Making sense out of Chaos
Debashish writes a very hard hitting piece on economic policies of current govt, which is totally self created . The promise of Achhe din needed to be fulfilled to unleash the potential of India.There was never better time or bigger mandate for India to succeed but the time and easy money both have turned adversary.
The bounce in Global GDP growth is over as per Morgan Stanley. This is not a signal of global reflation, or synchronised growth, but the evidence of secular stagnation caused by constant demand-side policies.
We will have to wait for something to break again….so that central bankers, like superheroes can come to our rescue and restart the cycle of pumping money.
I believe that day is coming ,but this time the bailout will happen by govt fiscal easing not by monetary easing which will lead to SOVEREIGN DEBT CRISIS (rapidly rising bond yields)
US fiscal policy is in uncharted territory: Running such a large primary deficit (federal revenues minus spending, not counting interest expense) in a period of strong growth and low unemployment is quite unusual, generally reserved for times of war, Goldman says.
why it will lead to higher rates across the globe?
I must put a caveat here…. I am expecting US 10 year to revisit 2.5% before we eventually break out to 4% over next couple of years.
ILFS saga continue to get interesting. When Andy Mukherjee wrote https://www.bloomberg.com/view/articles/2018-09-13/india-s-il-fs-is-facing-a-lehman-moment in Bloomberg, I was actually taken back by the comparisons to Lehman Moment. I am a little skeptical even now but I think this crisis will not blow over so easily and there is a high possibility it might spill over on other lower rated corporates. They might see their bond spread widen in coming days or at worst they might be shut out of corporate bond/commercial paper market. Since rating agencies have also been caught on wrong foot it is extremely rare for AA+ or A1+ to directly go to default), they will also tighten their so called standards further.
It is important for regulators and rating agencies to determine whether ILFS is a case of cash flow mismatch and simply overextending or something else.
2. The following chart is more relevant. It shows ILFS ( plus 4 subsidiaries)exposure as % of networth and as a % of credit book.
Most of it is still standard asset in Banks books
3. This is the copy to exchange of ILFS default on its commercial paper obligation. Most Commercial papers are in mutual fund books (liquid/ ultra/short term fund)and historically banks used to lend more money to corporates to payoff their commercial paper obligations and the liabilities used to shift to banks from mutual funds why?
Because Default on commercial paper or tradeable bond attract more media and public scrutiny than a default on individual loans to banks. Banks used to evergreen those loans and push default in future (problem solved)
ilfs3
4. Nomura has done a good job of quantifying the ILFS exposure but I think there are still more contingent liabilities which will come out in next few days.
ilfs4Sanjay Reddy an Economist at the New School for Social Research, New York writes on a very important which is not often analysed……India’s dependence on external financial confidence makes it fundamentally unlike China, as well as Korea, Taiwan, Singapore and other successful economies of east and southeast Asia. It makes it more akin to countries such as Brazil, Indonesia, South Africa or Turkey (collectively dubbed, with India, as the “Fragile Five” some years ago). China and other countries like it have pursued a policy that is export-oriented and manufacturing-centred, thereby generally covering their import bill and building up reserves over time In contrast, the fragile countries depend on the bets placed by foreign investors on their futures because they have failed to develop into successful exporting countries, at least on the required scale(that’s why our foreign exchange reserves can drain more quickly .Countries in this situation may grow but face continuous threats that a downturn in foreign confidence will halt their progress.
Efforts to please foreign investors with friendly policies, and robust economic growth based on domestic economic confidence can keep funds flowing in as long as the tide is favourable. Yet, these are not enough when the tide turns as a result of global factors. The most important such factor at present is the expected end of the “quantitative easing” policies that have caused cheap money to slosh around the globe, and financed much lending to and investment in the fast-growing emerging countries (of course, rising oil prices and other factors, including fears of increasing protectionism in the United States, also play a role). The export-oriented formula, “Make in India,” offers a correct prescription for India, as did Raghuram Rajan’s compatible import-substituting variant, “Make for India”. But the inadequate realisation of India’s productive potential is the ultimate basis of the ongoing vulnerability.
Conclusion
India’s failure to become a broad-based manufacturing exporter owes less to prices than to everything else that successful countries such as China do well and that India does not—adequate infrastructure, reliable and inexpensive power, an adequately healthy and educated workforce and many others. India’s remarkable success in global services exports masks this more basic failure of economic capabilities and social inclusion. Advice to the RBI and to the government to do nothing and allow the Rupee to slide confuses coping and cure. No one can predict if or when the fall of the Rupee will continue. What is clear is that it is the symptom and not the disease, and this must be not merely diagnosed but adequately treated.
