»Straight from the hip by Jawahir Mulraj

What would be the cost of a haircut in Europe?
22 OCTOBER 2011

Lest anyone feel, after looking at the title, that this column now deals with coiffure, allow me to point out that a haircut is a terminology to describe losses that investors may take, in a restructuring exercise. Since a default by Greece, the weakest of the EU economies, would trigger a crisis in the European banks that have lent to it, the European Governments wish to provide more capital to their banks. The IMF and EU have considered a fund of Euro 200b. to be enough with which to recapitalise their banks with.

But, according to Stratfor, a think tank "This plan is flawed. The figure, 200 billion euros, will not cover reasonable restructurings.

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The 50 percent writedowns or "haircuts" for Greece under discussion as part of a revised Greek bailout - likely to be announced at the end of the upcoming Oct. 23 EU summit - would absorb more than half of that 200 billion euros. A mere 8 percent haircut on Italian debt would absorb the remainder." The latest news is that the Greek haircut would be 60%. The IMF has now raised the fund requirement from 200 to 300 b. euros.

Once Greece restructures or defaults, there would be pressure by others, including Italy, Portugal and Spain. So the world faces an immense European banking crisis.

Added to this are the various political crisis and terrorist hotspots around the world. The most serious of which is in our neighbourhood!

The US is, rightly, pressuring the Pakistan Government to rein in the terrorist organisation known as the Haqani Network, and is attacking the region known as North Waziristan, frequently. Pakistan's army chief has threatened the US not to push it too far, as it has nuclear weapons! Since such weapons cannot be used by Pakistan against the US, without delivery capability, guess where they would be used, if at all?

The Middle East is another volcano waiting to erupt. The Fatah have cleverly made a demand for an observer status in the UN for Palestine.

Its political opponent, Hamas, has been the more aggressive, and is armed with tens of thousands of missiles by Iran and Syria, which can be used to hit Israeli towns and cause civilian casualties. The swap of Gilat Shalit, an Israeli soldier who was captured by the Palestinians, for over 1000 Palestinians, was, for Israel, a nation that refuses to negotiate, an opportunity to open a dialogue with Hamas, the faction that did the swap. But this is a powder keg that is waiting to explode. One felt that the India story was good and that, over the longer term, Indian stock markets would outperform, to reflect the over 8% GDP growth and the rising consumerism that would continue to propel it.

However, thanks to abysmal management by the Government, this, too, is coming unstuck. The Finance Minister has accepted that GDP growth this year would be less than 8%. He would not have the benefit of proceeds from sale of spectrum, as he did last year, and proceeds from disinvestment of public sector companies are also going to be much below the Rs 40,000 expected, as the markets are bad.

The FM says that revenue collections will be higher than budgeted. So if the fiscal deficit is higher than expected, it only means that expenditure has not been kept in check.

There is amazing non application of mind by Government agencies. Take the case of Reliance Industries' KG basin. As per the original development plan, it was to drill 4 wells but did not do so, as subsequent surveys pointed to the low probability of finding gas. It informed DGH (Director General of Hydrocarbons) of this, but was compelled by the latter to drill nonetheless, since it was part of the original plan! RIL did so, at a cost (wasted) of Rs 3000 crores. CAG has now instituted an inquiry as to why DGH asked it to drill 4 wells.

The cost of drilling is 'cost recoverable' which essentially means that it is the Government that would pay. Ergo - uncontrollable expenditure and ballooning fiscal deficit!

RIL is soon to roll out its broadband wireless 4G access, at an affordable cost and with high speeds.

The SAT (Securities Appellate Tribunal) has passed an order against the Sahara group, requiring it to pay, within 6 weeks, a sum of Rs 24,000 crores to over 30 m. investors from which it has raised money without Securities and Exchange Board of India (SEBI) approval (an offer to more than 50 persons needs such approval). One wonders how the group would be able to raise resources of this magnitude, although a few weeks ago, an ad. released by it, offered to do so! It is also quite interesting that a whopping 30 m. individuals trusted the group enough to subscribe to the debentures, probably attracted by high interest rates.

The Government, which owns 57% of India's largest bank, SBI, is upset over the lack of protest by the management of the bank when Moody's recently downgraded it. The downgrade was prompted by the rise in provisioning for non performing assets which, in turn was because of the Government prompting (directing?) it to lend more after the global financial crisis. When lending is directed, the scrutiny is lower, and chances of default higher. Having said that, SBI's performance is also being looked into, especially when compared to the better performances of private sector banks like HDFC (PAT up 20%) or the much smaller InduSind (up 45%). SBI needs additional capital but until the 57% holder of its equity participates in a rights issue or agrees to a dilution of its stake, is unable to raise it. The Government says it will make the rights issue in the next fiscal, or post April 2012. It is, after all, fiscally strapped.

The rights issue size has been pruned to Rs 5000 crores and the Government's share is around Rs 3000 crores. Guess what!! This is the amount that was wasted when the 4 wells were drilled despite knowledge that they would not yield gas! In other words, the stupidity of that decision is preventing the Government from recapitalising the largest bank because it is short of Rs 3000 crores! Simply amazing!

Shaken by the impending European crisis, global stockmarkets fell last week. So did India's, with the BSE-Sensex losing 297 points to end the week at 16785 and the NSE-Nifty dropping 82 to close at 5049.

Yes, there is surplus liquidity waiting for some good news to come back into equity and, whenever political leaders take some good steps, there is a short rally...until the next crisis. So, if there are positive announcements, its possible to see a brief rally, but not, one would imagine, going beyond 17600 on the sensex. More likely that the drift downwards would continue. There are far too many problems and issues globally.

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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