BPCL)). The OMCs, once 'navratnas' or nine jewels, have had their balance sheets decimated by being forced to pay out subsidies on petro products. The only product free from subsidies was aviation fuel, which they overpriced, since imports were banned. Now the OMCs are talking about needing to export the aviation fuel, since some airlines may import it! That would be comic, if it were not sad, from a national perspective. What would happen ultimately is a deal between airlines and OMCs, who would reduce the rates for the fuel, and ask them not to import it. This would cut airline sector losses and increase OMC losses.

The bigger chunk of petro subsidy burden is borne by Oil and Natural Gas Corporation Ltd. (ONGC), whose quarterly results for the Dec quarter showed a net profit of Rs 6741 crores, down 4.9%. This was thanks to it being compelled to sell crude oil at subsidised rates to OMCs; without which the profit would have been Rs 10,616 crores. One wonders why minority shareholders of ONGC, holding some 25% of the stock, don't sue.

The BSE-Sensex gained 143 points last week to end at 17748 and the NSE-Nifty added 55, to close at 5281. It may not be a bad idea to get lighter, so that one doesn't slip on Greece.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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4 Responses to "End of the line?"

kirandeep kaur

Feb 15, 2012



J Mulraj

Feb 12, 2012

Thank you readers. Error is being corrected.



Feb 12, 2012

Telenor belongs to the government of Norway and not sweden.



Feb 11, 2012


Last time also I had posted a comment that Telenor is not from Sweden but it is from Norway. The comment was never posted. Here again the same mistake is made again...

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