Hi,
You can also post on this thread. . .
Wall Street Week Ahead: Stocks to track earnings with an eye on Europe(APRIL 14TH)
NEW YORK: After suffering their worst two weeks of the year, stocks will look to quarterly earnings to determine whether the recent pullback has been exhausted or more losses are justified.
Alcoa Inc opened the earnings season with a bang, reporting a first-quarter profit on Tuesday instead of the expected loss. That positive surprise foretold a trend. Of the 32 companies in the S&P; 500 that have reported earnings so far, Thomson Reuters data showed that 75 percent - or two dozen - have beaten Wall Street's expectations.
Next week will start one of the two busiest weeks of the quarterly earnings reporting period. About 86 companies in the Standard & Poor's 500 are expected to post results, according to Thomson Reuters Director's Report.
At Friday's close, both the Dow Jones industrial average and the S&P; 500 wrapped up their worst two-week percentage drops since late November. The Dow and the S&P; each fell 2.7 percent for the two weeks from the close on March 30.
"It seems like everybody's been waiting for this so-called correction to potentially get back into the stock market," said Kei Sasaki, managing director of listed equities at PineBridge Investments in New York, which has $67 billion in assets under management.
"But I'd point to the extremely high levels of correlation within equity markets that we saw in 2011. That was coupled with heightened volatility in 2011," Sasaki added. "Even with the down moves in the market over the past several days, the volatility has stayed relatively subdued.
"The correlations on a moving average have also stayed relatively subdued, which tells us that investors are still looking at the market in a fundamental way that they haven't for the past year. So if earnings come in positive for the first quarter, we think they will get rewarded for it," he said.
Among the marquee names on next week's earnings calendar are 10 Dow components: Intel Corp, Johnson & Johnson , Coca-Cola Co, DuPont, Microsoft, The Travelers Companies Inc, Verizon Communications Inc , American Express Co, General Electric Co, and McDonald's Corp.
Financials will be eyed next week on the heels of Friday's results from JPMorgan Chase & Co and Wells Fargo & Co
with both big banks' earnings exceeding forecasts. In the coming week, earnings are expected from the likes of Citigroup Inc, Goldman Sachs and Morgan Stanley .
RIDING THE EURO-ZONE ROLLERCOASTER
But even with earnings attracting investors' attention, equities remain vulnerable to flare-ups in the euro zone as the bloc continues to grapple with its debt crisis.
"Earnings are beating expectations. Outlooks still look pretty optimistic," said Jack Ablin, chief investment officer of Harris Private Bank in Chicago.
"Overall pretty good news, but it takes one lousy headline out of Europe to trump the whole thing."
Equities snapped a two-day advance on Friday, pulled lower as the rising cost of insuring Spanish debt against default increased concerns about Europe's financial health.
The benchmark S&P; 500 rose for two consecutive days this week after a drop of more than 4 percent in the previous five sessions - opening the possibility that equities had seen the pullback many analysts were expecting after the S&P; 500 climbed 12 percent in the first quarter.
The S&P; 500 remained near its 50-day moving average, a key technical level that could help indicate the next direction for stocks.
Hi...
Thanks for starting a thread about discussion on business related topics.
I am finding difficulty in understanding these ..i lagging behind in understanding such talks..can you please help where i can start from for a better understanding of these discussions?
nice initiative...it will be helpful if we can even discuss about the article a bit to check our understanding of the articles posted in here..( well speaking for myself as am not too comfy with eco jargon 
)
can I post some articles here also which may I found interesting and helpful.
Here is a look at Spain's problems and what might be done to solve them.
RISING GOVERNMENT DEBT
Until recently Spain's national debt as a per centage of its economy did not look that bad when compared with other European countries. At the end of 2011, Spain's debt stood at 68.5 per cent of gross domestic product, below the eurozone average of about 90 per cent and in a different league from Greece at 160 per cent.
But now that ratio is expected to shoot up. This is due largely to some of the country's 17 semi-autonomous regions running up huge debts and thereby making the national figure look less manageable. It was overspending by some of these regions, Catalonia, Valencia and Madrid accounted for more than half of all regional debt last year, that made up more than a third of Spain's bloated deficit of 8.5 per cent of GDPThat was well over the 6 per cent which had been forecast.
The central government has guaranteed a (euro) 35 billion ($46 billion) bank loan to help regions and town halls pay gardeners, medical suppliers and other businesses with long-outstanding bills. The economy minister says this loan is one reason why by the end of this year the national debt to GDP ratio will be around 80 per cent.
After an austere budget unveiled in late March, Spain recently announced a new round of spending cuts designed to bring its deficit level down to 5.3 per cent of GDP. However, this has sparked concerns among analysts that if Madrid introduces more austerity measures, growth will be hit further and the country will even miss this target.
TROUBLED BANKS
The bursting in 2008 of a real estate bubble that powered the economy for more than a decade has saddled banks, particularly Spain's savings banks or 'cajas', with enormous amounts of bad loans. The country's central bank, the Bank of Spain, says the sector is still burdened with about (euro) 175 billion ($230 billion) in ``problematic'' real estate holdings.
As the second recession in three years bites further, bad loans are expected to surge while plunging house prices will lower the value of the vast sea of repossessed or unsold homes the banks already own.
The government has been pushing the lenders to strengthen their finances by merging. It has also introduced rules that require banks to set aside an estimated total of (euro) 50 billion ($65.7 billion) more in provisions by the end of the 2012 to cover their toxic real estate assets.
Banks unable to raise extra capital on their own by the end of May must present plans for a merger. The government will help finance these tie-ups by offering loans from an existing bailout fund.
But one big fear is that if the plummeting real estate market takes too much of a toll on banks, the government would not have enough money to save the sector.
NO EASY FIX
Spain's financial stability depends largely on whether it can borrow money from investors at affordable interest rates.
To help out Spain, the rest of the eurozone could promise to compensate investors against a first round of potential losses on Spanish bonds. That would make those bonds a safer investment and hopefully lower interest rates. Spain could also ask for more targeted loans from the eurozone emergency fund to, for example, fund bank rescues and then continue to foot the rest of its bills independently.
Given the limits of the eurozone's firewall, many analysts argue that the ECB is the only institution with the power to save large countries like Spain. The ECB could buy up hundreds of billions of euros worth of Spanish bonds from banks on secondary markets. This would lower the interest rates Madrid pays. But the ECB has so far insisted that such large-scale intervention would break the EU treaty. Alternatively, the ECB could launch another massive round of cheap loans to banks. But these loans do little to solve the underlying problems of the Spanish economy.
Above all is the fear that investors would not want to lend money to Spain if it is seen to be teetering. Some analysts warn that admitting it needs help could quickly push the country all the way to a full bailout.
All eyes will be on Spain's next round of bond auctions, 12- and 18-month bills on Tuesday, and benchmark 10-year bonds on Thursday. The government has insisted that it will have no trouble financing itself this year and that auctions held so far have gone well.
That was true until last week, when an auction of medium-term debt hit the bottom end of what Spain was expected to raise, sending yields up and pushing the country firmly back into the eurozone debt crisis.
i'd like to know...what's the difference between debt and deficit? Debt I understand is borrowing, while deficit is fiscal deficit in terms of expenditure vs revenue ratio...is there any relation b/w the two ?
UBS downgrades Indian shares to 'neutral', rates China as a better bet
UBS on Friday downgraded Indian shares to "neutral" from "overweight," saying China is the better bet. The investment bank said India was unlikely to see big downside surprises on inflation, and hence no aggressive rate cuts.
By contrast, China, the bank's biggest overweight market, offers an opportunity to benefit from expected policy easing, a more stable economy, and more attractive valuations.
"We continue to think the best theme in the region is to be tilted towards policy easing. Our preference here is now China rather than India," said UBS in the report.
The Reserve Bank of India cut interest rates by 50 basis points on Tuesday but warned of a limited scope for further rate cuts.
A subsequent poll of economies done by Reuters showed analysts expect another half of percentage of easing in the fiscal year ending in March 2012.
By contrast, China is expected to cut the reserve requirement ratio for banks by 50 basis points in each of the last three quarters of 2012.
Earlier this week, CLSA cut its target for benchmark index Sensex, to 19,000 from 20,000 citing risks such as the widening current account and fiscal deficits, as well as the uncertainty over foreign taxation.
However, CLSA said the SENSEX was trading at a P/E forward of 13.5 times for fiscal 2012-13, an 8 per cent discount to the past 10-year average, maintaining its "Overweight" rating on the index.
"While we have turned less bullish on the market due to adverse macro developments over the past few weeks," CLSA said, before adding: "we still expect 10-12 percent market returns over the next one year, helped by valuations.
ps:@cognizant...sir we need discussions...can we do something like at the end of an article,giving opinion or something about what is done,like regarding some steps taken like the repo rate..or instead of putting the whole article as such we can just put up the main points ,so that it is much easier to understand...just a suggestion ,so that we can make this thread more active
UBS on Friday downgraded Indian shares to "neutral" from "overweight," saying China is the better bet. The investment bank said India was unlikely to see big downside surprises on inflation, and hence no aggressive rate cuts.
By contrast, China, the bank's biggest overweight market, offers an opportunity to benefit from expected policy easing, a more stable economy, and more attractive valuations.
"We continue to think the best theme in the region is to be tilted towards policy easing. Our preference here is now China rather than India," said UBS in the report.
The Reserve Bank of India cut interest rates by 50 basis points on Tuesday but warned of a limited scope for further rate cuts.
A subsequent poll of economies done by Reuters showed analysts expect another half of percentage of easing in the fiscal year ending in March 2012.
By contrast, China is expected to cut the reserve requirement ratio for banks by 50 basis points in each of the last three quarters of 2012.
Earlier this week, CLSA cut its target for benchmark index Sensex, to 19,000 from 20,000 citing risks such as the widening current account and fiscal deficits, as well as the uncertainty over foreign taxation.
However, CLSA said the SENSEX was trading at a P/E forward of 13.5 times for fiscal 2012-13, an 8 per cent discount to the past 10-year average, maintaining its "Overweight" rating on the index.
"While we have turned less bullish on the market due to adverse macro developments over the past few weeks," CLSA said, before adding: "we still expect 10-12 percent market returns over the next one year, helped by valuations.
ps:@cognizant...sir we need discussions...can we do something like at the end of an article,giving opinion or something about what is done,like regarding some steps taken like the repo rate..or instead of putting the whole article as such we can just put up the main points ,so that it is much easier to understand...just a suggestion ,so that we can make this thread more active
In 1970 46% of recorded remittances were reckoned to originate in America. By 2010 America's share was just 17%.
Remittance corridors: New rivers of gold | The Economist
It's interesting to realize that remittance patterns are changing from the traditional model of flowing from developed to developing countries, there seems to be a shift towards remittances flowing from economies which are more tied to commodity exports. Maybe this is a signal towards an inherent commodity price boom which will favor countries like Venezuela and Russia etc.
{Posting this from the Economist discussions thread, Mods told me to post here, so not a repeat post 😃 }
Industrial output slumps 3.5% in March; jolts market
Factory output declined by 3.5 per cent in March, a sharp fall from the 4.1 per cent growth recorded in February and 9.4 per cent growth a year ago, according to official data released on Friday. The disappointing news came as a jolt to the stock market. The benchmark Sensex ended lower by 127 points falling for the fourth straight day. A slowing economy and renewed concerns over recovery in the Euro zone also cast a shadow on the markets.
RATE CUTS
The weaker than anticipated industrial performance, coupled with stable core inflation, has raised the probability of further rate cuts by the Reserve Bank of India (RBI), say economy watchers.
The RBI had sprung a surprise in March with a 50 basis point cut in the repo rate. Many economists see a gradual pick-up in industrial activity only in the second half of this year, once the repo rate cuts get transmitted into the system.
For the full 2011-12, the index of industrial production (IIP) grew just 2.8 per cent, compared with 8.3 per cent last year. This weak performance prompted India Inc to renew its demand for further rate cuts by the RBI.
CAPITAL GOODS PLUNGE
The weakness in headline IIP was driven by the sharp fall in capital goods (-21.3 per cent) in March due to the weak investment climate. For the entire 2011-12, capital goods contracted 4.1 per cent, vis--vis 14.8 per cent growth the previous year.
Both mining and manufacturing did indifferently in March. While manufacturing output contracted 4.4 per cent (11 per cent growth), mining output fell 1.3 per cent (0.4 per cent growth).
Consumer goods output grew a modest 0.7 per cent (13.2 per cent).
FM DISAPPOINTED
Reacting to the March IIP numbers, the Finance Minister, Mr Pranab Mukherjee, said the figures were disappointing. He said the anticipated revival of manufacturing in the last quarter of 2011-12 had not materialised.
Mr Mukherjee said domestic investments remained frail. Uncertainty in the global economy coupled with monetary tightening over the last two years has impacted investment recovery, he told reporters.
Although the RBI reversed its monetary stance in the last policy announcement, it will take some time for interest rates to come down, he added.
The Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, said the solution lies in focusing on project execution, not in providing a stimulus.
He said he did not think the Eurozone problems could be linked to the negative IIP, adding, however, that: It (Euro zone) is clearly an important factor which is depressing investment sentiment
Factory output declined by 3.5 per cent in March, a sharp fall from the 4.1 per cent growth recorded in February and 9.4 per cent growth a year ago, according to official data released on Friday. The disappointing news came as a jolt to the stock market. The benchmark Sensex ended lower by 127 points falling for the fourth straight day. A slowing economy and renewed concerns over recovery in the Euro zone also cast a shadow on the markets.
RATE CUTS
The weaker than anticipated industrial performance, coupled with stable core inflation, has raised the probability of further rate cuts by the Reserve Bank of India (RBI), say economy watchers.
The RBI had sprung a surprise in March with a 50 basis point cut in the repo rate. Many economists see a gradual pick-up in industrial activity only in the second half of this year, once the repo rate cuts get transmitted into the system.
For the full 2011-12, the index of industrial production (IIP) grew just 2.8 per cent, compared with 8.3 per cent last year. This weak performance prompted India Inc to renew its demand for further rate cuts by the RBI.
CAPITAL GOODS PLUNGE
The weakness in headline IIP was driven by the sharp fall in capital goods (-21.3 per cent) in March due to the weak investment climate. For the entire 2011-12, capital goods contracted 4.1 per cent, vis--vis 14.8 per cent growth the previous year.
Both mining and manufacturing did indifferently in March. While manufacturing output contracted 4.4 per cent (11 per cent growth), mining output fell 1.3 per cent (0.4 per cent growth).
Consumer goods output grew a modest 0.7 per cent (13.2 per cent).
FM DISAPPOINTED
Reacting to the March IIP numbers, the Finance Minister, Mr Pranab Mukherjee, said the figures were disappointing. He said the anticipated revival of manufacturing in the last quarter of 2011-12 had not materialised.
Mr Mukherjee said domestic investments remained frail. Uncertainty in the global economy coupled with monetary tightening over the last two years has impacted investment recovery, he told reporters.
Although the RBI reversed its monetary stance in the last policy announcement, it will take some time for interest rates to come down, he added.
The Planning Commission Deputy Chairman, Mr Montek Singh Ahluwalia, said the solution lies in focusing on project execution, not in providing a stimulus.
He said he did not think the Eurozone problems could be linked to the negative IIP, adding, however, that: It (Euro zone) is clearly an important factor which is depressing investment sentiment
Pilots should start flights before coming for talks: Ajit Singh
NEW DELHI, MAY 12:
Taking a tough stand, the Civil Aviation Minister, Mr Ajit Singh today asked the striking Air India pilots to apologise to passengers, start the flights and then come to the government for talks.
The first priority must be to make sure that the passengers feel they are being listened to. So, let the pilots decide that. Ask for forgiveness from passengers. Start the flights ... we can talk on anything after that, Mr Singh said.
He reminded the pilots that Air India was almost bankrupt and public money was being pumped to revive the national carrier.
Our plan is to make Air India viable, revive Air India, and make it profitable. That is why we are giving public money to Air India, Mr Singh said.
The Minister said the process of revival was bound to see many problems and asked the airline employees to be patient.
They should firmly say their views but not inconvenience the passengers and make Air India lose credibility. Dont cause monetary loss to Air India. The airline is almost bankrupt, he said.
Mr Singh said the government was mulling taking some aircraft on wet lease, as in such cases the planes come with a crew.
The Minister said that the government was also in touch with some retired pilots besides rationalising the flights operated by Air India.
source:BUSINESS LINE
NEW DELHI, MAY 12:
Taking a tough stand, the Civil Aviation Minister, Mr Ajit Singh today asked the striking Air India pilots to apologise to passengers, start the flights and then come to the government for talks.
The first priority must be to make sure that the passengers feel they are being listened to. So, let the pilots decide that. Ask for forgiveness from passengers. Start the flights ... we can talk on anything after that, Mr Singh said.
He reminded the pilots that Air India was almost bankrupt and public money was being pumped to revive the national carrier.
Our plan is to make Air India viable, revive Air India, and make it profitable. That is why we are giving public money to Air India, Mr Singh said.
The Minister said the process of revival was bound to see many problems and asked the airline employees to be patient.
They should firmly say their views but not inconvenience the passengers and make Air India lose credibility. Dont cause monetary loss to Air India. The airline is almost bankrupt, he said.
Mr Singh said the government was mulling taking some aircraft on wet lease, as in such cases the planes come with a crew.
The Minister said that the government was also in touch with some retired pilots besides rationalising the flights operated by Air India.
source:BUSINESS LINE
NRIs deposits in banks treble to $11 b in 2011-12
BL RESEARCH BUREAU:
Monies that NRIs deposited into Indian banks trebled to a record $11 billion in 2011-12.
Interest rates that NRIs earn on rupee deposits were freed in December. In the previous five years, inflows of NRI money averaged $2.9 billion.
The record inflows came amid sharp depreciation of the rupee from 44.5 to a dollar to 51.1
Among the different deposits options open to NRIs, only foreign currency non-resident (FCNR) deposits - where NRIs can make deposits in a foreign currency - witnessed outflows of $431 million in 2011-12 against inflows of $1.33 billion in the previous year. The FCNR outflows were more than offset by a surge in inflows into non-resident (external) rupee accounts (NRE).
These accounts saw inflows of $7.5 billion during the 12-month period, from outflows of $280 million the previous year.
Of this, $4.5 billion came in during the last quarter of the fiscal, after interest rates on these deposits were freed. Some banks now offer rates as high as 9-10 per cent on these accounts.
Non-resident ordinary (NRO) rupee accounts (where deposits cannot be repatriated) also saw substantial inflows of $3.9 billion during April-March.
The aggregate value of NRI deposits held by Indian banks stood at $57.9 billion by March 31 2012, provisional RBI data show.
Non-resident external and non-resident (ordinary) accounts are two different types of rupee-denominated bank accounts permitted by the government for NRIs. While NRE funds are repatriable, NRO money can not be remitted abroad.
FCNR accounts, on the other hand, are denomi- nated in foreign currency and the funds are fully repatriable.
RBI rate hikes
In November 2011, the RBI raised maximum interest rates on NRE accounts for 1 year-plus to LIBOR/SWAP plus 275 basis points.
Many banks raised their interest rates on these accounts.
In December 2011, deposit rates on NRE accounts were deregulated.
Earlier this month, the RBI hiked the cap on FCNR interest rates, raising it to 200 basis points above the LIBOR/SWAP rate for 1-3 year deposits and 300 basis points for deposits with a 3-5 year tenor.
BL RESEARCH BUREAU:
Monies that NRIs deposited into Indian banks trebled to a record $11 billion in 2011-12.
Interest rates that NRIs earn on rupee deposits were freed in December. In the previous five years, inflows of NRI money averaged $2.9 billion.
The record inflows came amid sharp depreciation of the rupee from 44.5 to a dollar to 51.1
Among the different deposits options open to NRIs, only foreign currency non-resident (FCNR) deposits - where NRIs can make deposits in a foreign currency - witnessed outflows of $431 million in 2011-12 against inflows of $1.33 billion in the previous year. The FCNR outflows were more than offset by a surge in inflows into non-resident (external) rupee accounts (NRE).
These accounts saw inflows of $7.5 billion during the 12-month period, from outflows of $280 million the previous year.
Of this, $4.5 billion came in during the last quarter of the fiscal, after interest rates on these deposits were freed. Some banks now offer rates as high as 9-10 per cent on these accounts.
Non-resident ordinary (NRO) rupee accounts (where deposits cannot be repatriated) also saw substantial inflows of $3.9 billion during April-March.
The aggregate value of NRI deposits held by Indian banks stood at $57.9 billion by March 31 2012, provisional RBI data show.
Non-resident external and non-resident (ordinary) accounts are two different types of rupee-denominated bank accounts permitted by the government for NRIs. While NRE funds are repatriable, NRO money can not be remitted abroad.
FCNR accounts, on the other hand, are denomi- nated in foreign currency and the funds are fully repatriable.
RBI rate hikes
In November 2011, the RBI raised maximum interest rates on NRE accounts for 1 year-plus to LIBOR/SWAP plus 275 basis points.
Many banks raised their interest rates on these accounts.
In December 2011, deposit rates on NRE accounts were deregulated.
Earlier this month, the RBI hiked the cap on FCNR interest rates, raising it to 200 basis points above the LIBOR/SWAP rate for 1-3 year deposits and 300 basis points for deposits with a 3-5 year tenor.
Europe gaping at a lost decade
Europe cannot afford to abandon austerity and run big deficits, when its growth prospects are weak.
The European economic crisis is back again at the centrestage of all economic discussion. During an economic crisis, consumers spend less, and investors do not invest (or postpone their investment decisions). There is a general sense of pessimism about future earning prospects, leading to higher unemployment and lower productivity growth something that is evident in present day Europe.
In order to understand this crisis, we have to step a little back into history. Soon after the Second World War, when Europe was devastated, policymakers in the region wanted to re-build Europe on the premise of socialist capitalism. The underlying idea is that when the market is at a nascent stage, the state will ensure that a labour market comes into play and jobs become available. For the elderly, and those without jobs, the state will take care through a benevolent social security system paying unemployment benefit and pensions.
NOBLE SYSTEM, FALLING GROWTH
The objective is noble, but to make the system efficient the government has to ensure that it collects funds through taxation to pay dole for the unemployed and pension for the retired. Dole and pension are expenditures for the government, and to pay for it, the government has to collect taxes.
The principal source of tax is corporate income tax (contributing to nearly 80 per cent of the total tax collection), indirect tax (such as excise and service tax) and direct income tax (that is, taxing the working class).
At the time of recession when businesses are not forthcoming, or when people find it hard to get a job, it is quite natural that tax collection will be inadequate. Therefore, the government will meet its welfare objective (that is, to pay for dole and pensions) by printing money or by borrowing. Both are perfect recipes for increasing the budget deficit and the public debt.
A higher budget deficit can be sustained, provided the economy is growing. However, economic growth is continuously falling in the Euro Zone 3.4 per cent during the 1970s, 2.4 per cent during the 1980s, 2.2 per cent during the 90s, and 1.1 per cent between 2001 and 2009.
A reason for this is lack of institutional reforms. In a socialist capitalist structure, wages are protected by trade unions. This is irrespective of labour productivity and firms' ability to earn profit. Add to this, is Europe's ageing population, which is likely to increase further in the future. To maintain a stable population, 2.1 children should be born to each woman in an economy, assuming an average death rate applicable to the world's population.
In contrast, the figures for some Euro-Zone economies are much lower: 1.38 for Greece, 1.39 for Spain, 1.41 for Italy and 1.94 for the UK. For Spain and Greece, the over-65-year population will increase from around 17 per cent now to 25 per cent by 2030. The bottomline: Europe has fewer younger people to work, to pay for the expensive welfare programme.
WAY OUT
A natural suggestion would be to reform the labour and pension laws (dubbed as austerity measures), and slacken the immigration laws. But, if the recent poll results are any indication, it seems voters in France and Greece do not like reforms, and would rather punishing the parties in favour of austerity measures.
A closer look at European democracies suggests it is run by the insiders made up of pensioners, trade union leaders, public sector workers and big farmers. The outsiders consisting of small numbers of immigrants, the youth and small private entrepreneurs have little say.
THREAT TO EU
It is a classic case of a socialist democracy in which the insiders are myopic, care too much about present benefits, and are deliberately voting parties to power that support their cause. On the contrary, the outsiders are quite powerless.
Even issues such as changes in labour immigration laws are stalled. A flexible labour immigration clause is expected to resolve issues related to the dearth of a young skilled labour force. The brain drain from developing countries such as India and China has helped fuel economic growth in the US, but not in Europe.
Lack of austerity measures in the form of institutional reforms is reflected in the form of the ever-increasing debt to GDP ratio. Cumulative public debt as a percentage of GDP for most of the Euro Zone countries is already more than 100 per cent 120 per cent for Italy, 160 per cent for Greece, 105 per cent for Ireland, and 107 per cent for Portugal.
Besides, dissimilar macro-economic conditions (reflected in the debt-GDP ratio) may even threaten the existence of the European Union (EU). This is because it renders a common macro-economic policy expansionary monetary/fiscal policy during a recession and contractionary monetary/fiscal policy during an expansion ineffective. But Europe is diverse, and when Greece is facing recession and Germany is doing well, then following an expansionary monetary policy may help Greece but will heat up the German economy.
It is precisely for this reason that countries willing to join the EU were expected to display similar macroeconomic indicators. It was decided only those countries that have a budget deficit less than 3 per cent of GDP and a government debt-GDP ratio of less than 60 per cent will be allowed to become part of the EU.
However, a few countries such as Greece, Italy and Belgium, with debt-GDP ratios of more than 120 per cent, resorted to creative accounting to become a member of the Union.
We are now faced with the results, with demand management failing miserably, and the euro trading at an all-time low.
It will be to Europe's benefit if the nations prepare themselves for austerity measures. Otherwise, like Argentina during the 80s and Japan during the 90s, a lost decade will be a reality for Europe.
source:business line
Europe cannot afford to abandon austerity and run big deficits, when its growth prospects are weak.
The European economic crisis is back again at the centrestage of all economic discussion. During an economic crisis, consumers spend less, and investors do not invest (or postpone their investment decisions). There is a general sense of pessimism about future earning prospects, leading to higher unemployment and lower productivity growth something that is evident in present day Europe.
In order to understand this crisis, we have to step a little back into history. Soon after the Second World War, when Europe was devastated, policymakers in the region wanted to re-build Europe on the premise of socialist capitalism. The underlying idea is that when the market is at a nascent stage, the state will ensure that a labour market comes into play and jobs become available. For the elderly, and those without jobs, the state will take care through a benevolent social security system paying unemployment benefit and pensions.
NOBLE SYSTEM, FALLING GROWTH
The objective is noble, but to make the system efficient the government has to ensure that it collects funds through taxation to pay dole for the unemployed and pension for the retired. Dole and pension are expenditures for the government, and to pay for it, the government has to collect taxes.
The principal source of tax is corporate income tax (contributing to nearly 80 per cent of the total tax collection), indirect tax (such as excise and service tax) and direct income tax (that is, taxing the working class).
At the time of recession when businesses are not forthcoming, or when people find it hard to get a job, it is quite natural that tax collection will be inadequate. Therefore, the government will meet its welfare objective (that is, to pay for dole and pensions) by printing money or by borrowing. Both are perfect recipes for increasing the budget deficit and the public debt.
A higher budget deficit can be sustained, provided the economy is growing. However, economic growth is continuously falling in the Euro Zone 3.4 per cent during the 1970s, 2.4 per cent during the 1980s, 2.2 per cent during the 90s, and 1.1 per cent between 2001 and 2009.
A reason for this is lack of institutional reforms. In a socialist capitalist structure, wages are protected by trade unions. This is irrespective of labour productivity and firms' ability to earn profit. Add to this, is Europe's ageing population, which is likely to increase further in the future. To maintain a stable population, 2.1 children should be born to each woman in an economy, assuming an average death rate applicable to the world's population.
In contrast, the figures for some Euro-Zone economies are much lower: 1.38 for Greece, 1.39 for Spain, 1.41 for Italy and 1.94 for the UK. For Spain and Greece, the over-65-year population will increase from around 17 per cent now to 25 per cent by 2030. The bottomline: Europe has fewer younger people to work, to pay for the expensive welfare programme.
WAY OUT
A natural suggestion would be to reform the labour and pension laws (dubbed as austerity measures), and slacken the immigration laws. But, if the recent poll results are any indication, it seems voters in France and Greece do not like reforms, and would rather punishing the parties in favour of austerity measures.
A closer look at European democracies suggests it is run by the insiders made up of pensioners, trade union leaders, public sector workers and big farmers. The outsiders consisting of small numbers of immigrants, the youth and small private entrepreneurs have little say.
THREAT TO EU
It is a classic case of a socialist democracy in which the insiders are myopic, care too much about present benefits, and are deliberately voting parties to power that support their cause. On the contrary, the outsiders are quite powerless.
Even issues such as changes in labour immigration laws are stalled. A flexible labour immigration clause is expected to resolve issues related to the dearth of a young skilled labour force. The brain drain from developing countries such as India and China has helped fuel economic growth in the US, but not in Europe.
Lack of austerity measures in the form of institutional reforms is reflected in the form of the ever-increasing debt to GDP ratio. Cumulative public debt as a percentage of GDP for most of the Euro Zone countries is already more than 100 per cent 120 per cent for Italy, 160 per cent for Greece, 105 per cent for Ireland, and 107 per cent for Portugal.
Besides, dissimilar macro-economic conditions (reflected in the debt-GDP ratio) may even threaten the existence of the European Union (EU). This is because it renders a common macro-economic policy expansionary monetary/fiscal policy during a recession and contractionary monetary/fiscal policy during an expansion ineffective. But Europe is diverse, and when Greece is facing recession and Germany is doing well, then following an expansionary monetary policy may help Greece but will heat up the German economy.
It is precisely for this reason that countries willing to join the EU were expected to display similar macroeconomic indicators. It was decided only those countries that have a budget deficit less than 3 per cent of GDP and a government debt-GDP ratio of less than 60 per cent will be allowed to become part of the EU.
However, a few countries such as Greece, Italy and Belgium, with debt-GDP ratios of more than 120 per cent, resorted to creative accounting to become a member of the Union.
We are now faced with the results, with demand management failing miserably, and the euro trading at an all-time low.
It will be to Europe's benefit if the nations prepare themselves for austerity measures. Otherwise, like Argentina during the 80s and Japan during the 90s, a lost decade will be a reality for Europe.
source:business line
Headline inflation rises to 7.23% in April
India's headline inflation for April came in at 7.23 per cent, official data released today showed.
This is much higher than the 6.89 per cent wholesale price index based inflation recorded in the previous month.
The latest inflation number is also higher than the comfort zone indicated by the Reserve Bank of India. It may pose a challenge for the RBI in going in for further rate cuts in its upcoming policy review meeting in June, say economy watchers.
The latest inflation data comes close on the heels of IIP shocker of decline of 3.5 per cent for March.
India's headline inflation for April came in at 7.23 per cent, official data released today showed.
This is much higher than the 6.89 per cent wholesale price index based inflation recorded in the previous month.
The latest inflation number is also higher than the comfort zone indicated by the Reserve Bank of India. It may pose a challenge for the RBI in going in for further rate cuts in its upcoming policy review meeting in June, say economy watchers.
The latest inflation data comes close on the heels of IIP shocker of decline of 3.5 per cent for March.
Gold futures down at Rs 28,055 per 10 gm
Gold futures prices fell Rs 189 to Rs 28,055 per 10 gm today, as speculators offloaded their positions after the precious metal dropped to an years low in overseas markets.
At the Multi Commodity Exchange, gold for delivery in April fell Rs 189 or 0.67 per cent to Rs 28,055 per 10 gm with a business turnover of 3,905 lots.
Similarly, the metal for delivery in August declined by Rs 177 or 0.62 per cent to Rs 28,441 per 10 gm with an open interest of 364 lots.
Analysts attributed the fall in gold prices at futures trade to offloading of positions by speculators after the precious metal dipped to an years low. Concerns over Europes debt crisis strengthened the dollar and cut its appeal as an alternative asset.
Meanwhile, gold fell 0.2 per cent to $1,552.97 an ounce in Singapore, the lowest level since December 30.
Oil hits 5-month low of $94 per barrel
SINGAPORE, MAY 15:
Oil prices fell to near $94 a barrel today in Asia, extending a two-week sell-off that has brought crude to a five-month low amid concerns over Europes debt crisis.
Benchmark oil for June delivery was down 44 cents at $94.34 a barrel, the lowest since December, at midday Singapore time in electronic trading on the New York Mercantile Exchange.
The contract fell $1.35 to settle at $94.78 in New York yesterday.
Brent crude for July delivery was down 45 cents at $110.55 per barrel in London.
Crude has sunk about 11 per cent from $106 earlier this month amid signs of slowing economic activity in the worlds two biggest oil consumers, the US and China.
This week, traders are worrying that Greeces inability to form a government after recent elections could worsen the countrys debt crisis and deep recession, and undermine confidence throughout Europe.
Greeces struggle to form a new government has moved to centre stage, energy trader and consultant Ritterbusch and Associates said in a report. The possibility of a significant economic slowdown in European economic activity is prompting contagion fears.
Oil investors are also taking their cues from global stock markets, which have slumped so far this month. The Dow Jones industrial average fell 1 per cent yesterday and most Asian stock markets were down today.
SINGAPORE, MAY 15:
Oil prices fell to near $94 a barrel today in Asia, extending a two-week sell-off that has brought crude to a five-month low amid concerns over Europes debt crisis.
Benchmark oil for June delivery was down 44 cents at $94.34 a barrel, the lowest since December, at midday Singapore time in electronic trading on the New York Mercantile Exchange.
The contract fell $1.35 to settle at $94.78 in New York yesterday.
Brent crude for July delivery was down 45 cents at $110.55 per barrel in London.
Crude has sunk about 11 per cent from $106 earlier this month amid signs of slowing economic activity in the worlds two biggest oil consumers, the US and China.
This week, traders are worrying that Greeces inability to form a government after recent elections could worsen the countrys debt crisis and deep recession, and undermine confidence throughout Europe.
Greeces struggle to form a new government has moved to centre stage, energy trader and consultant Ritterbusch and Associates said in a report. The possibility of a significant economic slowdown in European economic activity is prompting contagion fears.
Oil investors are also taking their cues from global stock markets, which have slumped so far this month. The Dow Jones industrial average fell 1 per cent yesterday and most Asian stock markets were down today.
Goldman Sachs & CLSA split on RBI rate cut
Falling industrial output
deteriorating currency
inflation outlooks
These are driving economists in Goldman Sachs and CLSA apart on how the Reserve Bank of India would respond to macro-economic forces pulling in opposite directions.
Application of economic theory, after the March industrial output fell 3.5%, should lead all economists to conclude that RBI will ease interest rates to revive growth. But that would be difficult to do given the price pressures.
Some like Goldman Sachs' Tushar Poddar and Citigroup's Rohini Malkani believe that inflation may not be a big threat at this point.
But others, including CLSA's Rejeev Malik and ICICI Securities Primary Dealership's A Prasanna, say a rate cut will be unwise. They believe a cut could worsen inflation outlook when the currency is under hammer due to record high current account deficit, the excess of imports over exports.
At the heart of the difference is the inflation outlook.
Goldman's Poddar believes a stable manufacturing products inflation at around 5% provides scope for a 75 basis points cut in repo rate, the rate at which the central bank lends to banks. A basis point is 0.01 percentage point.
Others say a cut could stoke demand that could push up prices in the absence of significant capacity additions to boost supplies.
"While our base case is one more round of rate easing, subdued trends in growth coupled with lower core inflation could result in the RBI easing more than ours as well as market expectations,'' says Rohini Malkani at Citigroup.
But ICICI's Prasanna believe stable inflation may be deceptive given that manufacturers are raising prices to accommodate increase in excise duty rise and freight rates. As and when fuel prices are raised, there could be yet another round of product price hike that could push manufacturing inflation above the RBI's comfort level of 4%.
"In a normal business cycle, weak industrial activity offers scope for cutting policy rates if the inflation outlook justifies it,'' says CLSA's Malik. "However, the situation in India is far from normal. Government's policy inaction is hurting business confidence and investment spending. Also, inflationary pressures, especially due to inadequate supply-side response and chronic suppressed inflation, are still alive.''
Factors such as record current account deficit, highest ever market borrowing by the government in a year, unbridled subsidies on oil and fertilizers, lack of projects to boost supplies due to policy paralysis and slowing overseas fund flows complicate policy making for the RBI.
While the depreciating rupee and government borrowings are real, the same cannot be said about the Index of Industrial Production numbers. RBI Governor D Subbarao called it "analytically bewildering" while Finance Minister Pranab Mukherjee finds it "totally baffling".
RBI shocked the markets with a 50 basis points cut in repo rate last month to 8%. But it warned against enthusiasm that rate cycle has decisively turned and that it could keep coming down regularly. It forecasts year-end inflation at 6.5%, substantially higher than its long term ambition to bring it to international levels of 3%.
The warning was reiterated by the central bank again last week. "If you look at our inflation projections in relation to what we consider as long-term, or medium objectives, there are inflation pressures,'' said RBI deputy governor, Subir Gokarn last Tuesday. "That in a sense, limits the room that we have to reduce rates."
Falling industrial output
deteriorating currency
inflation outlooks
These are driving economists in Goldman Sachs and CLSA apart on how the Reserve Bank of India would respond to macro-economic forces pulling in opposite directions.
Application of economic theory, after the March industrial output fell 3.5%, should lead all economists to conclude that RBI will ease interest rates to revive growth. But that would be difficult to do given the price pressures.
Some like Goldman Sachs' Tushar Poddar and Citigroup's Rohini Malkani believe that inflation may not be a big threat at this point.
But others, including CLSA's Rejeev Malik and ICICI Securities Primary Dealership's A Prasanna, say a rate cut will be unwise. They believe a cut could worsen inflation outlook when the currency is under hammer due to record high current account deficit, the excess of imports over exports.
At the heart of the difference is the inflation outlook.
Goldman's Poddar believes a stable manufacturing products inflation at around 5% provides scope for a 75 basis points cut in repo rate, the rate at which the central bank lends to banks. A basis point is 0.01 percentage point.
Others say a cut could stoke demand that could push up prices in the absence of significant capacity additions to boost supplies.
"While our base case is one more round of rate easing, subdued trends in growth coupled with lower core inflation could result in the RBI easing more than ours as well as market expectations,'' says Rohini Malkani at Citigroup.
But ICICI's Prasanna believe stable inflation may be deceptive given that manufacturers are raising prices to accommodate increase in excise duty rise and freight rates. As and when fuel prices are raised, there could be yet another round of product price hike that could push manufacturing inflation above the RBI's comfort level of 4%.
"In a normal business cycle, weak industrial activity offers scope for cutting policy rates if the inflation outlook justifies it,'' says CLSA's Malik. "However, the situation in India is far from normal. Government's policy inaction is hurting business confidence and investment spending. Also, inflationary pressures, especially due to inadequate supply-side response and chronic suppressed inflation, are still alive.''
Factors such as record current account deficit, highest ever market borrowing by the government in a year, unbridled subsidies on oil and fertilizers, lack of projects to boost supplies due to policy paralysis and slowing overseas fund flows complicate policy making for the RBI.
While the depreciating rupee and government borrowings are real, the same cannot be said about the Index of Industrial Production numbers. RBI Governor D Subbarao called it "analytically bewildering" while Finance Minister Pranab Mukherjee finds it "totally baffling".
RBI shocked the markets with a 50 basis points cut in repo rate last month to 8%. But it warned against enthusiasm that rate cycle has decisively turned and that it could keep coming down regularly. It forecasts year-end inflation at 6.5%, substantially higher than its long term ambition to bring it to international levels of 3%.
The warning was reiterated by the central bank again last week. "If you look at our inflation projections in relation to what we consider as long-term, or medium objectives, there are inflation pressures,'' said RBI deputy governor, Subir Gokarn last Tuesday. "That in a sense, limits the room that we have to reduce rates."
Rupee hits intra-day low of 54.56
The rupee hit an intra-day low of 54.56 to the dollar on the back of sustained demand for the greenback from oil companies and foreign institutional investors (selling in equity markets).
Demand for dollars far outstripped the supply. RBI's intervention (selling dollars to prop up the rupee) was strongly felt in the market. The Indian currency opened at 54.0650 , against the previous close of 53.81 to the dollar.
The rupee was trading at 54.32 to the dollar at 2.22 p.m. The sentiment on the Indian unit continued to be bearish due to widening trade deficit and a possibility that the Government will overshoot the fiscal deficit target of 5.1 per cent in FY13.
The rupee hit an intra-day low of 54.56 to the dollar on the back of sustained demand for the greenback from oil companies and foreign institutional investors (selling in equity markets).
Demand for dollars far outstripped the supply. RBI's intervention (selling dollars to prop up the rupee) was strongly felt in the market. The Indian currency opened at 54.0650 , against the previous close of 53.81 to the dollar.
The rupee was trading at 54.32 to the dollar at 2.22 p.m. The sentiment on the Indian unit continued to be bearish due to widening trade deficit and a possibility that the Government will overshoot the fiscal deficit target of 5.1 per cent in FY13.
Will rupee touch 55 ? Heres what experts have to say
The rupee fell to a record low against the US dollar on Wednesday, breaching 54.30, weighed down by a sluggish domestic economy and risk-averse global sentiment.
Sean Callow, senior currency strategist at Westpac Banking Corporation, Sydney said that this is not a great environment to run a current account deficit and thus it is difficult for the rupee to be reseliant on capital inflows from foreign lenders. New highs on USD/INR mean fresh air to the top side, he said, adding that Net foreign purchases of Indian equities YTD $8.8 billion means lots of capital could be pulled from India if the mood doesnt improve. A rare positive is lower oil prices.
Suspect only radical steps by RBI or sudden action by foreign central banks and/or G20 will stop a push through 55 and quite possible higher.
Deepak Kundo, dealer at forex and rates, ING Vysya,Mumbai said I think the rupee is likely to touch 56 to the dollar by June-end. As of now, the only support can come from the Reserve Bank of India. There is no dollar supply in the market and exporters are not selling.
Indranil Pan, chief economist at Kotak Mahindra said The stress on Indian currency deriving out of the worries from the global conditions have increased significantly. The issue now focuses squarely on capital flows and if a heightened risk aversion globally would significantly lead to a drying up of the capital flows.
Significant firming of the dollar is also adding to the rupee depreciation pressures. Attempts by the RBI to contain rupee depreciation is only likely to worsen rupee liquidity conditions. A difficult scenario presently for the policy makers.
Ashtosh Raina, head of foreign currency trading at HDFC Bank said: The level of 55 rupees to a dollar is very much possible. The RBI can intervene strongly. But, for the rupee, given the global environment, and the dollar strength, RBI can contain the fall, but not control it.
Radhika Rao, economist at Forecast says Given the one-sided bias in the markets, there was little that the central bank could unilaterally do, especially as EUR/USD is tumbling fast and stark losses in the stock markets.
USD/INR in unchartered territory, approach of 55.00 doesnt seem too distant.
The rupee will hover near record lows against the dollar for the next month or so, but a further significant fall is unlikely following a near 10 percent slide in the currency since February. The currency is expected to appreciate gradually after June to around 50 by March 2013, a Reuters poll of more than 20 respondents shows.
The rupee fell to a record low against the US dollar on Wednesday, breaching 54.30, weighed down by a sluggish domestic economy and risk-averse global sentiment.
Sean Callow, senior currency strategist at Westpac Banking Corporation, Sydney said that this is not a great environment to run a current account deficit and thus it is difficult for the rupee to be reseliant on capital inflows from foreign lenders. New highs on USD/INR mean fresh air to the top side, he said, adding that Net foreign purchases of Indian equities YTD $8.8 billion means lots of capital could be pulled from India if the mood doesnt improve. A rare positive is lower oil prices.
Suspect only radical steps by RBI or sudden action by foreign central banks and/or G20 will stop a push through 55 and quite possible higher.
Deepak Kundo, dealer at forex and rates, ING Vysya,Mumbai said I think the rupee is likely to touch 56 to the dollar by June-end. As of now, the only support can come from the Reserve Bank of India. There is no dollar supply in the market and exporters are not selling.
Indranil Pan, chief economist at Kotak Mahindra said The stress on Indian currency deriving out of the worries from the global conditions have increased significantly. The issue now focuses squarely on capital flows and if a heightened risk aversion globally would significantly lead to a drying up of the capital flows.
Significant firming of the dollar is also adding to the rupee depreciation pressures. Attempts by the RBI to contain rupee depreciation is only likely to worsen rupee liquidity conditions. A difficult scenario presently for the policy makers.
Ashtosh Raina, head of foreign currency trading at HDFC Bank said: The level of 55 rupees to a dollar is very much possible. The RBI can intervene strongly. But, for the rupee, given the global environment, and the dollar strength, RBI can contain the fall, but not control it.
Radhika Rao, economist at Forecast says Given the one-sided bias in the markets, there was little that the central bank could unilaterally do, especially as EUR/USD is tumbling fast and stark losses in the stock markets.
USD/INR in unchartered territory, approach of 55.00 doesnt seem too distant.
The rupee will hover near record lows against the dollar for the next month or so, but a further significant fall is unlikely following a near 10 percent slide in the currency since February. The currency is expected to appreciate gradually after June to around 50 by March 2013, a Reuters poll of more than 20 respondents shows.
Greece Crisis: IMF chief warns on expensive cost of Greek exit from euro
IMF chief Christine Lagarde warned of "extremely expensive" consequences were Greece to leave the euro zone, a once taboo possibility that European leaders have begun to discuss openly after the nation descended into political chaos.
Fears that Greece's dire state could drag the euro zone deeper into crisis rattled financial markets across the globe, as a little-known judge was installed to head an emergency government which will lead the nation to new elections on June 17.
Lagarde on Wednesday called on Greek leaders to show their resolve to keep the country in the euro by sticking to its bailout deal with the International Monetary Fund and European Union, the terms of which have inflicted great suffering on its people.
However, she told Dutch television that any Greek departure from the euro "would be extremely expensive and hard, and not just for Greece".
Greece's economic crisis turned into a full political crisis after an inconclusive election on May 6 when parties opposed to the austerity terms of the 130-billion-euro ($168 billion) bailout made strong gains, raising the chance that the rescue funds could be halted, pushing the country towards bankruptcy and out of the euro.
A failure of pro- and anti-bailout parties to agree a coalition forced President Karolos Papoulias to call the second election in as many months, and prompted him to say that the chaos risked causing panic and a run on bank deposits. The IMF's sister organisation, the World Bank, said the crisis could spread beyond Greek borders to far bigger euro zone economies that are in trouble.
"The core question will be not Greece, but Spain and Italy," World Bank President Robert Zoellick said. If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets.
BLOW TO CONFIDENCE
In a blow to confidence, the European Central Bank said it had halted liquidity operations with some Greek banks because their capital was too depleted. That means they can no longer offer assets to the ECB as collateral for loans, and would have to seek costlier emergency financing from the Bank of Greece.
It was not immediately clear which banks, or how many of them, were affected. One person familiar with the matter said the capital of four Greek banks was so low that they were operating with negative equity.
Greeks have withdrawn hundreds of millions of euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches. ECB President Mario Draghi said that under the EU treaty, it wasn't his job to decide what happened to Greece.
LEFTISTS LEAD
A new opinion poll confirmed that leftists who reject the bailout are poised to win next month, and the two establishment parties that agreed the rescue are sinking further. The leftists argue they can tear up the bailout deal and keep the euro, but European leaders say that if Greece fails to meet promises to them, lenders will pull the plug on financing.
On Monday, the president told party chiefs that figures from the central bank headed by George Provopoulos showed savers had withdrawn up to 800 million euros ($1 billion) from banks. "Mr. Provopoulos told me there was no panic, but there was great fear that could develop into a panic," Papoulias was quoted as saying in minutes of a meeting to discuss a coalition.
Several banking sources told Reuters that similar amounts had also been withdrawn on Tuesday. Nevertheless, there was no sign of panic or queues at bank branches in Athens on Wednesday. Bankers dismissed suggestions that a bank run was looming.
BANK WITHDRAWALS
Analysts predicted Greece would avoid a bank run, if only because so many people have pulled out their savings already. "We have witnessed periods of tension before when the banks experienced large outflows. In my view, the majority of people with these concerns would have done so by now," said Alex Tsirigotis, Greek banks analyst at Mediobanca.
The spectre of Greece quitting the single currency sent the euro and European shares to a fresh four-month low on Wednesday and raised the yields on Spanish and Italian debt, reflecting the risk that other European countries will be hurt.
Greece's two wounded establishment parties hope to persuade voters that the election will be a referendum on the euro, which nearly 80 percent of Greeks say they want to keep. The view from Brussels is clearly that Greek euro membership is now at stake.
"It is important that the Greek people now take a decision fully informed about the consequences," European Commission President Jose Manuel Barroso told a news conference. "The ultimate resolve to stay in the euro area must come from Greece itself," Barroso said. "We must tell the people that the programme for Greece is the least difficult of all the difficult alternatives."
IMF chief Christine Lagarde warned of "extremely expensive" consequences were Greece to leave the euro zone, a once taboo possibility that European leaders have begun to discuss openly after the nation descended into political chaos.
Fears that Greece's dire state could drag the euro zone deeper into crisis rattled financial markets across the globe, as a little-known judge was installed to head an emergency government which will lead the nation to new elections on June 17.
Lagarde on Wednesday called on Greek leaders to show their resolve to keep the country in the euro by sticking to its bailout deal with the International Monetary Fund and European Union, the terms of which have inflicted great suffering on its people.
However, she told Dutch television that any Greek departure from the euro "would be extremely expensive and hard, and not just for Greece".
Greece's economic crisis turned into a full political crisis after an inconclusive election on May 6 when parties opposed to the austerity terms of the 130-billion-euro ($168 billion) bailout made strong gains, raising the chance that the rescue funds could be halted, pushing the country towards bankruptcy and out of the euro.
A failure of pro- and anti-bailout parties to agree a coalition forced President Karolos Papoulias to call the second election in as many months, and prompted him to say that the chaos risked causing panic and a run on bank deposits. The IMF's sister organisation, the World Bank, said the crisis could spread beyond Greek borders to far bigger euro zone economies that are in trouble.
"The core question will be not Greece, but Spain and Italy," World Bank President Robert Zoellick said. If Greece left the euro zone, the ripple effects could be very damaging and reminiscent of when Lehman Brothers investment bank collapsed in 2008, spreading panic on global financial markets.
BLOW TO CONFIDENCE
In a blow to confidence, the European Central Bank said it had halted liquidity operations with some Greek banks because their capital was too depleted. That means they can no longer offer assets to the ECB as collateral for loans, and would have to seek costlier emergency financing from the Bank of Greece.
It was not immediately clear which banks, or how many of them, were affected. One person familiar with the matter said the capital of four Greek banks was so low that they were operating with negative equity.
Greeks have withdrawn hundreds of millions of euros from banks in recent days as the fears grow that the country might be forced out of the euro zone, although there has been no sign of a run on Athens bank branches. ECB President Mario Draghi said that under the EU treaty, it wasn't his job to decide what happened to Greece.
LEFTISTS LEAD
A new opinion poll confirmed that leftists who reject the bailout are poised to win next month, and the two establishment parties that agreed the rescue are sinking further. The leftists argue they can tear up the bailout deal and keep the euro, but European leaders say that if Greece fails to meet promises to them, lenders will pull the plug on financing.
On Monday, the president told party chiefs that figures from the central bank headed by George Provopoulos showed savers had withdrawn up to 800 million euros ($1 billion) from banks. "Mr. Provopoulos told me there was no panic, but there was great fear that could develop into a panic," Papoulias was quoted as saying in minutes of a meeting to discuss a coalition.
Several banking sources told Reuters that similar amounts had also been withdrawn on Tuesday. Nevertheless, there was no sign of panic or queues at bank branches in Athens on Wednesday. Bankers dismissed suggestions that a bank run was looming.
BANK WITHDRAWALS
Analysts predicted Greece would avoid a bank run, if only because so many people have pulled out their savings already. "We have witnessed periods of tension before when the banks experienced large outflows. In my view, the majority of people with these concerns would have done so by now," said Alex Tsirigotis, Greek banks analyst at Mediobanca.
The spectre of Greece quitting the single currency sent the euro and European shares to a fresh four-month low on Wednesday and raised the yields on Spanish and Italian debt, reflecting the risk that other European countries will be hurt.
Greece's two wounded establishment parties hope to persuade voters that the election will be a referendum on the euro, which nearly 80 percent of Greeks say they want to keep. The view from Brussels is clearly that Greek euro membership is now at stake.
"It is important that the Greek people now take a decision fully informed about the consequences," European Commission President Jose Manuel Barroso told a news conference. "The ultimate resolve to stay in the euro area must come from Greece itself," Barroso said. "We must tell the people that the programme for Greece is the least difficult of all the difficult alternatives."
Guys an article worth reading on "Eurozone Crisis"
Ifa Magazine € So, What happens if Greece does leave the Eurozone?
Imp. considerations taken into account nd written in very simple language...hope u all will find it useful :-P
Austerity and the rupee
The rupee's weakness today has to do with India's current account deficits, not problems in Euro Zone.
The Finance Minister, Mr Pranab Mukherjee's statement on Wednesday calling for some austerity and little bit of unpopular steps is perhaps the first admission by this Government that the current woes of the economy go beyond just Greece or the Euro Zone. These remarks came on a day when the rupee slid to a fresh low of Rs 54.5-to-the-dollar. Since February-end, when its second phase of weakening began after an earlier one from August to December, the rupee has shed 9.9 per cent against the dollar. But it has also lost 10 per cent against the pound, 9.8 per cent against the yen and 4.3 per cent against even the euro. The rupee's fall, thus, is not simply about a strengthening dollar, linked to the latter's safe haven status in these times of global economic uncertainty. It is an independent phenomenon reflective of India's, and not Europe's, problems.
The rupee's problems are largely structural, having to do with a current account deficit (CAD) that has grown almost five-folds from less than $ 16 billion to roughly $ 75 billion between 2007-08 and 2011-12. There are limits to financing these through capital inflows, which average $ 50-60 billion in a normal year (2007-08 was exceptional, when they touched $ 107 billion, just as they plunged to $ 7.4 billion in the following crisis year). One cannot expect this year to be a normal one for capital flows, when most global investors are primarily concerned about not losing their shirts. Nor can measures such as what the Reserve Bank of India did last week forcing exporters to convert half of their dollar remittances immediately to rupees or raising interest rates on foreign currency-denominated non-resident Indian deposits be a durable cure for a structural problem that is bound to assert itself after brief moments of respite.
The only real solution, then, is to cut the CAD. But that cannot happen without restraints on high-value imports, particularly oil, fertilisers and gold. In the case of the first two, domestic prices are mainly set by the Government. Not raising the domestic prices has led to an artificial demand and growing imports of these commodities, even in the face of spiralling international prices. Deregulation, especially of diesel and urea, will bring down not only the CAD, but even the Government's subsidy burden, enabling a redirection of its expenditures to more productive, growth-promoting investments. Such positive austerity measures would, in turn, inspire investor confidence and bring back capital flows that can fund CADs on a sustainable basis. They would also contribute to a structurally strong rupee, as was the case over much of the last decade
The rupee's weakness today has to do with India's current account deficits, not problems in Euro Zone.
The Finance Minister, Mr Pranab Mukherjee's statement on Wednesday calling for some austerity and little bit of unpopular steps is perhaps the first admission by this Government that the current woes of the economy go beyond just Greece or the Euro Zone. These remarks came on a day when the rupee slid to a fresh low of Rs 54.5-to-the-dollar. Since February-end, when its second phase of weakening began after an earlier one from August to December, the rupee has shed 9.9 per cent against the dollar. But it has also lost 10 per cent against the pound, 9.8 per cent against the yen and 4.3 per cent against even the euro. The rupee's fall, thus, is not simply about a strengthening dollar, linked to the latter's safe haven status in these times of global economic uncertainty. It is an independent phenomenon reflective of India's, and not Europe's, problems.
The rupee's problems are largely structural, having to do with a current account deficit (CAD) that has grown almost five-folds from less than $ 16 billion to roughly $ 75 billion between 2007-08 and 2011-12. There are limits to financing these through capital inflows, which average $ 50-60 billion in a normal year (2007-08 was exceptional, when they touched $ 107 billion, just as they plunged to $ 7.4 billion in the following crisis year). One cannot expect this year to be a normal one for capital flows, when most global investors are primarily concerned about not losing their shirts. Nor can measures such as what the Reserve Bank of India did last week forcing exporters to convert half of their dollar remittances immediately to rupees or raising interest rates on foreign currency-denominated non-resident Indian deposits be a durable cure for a structural problem that is bound to assert itself after brief moments of respite.
The only real solution, then, is to cut the CAD. But that cannot happen without restraints on high-value imports, particularly oil, fertilisers and gold. In the case of the first two, domestic prices are mainly set by the Government. Not raising the domestic prices has led to an artificial demand and growing imports of these commodities, even in the face of spiralling international prices. Deregulation, especially of diesel and urea, will bring down not only the CAD, but even the Government's subsidy burden, enabling a redirection of its expenditures to more productive, growth-promoting investments. Such positive austerity measures would, in turn, inspire investor confidence and bring back capital flows that can fund CADs on a sustainable basis. They would also contribute to a structurally strong rupee, as was the case over much of the last decade