»Straight from the hip by Jawahir Mulraj

Syriza and Trinamool
19 MAY 2012

Greece is a very slippery situation.

When it joined the Eurozone, its Government fudged figures for the budget deficit in order to bring it down to the 3% level which would qualify it for entry. It is estimated that the true figure was actually 14%. Entry to the EU brought down the Government's cost of funds by some 4-5%, allowing it to go on a spending spree by piling on debt. When the bubble burst, Greece found it could not repay its debt; it entered into a deal with the troika (the IMF, EU and ECB) which, in order to get more funds to meet its debt obligations, called for a severe cut in spending, thus contracting the economy. This contraction has led to half the country's youth being unemployed, and, of course, angry. The country went into elections, from which no clear party scored a majority, and is going into elections again.

The leader of the Leftist Syriza party, Alex Tsiparis, which came second in the recent elections and is expected to lead in the next one, is threatening to tear up the agreement with the troika. He doesn't believe the new Government should be saddled with the debts incurred by previous, foolish ones. He wants to renegotiate the deal; the troika, and particularly Germany's Angela Merkel, is unwilling to listen.

Shift to India. The Trinamool Congress was also elected in state elections, trouncing the Left, which had been in power for over 3 decades in the State. She, too, feels that she ought not to be burdened with the debts taken by the CPM. Unlike Angela Merkel, Pranabbabu is more willing to listen. He, however, feels that he cannot show partisanship to a fellow Bengali, and would extend the benefit of debt reductions to all states. That would be a folly of lasting magnitude.

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This, then, begs the question - who is responsible for repayment of debt? Is the lender under an obligation to contain the borrowing, so that the borrower does not over-borrow? In the case of Greece, for example, oversmart global investment banking firms encouraged the Government to overborrow. They did this by telling the Government that it could securitise future earnings and borrow against them. All sorts of revenue streams were securitised to enable more borrowing, by issuing sovereign bonds. Products like credit default swaps, basically an insurance against a sovereign default, were sold in order to encourage investors to invest in the sovereign bonds. These CDSs are now a part of the problem for those that issued them.

That said, the responsibility for repayment must necessarily be that of the borrower and it is wrong for both Syriza and Trinamool to disavow it, as, indeed, it would be wrong for the lenders to acquiesce. Prudence may require the lenders to renegotiate the repayment terms, which the troika did, but not much more.

The Indian Government is now asking banks to crack the whip on companies who seek restructuring of loans, especially in cases of mismanagement. This was the front page headline in the Economic Times of May 18. Right beside it was another story of several states which will face severe power cuts, due to lack of fuel and equipment failure. These, too, are cases of mismanagement, but by the Government and its agencies. Would a whip be cracked on them as well?

Globally, then, events in Greece are heading for a showdown. New York Times columnist Krugman thinks it will be an acopolypse. Greece is seeing a withdrawal of euros from its banks by the wealthier citizens and soon the euros will run out. Right now the rate is lower, a bank jog instead of a bank run. Unless a deal is struck to keep it within the eurozone (difficult to envisage) Greece will exit the euro. The pressure will then move to other weak countries like Spain and Ireland, which will see bank jogs.

Domestically, if banks have to crack a whip on mismanaged companies, they could start with Air India. Its troubles began when it was forced to buy, for reasons to be imagined, more aircraft than it could possibly afford or need. In order to justify the need, it was merged with Indian Airlines, a shotgun wedding of two culturally different organisations. The debt taken for the aircraft purchases could not be serviced. The pilots have now gone on strike, one that has already cost the airline Rs 200 crores, which it cannot afford. So badly is the organisation managed, that it served a notice on two (of many) pilots about the strike. One of the two had quit, and now flies Emirates. The other was, at the moment the notice was served, flying an Air India plane himself! And it is for this entity that the Government is clearing a Rs 30,000 crore package! It is the duty of the Civil Aviation Minister to explain why the Government feels that Air India is so sacrosanct that it cannot be sold, as it should, to an entity where it would not come under constant political interference.

In corporate news of interest, Facebook made its IPO at a price of $38/share, and ended the day barely above that. It is now valued at over $ 100b. At the start of the dotcom boom, Netscape (remember the first browser?) made an IPO that made so much money for its initial investors that it triggered the dotcom boom. It also triggered many enthusiastic start ups, and emboldened venture capital firms to back them. Will Facebook do the same? It seems doubteful. Whilst Netscape zoomed on opening day, creating the investor frenzy that subsequently led to the dotcom boom, Facebook barely managed to get its chin above the closing bar. So, whilst its IPO pricing may have been on the, err, Mark, one doesn't expect it to get set and go.

The market slid below 16,000 on the BSE-Sensex on Friday, but better than expected results of State Bank of India (SBI) helped it recover to close the day up 82 points. It ended the week at 16152, down 140. The NSE-Nifty ended at 4891, down 37.

What next?

The India market is oversold, and a bounce can occur in the coming week. What could trigger it? Perhaps another round of monetary easing by the ECB, in order to stanch the effect of a Grexit. If the easing is of a similarly large magnitude as the previous one, the rally would last a few weeks. Else it would fizzle faster.

For the Indian market to rally on a more sustained basis, our Government needs to show that it has a backbone. Prices of petro products can thus be expected to rise, after the Budget session on 22nd. The rise ought to be cushioned by a reduction in excise duties, which are unjustifiably high. But not with a Government that believes that belt tightening is a prerogative only of its people and not of its leaders. So, once the rally is over, the downswing would resume. For the moment, enjoy the expected rally.

J Mulraj is a stockmarket columnist and observer of long standing. His weekly column on stockmarkets has run for over 17 years. An MBA from IIM Kolkata, he has been a member of the BSE. He is now India Representative for Institutional Investor. 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 stockmarkets yet being a reader of his columns. His other interests include reading, both fiction and non fiction, bridge, snooker and chess.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors, Quantum AMC and Quantum Advisors do not claim it to be accurate nor accept any responsibility for the same.
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