Currency war' or 'competitive devaluation' is a buzzword today. Interestingly, given the cause of devaluation as gaining export advantage and price-competitiveness in international trade, it raises a fundamental question about the appropriateness of excessive export-dependency of an economy to achieve high growth-rate for itself. Is there any alternative growth model that will keep the economic engine firing on all cylinders, even if export demand plummets? And how is it related to the real economy, namely the growth rate, employment, investment and inflation? These are questions needing urgent attention and it's imperative for management students to comprehend it in depth.
It's common knowledge that, for example, when the rupee depreciates from 45 to 46 per dollar, Indian exporters get one rupee extra for export worth one dollar. A smarter businessman would, rather than partying with the extra rupee, reduce the price of his export from $1 to $0.98, yet get Rs 45 at the new depreciated exchange rate. This gives him competitive advantage in the international market. This is how China has swept the world market with undervalued renminbi, besides their lower cost of production. Many developing nations, including India, have kept their currencies undervalued vis- -vis their PPP levels, to gain export advantage. While helping exports, devaluation or depreciation discourages imports, which is not bad for the BoP. So countries are interested in keeping their currencies suppressed. Countries that do so get advantage over those who don't, but in case all countries start devaluing their currencies in competition with each-other, it amounts to a 'currency war', the term coined by the Brazilian FM Guido Mantega. It's like a price war if one looks at the exchange rate as price of one currency in terms of another, usually the dollar. If all countries adapt the practice, including the US, it would become a zero-sum game with no one benefiting but all losing faith in the stability of international financial system and getting suspicious about each-other. Hence the strong objections and worries about currency war worldwide.
. It's common knowledge that in a fixed exchange rate regime the exchange rate is determined and maintained by the central bank of the country, while in a free floating regime it's decided by the market forces of demand for and supply of the currencies. In a 'managed float' however, the currency is allowed to move by the demand-supply forces, but in a certain 'band' decided by the central bank, like a 'snake in a tunnel'. Most currencies, including the rupee, are on a managed float. RBI intervenes by buying dollars and selling rupees if it wants to keep the rupee from appreciating, since an appreciating domestic currency hurts exports. But when it does so it ends up releasing excess rupee supply in the market, which leads to inflation. To avoid this undesirable spin-off, RBI mops up the excess money supply by selling government bonds, thus sterilising its intervention.
Other reasons for rupee-appreciation are dollar inflows through FDI, FII, ECB, foreign remittances, export earning and hence other measures to control rupee appreciation include capping FDI-FII; ECB to be spent in dollars, partial convertibility of rupee, lower interest rates, etc. The issue at present is, the countries that didn't intervene so far have started doing so. For example, Bank of Japan has started devaluing yen after years of non-intervention. Korea, Taiwan, China, Malaysia, India all have undervalued currencies vis- -vis PPP levels. There is also a debate whether it really is a currency war or no. Because, the currencies that appear devalued today were actually strengthening during the 2008 crisis and now are only moving back the pre-crisis levels. It would be rather premature and even irresponsible to spread panic by using strong words for a potent problem.
Sunday 13 November 2011
Berlusconi Quits, Monti Forms New Government
Prime Minister Silvio Berlusconi, who dominated Italian politics for almost two decades, stepped down as the fallout from his legal woes and contagion from the euro-region’s debt crisis led his government to unravel.
Berlusconi presented his resignation last night to President Giorgio Napolitano after the Parliament in Rome approved measures to spur growth and reduce the euro-area’s second-biggest debt. Napolitano will ask former European Union Competition Commissioner Mario Monti to form a government this evening after talks with political parties that began at 9 a.m.
Thousands of Italians gathered outside the presidential palace to witness the final minutes of the country’s longest- serving prime minister since the Second World War. Berlusconi won three elections and governed for more than half the 17 years he was in politics. Many yelled “buffoon” as he drove by. Celebrations broke out with people waving flags, drinking prosecco and dancing, producing an atmosphere more reminiscent of Italy’s 2006 World Cup victory than a political event.
“We cannot imagine that without Berlusconi our problems are solved, but without Berlusconi we can start working on how to solve the problem,” Rocco Buttiglione, a member of the Union of Centrists and a member of Berlusconi’s previous government, said yesterday in Rome.
Yields Surge
Berlusconi, 75, said on Nov. 8 that he would resign as soon as the budget measures were passed. Defections had left him without a majority in parliament, and Italy’s 10-year bond yield had surged past the 7 percent threshold that led Greece, Ireland and Portugal to seek EU bailouts. Squabbling among his Cabinet paralyzed the government, and his defense of charges that include bribery and paying for sex with a minor sapped his popularity at home and undercut his support abroad.
Since Berlusconi’s first election, “not very much has changed,” said Grant Amyot, professor of politics at Queen’s University in Ontario, Canada, and co-author of “The End of the Berlusconi Era?”
“All the world has become more competitive,” Amyot said. “Italy’s economic and state structures needed to be reformed, and it hasn’t been done. That’s the real problem: Stagnation is the word I would use to describe the impact of Berlusconi’s rule.”
Markets React
The yield on Italy’s benchmark 10-year bond jumped to a euro-era record 7.48 percent on Nov. 9, hours after Berlusconi first said he would resign. Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years. News of the growing support for a Monti government helped knock more than 100 basis points off that peak and sent Italy’s benchmark SPMIB Index up 3.7 percent on Nov. 11, the biggest advance of any European benchmark.
In his third term, Berlusconi was increasingly distracted by his four personal court cases while his government faced pressure from European allies to accelerate debt reduction as Italy’s bonds slumped, leading the European Central Bank to start buying the country’s debt in August.
Berlusconi’s fall comes two days after Greek Prime Minister George Papandreou resigned to make way for a coalition government with broader support to implement cost-cuts that will shrink the biggest deficit in the euro region. Changes of governments in Italy and Greece were “positive,” U.S. President Barack Obama said in Honolulu yesterday.
Party Backs Monti
Monti, 68, must still win confidence votes in both houses of parliament. Berlusconi’s People of Liberty party said in a statement yesterday that it will back Monti, diffusing calls from some Berlusconi allies to try to block his confirmation in the Senate, where the outgoing premier still has a majority.
Monti would lead a so-called technical government of mostly non-politicians charged with implementing the austerity measures passed by Berlusconi. They will try to persuade investors that Italy can trim its debt of 1.9 trillion euros ($2.6 trillion), more than that of Greece, Spain, Portugal and Ireland combined.
His economic policy will initially focus on cutting debt, before seeking to revive expansion in an economy where growth has lagged behind the euro-region average for more than a decade, la Repubblica reported today, without saying where it got the information.
Berlusconi presented his resignation last night to President Giorgio Napolitano after the Parliament in Rome approved measures to spur growth and reduce the euro-area’s second-biggest debt. Napolitano will ask former European Union Competition Commissioner Mario Monti to form a government this evening after talks with political parties that began at 9 a.m.
Thousands of Italians gathered outside the presidential palace to witness the final minutes of the country’s longest- serving prime minister since the Second World War. Berlusconi won three elections and governed for more than half the 17 years he was in politics. Many yelled “buffoon” as he drove by. Celebrations broke out with people waving flags, drinking prosecco and dancing, producing an atmosphere more reminiscent of Italy’s 2006 World Cup victory than a political event.
“We cannot imagine that without Berlusconi our problems are solved, but without Berlusconi we can start working on how to solve the problem,” Rocco Buttiglione, a member of the Union of Centrists and a member of Berlusconi’s previous government, said yesterday in Rome.
Yields Surge
Berlusconi, 75, said on Nov. 8 that he would resign as soon as the budget measures were passed. Defections had left him without a majority in parliament, and Italy’s 10-year bond yield had surged past the 7 percent threshold that led Greece, Ireland and Portugal to seek EU bailouts. Squabbling among his Cabinet paralyzed the government, and his defense of charges that include bribery and paying for sex with a minor sapped his popularity at home and undercut his support abroad.
Since Berlusconi’s first election, “not very much has changed,” said Grant Amyot, professor of politics at Queen’s University in Ontario, Canada, and co-author of “The End of the Berlusconi Era?”
“All the world has become more competitive,” Amyot said. “Italy’s economic and state structures needed to be reformed, and it hasn’t been done. That’s the real problem: Stagnation is the word I would use to describe the impact of Berlusconi’s rule.”
Markets React
The yield on Italy’s benchmark 10-year bond jumped to a euro-era record 7.48 percent on Nov. 9, hours after Berlusconi first said he would resign. Italy was forced to pay 6.087 percent on one-year bills at an auction on Nov. 10, the most in more than 14 years. News of the growing support for a Monti government helped knock more than 100 basis points off that peak and sent Italy’s benchmark SPMIB Index up 3.7 percent on Nov. 11, the biggest advance of any European benchmark.
In his third term, Berlusconi was increasingly distracted by his four personal court cases while his government faced pressure from European allies to accelerate debt reduction as Italy’s bonds slumped, leading the European Central Bank to start buying the country’s debt in August.
Berlusconi’s fall comes two days after Greek Prime Minister George Papandreou resigned to make way for a coalition government with broader support to implement cost-cuts that will shrink the biggest deficit in the euro region. Changes of governments in Italy and Greece were “positive,” U.S. President Barack Obama said in Honolulu yesterday.
Party Backs Monti
Monti, 68, must still win confidence votes in both houses of parliament. Berlusconi’s People of Liberty party said in a statement yesterday that it will back Monti, diffusing calls from some Berlusconi allies to try to block his confirmation in the Senate, where the outgoing premier still has a majority.
Monti would lead a so-called technical government of mostly non-politicians charged with implementing the austerity measures passed by Berlusconi. They will try to persuade investors that Italy can trim its debt of 1.9 trillion euros ($2.6 trillion), more than that of Greece, Spain, Portugal and Ireland combined.
His economic policy will initially focus on cutting debt, before seeking to revive expansion in an economy where growth has lagged behind the euro-region average for more than a decade, la Repubblica reported today, without saying where it got the information.
China’s Dagong May Cut U.S. Credit Rating Again If It Adopts QE3 Program
China’s Dagong Global Credit Rating Co. may cut the U.S.’s sovereign rating for the second time since August if the world’s biggest economy conducts more large- scale asset purchases.
Dagong, based in Beijing, lowered the U.S. sovereign rating one level to A on Aug. 3, on par with Russia and South Africa, after saying America’s decision to raise the debt ceiling will precipitate a national crisis. Investors have been speculating the U.S. will conduct a third-round of quantitative easing, or QE3, to boost an economy hurt by job losses.
“If the U.S. adopts more quantitative easing policies, we may downgrade or put it on the negative watch list,” Zhang Jun, general manager of Dagong’s marketing division, said by phone today. “We are closely monitoring it.”
The U.S. central bank purchased $2.3 trillion of debt to spur the economy in two earlier rounds of quantitative easing. Federal Reserve Vice Chairman Janet Yellen said Oct. 21 a third round might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.
Quantitative easing will cause the dollar to weaken, which may in turn bring about a default, Zhang said. He declined to say whether a formal report will be published.
Fed officials are probably engineering additional asset purchases, according to economists surveyed by Bloomberg between Oct. 26 and 31. Sixty-nine percent said Chairman Ben S. Bernanke will embark on a third round of quantitative easing, with 36 percent predicting the move will come in the first quarter next year, according to the survey.
Dagong, based in Beijing, lowered the U.S. sovereign rating one level to A on Aug. 3, on par with Russia and South Africa, after saying America’s decision to raise the debt ceiling will precipitate a national crisis. Investors have been speculating the U.S. will conduct a third-round of quantitative easing, or QE3, to boost an economy hurt by job losses.
“If the U.S. adopts more quantitative easing policies, we may downgrade or put it on the negative watch list,” Zhang Jun, general manager of Dagong’s marketing division, said by phone today. “We are closely monitoring it.”
The U.S. central bank purchased $2.3 trillion of debt to spur the economy in two earlier rounds of quantitative easing. Federal Reserve Vice Chairman Janet Yellen said Oct. 21 a third round might become warranted if necessary to boost a U.S. economy challenged by unemployment and financial turmoil.
Quantitative easing will cause the dollar to weaken, which may in turn bring about a default, Zhang said. He declined to say whether a formal report will be published.
Fed officials are probably engineering additional asset purchases, according to economists surveyed by Bloomberg between Oct. 26 and 31. Sixty-nine percent said Chairman Ben S. Bernanke will embark on a third round of quantitative easing, with 36 percent predicting the move will come in the first quarter next year, according to the survey.
Monday 7 November 2011
Old Debts Dog Europe's Banks
European banks are sitting on heaps of exotic mortgage products and other risky assets that predate the financial crisis, adding to pressure on lenders that also are holding large quantities of euro-zone government debt.
Four years after instruments like "collateralized debt obligations" and "leveraged loans" became dirty words because of the massive losses they inflicted on holders, European banks still own tens of billions of euros of such assets. They also have sizable portfolios of U.S. commercial real-estate loans and subprime mortgages that could remain under pressure until the global economy recovers.
While the assets largely originated in the U.S. financial system, top American banks have moved faster than their European counterparts to rid themselves of the majority of such detritus.
Sixteen top European banks are holding a total of about €386 billion ($532 billion) of potentially suspect credit-market and real-estate assets, according to a recent report by Credit Suisse analysts. That's more than the €339 billion of Greek, Irish, Italian, Portuguese and Spanish government debt that those same banks were holding at the end of last year, according to European "stress test" data.
The banks are in the spotlight largely because of the political and financial turmoil racking the Continent. In the latest upheaval, Greece's prime minister agreed Sunday to step down as the country's main political parties announced plans for a unity government. Meanwhile, the future of Italian Prime Minister Silvio Berlusconi's government appeared increasingly uncertain as some members of his own party threatened to pull their support.
Greek Prime Minister Agrees to Step Down European Bonds Lure U.S. Bargain Hunters
The Outlook: U.S. at Risk if Europe Goes Bad Berlusconi Stands on Shakier Ground
German Coalition Plans Income-Tax Cuts France to Unveil Cuts in Spending
The old credit-market assets might turn out to be harmless for the banks. If real-estate markets hold steady or strengthen, for example, instruments made up of home loans could gain value and generate a steady stream of cash payments for their holders.
Still, the hefty holdings of debt from before the 2008 financial crisis compound the challenge facing the Continent's banks.
Many are holding tens of billions of euros of bonds issued by financially shaky countries. They are holding hundreds of billions more in loans to customers in those same countries, which are likely to go bad at an increasing clip if Europe's economy continues to struggle.
The Royal Bank of Scotland is sitting on €79.6 billion in credit-market assets dating back to the first round of the financial crisis.
The situation is heightening fears that the banks lack enough capital to absorb potential losses and could require government support.
The banks generally have been holding the assets since before the financial crisis got under way four years ago, a time when real-estate assets in general had much higher prices. Some banks haven't fully written down these loans to reflect their current market values.
European banks, on average, have roughly halved their stockpiles of the legacy assets since 2007, the Credit Suisse analysts found. Meanwhile, the top three U.S. banks—Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co.—have slashed such assets by well over 80% over a similar period.
"There's been very much a pattern of just holding them," said Carla Antunes-Silva, head of European banks research at Credit Suisse. "It will be another drag" on the banks' capital and returns on equity.
Bank executives in Europe play down such concerns. They say they have reduced their exposures to risky assets and have enough capital to soak up any losses.
They add that investors seem preoccupied with the euro-zone mess and haven't been asking questions lately about the banks' lingering credit-market exposures.
"It's not at all a concern," said a top official at France's BNP Paribas SA, which is sitting on €12.5 billion of asset-backed securities and collateralized debt obligations tied to real-estate markets. The assets are liquid and "priced very conservatively."
The assets could lose value due to a wave of selling by the banks. Last month, regulators instructed many European lenders to come up with a total of about €106 billion in new capital by next summer. Bankers, analysts and other experts say that dumping leftover credit assets is likely to be an attractive method of finding the funds.
French banks in particular have pointed to such sales as a key part of their plan to address a cumulative €8.8 billion capital shortfall.
If the banks sell the assets at a loss, it erodes their profits and can dent their capital bases. But if they don't sell them, they're stuck with assets that consume significant quantities of capital.
The large amount of structured-credit assets still on European banks' books "clearly heightens the importance of capital that banks need," said Kian Abouhossein, head of European banks research at J.P. Morgan. Until now, "they just haven't taken the hits."
Banks in the U.K., France and Germany are the biggest holders of such assets, even after chipping away at their exposures. The four biggest British banks reduced their holdings by more than half since 2007, while four French banks trimmed theirs by less than 30%.
Barclays PLC, for example, is sitting on about £17.9 billion as of Sept. 30, down from £23.9 billion at the start of the year. The assets, which landed on the giant U.K. bank's books before mid-2007, include collateralized debt obligations, composed of securities backed by assets like mortgages, commercial real-estate loans and leveraged loans that helped finance boom-era corporate buyout deals. Barclays executives say they have made good progress reducing their portfolio by selling assets or letting them mature.
At roughly €28 billion, Crédit Agricole SA has the biggest portfolio of such assets among French banks, according to Credit Suisse. The bank's June 30 financial report includes €8.6 billion of CDOs backed by U.S. residential mortgages.
On top of that, Crédit Agricole also has at least €1 billion of U.S. mortgage-backed securities, some composed of subprime loans. With the U.S. real-estate market still hurting, further losses are possible in all these securities.
A Crédit Agricole spokeswoman declined to comment.
Legacy assets are also haunting Deutsche Bank AG. The Frankfurt-based bank is holding €2.9 billion in U.S. residential mortgage assets, including subprime loans. It has an additional €20.2 billion tied up in commercial mortgages and whole loans. The bank says it has hedged nearly all of its residential mortgage exposure.
Analysts at Mediobanca estimate that Deutsche's exposure to such assets amounts to more than 150% of its tangible equity—a key measure of its ability to absorb unexpected losses.
Deutsche Bank said it plans to let most of its legacy assets mature, so it won't face losses selling them at discounted prices.
Compared with European banks, U.S. lenders have moved faster to dump such assets. Citigroup, which required $45 billion of government aid in 2008, faced intense pressure from regulators to rid itself of risky assets, many linked to mortgages, that got the New York bank in trouble. Its stockpile of such assets was down by 86% to $45 billion at Sept. 30.
"It's a very cultural difference," said Mr. Abouhossein, the J.P. Morgan analyst. "In the U.S., you take the hits, raise equity, and move on…In Europe, it's more, 'Let's see more normalized pricing and then let's get rid of it.' "
source: http://online.wsj.com/article/SB10001424052970203716204577017863239915378.html?mod=ITP_businessandfinance_0
Four years after instruments like "collateralized debt obligations" and "leveraged loans" became dirty words because of the massive losses they inflicted on holders, European banks still own tens of billions of euros of such assets. They also have sizable portfolios of U.S. commercial real-estate loans and subprime mortgages that could remain under pressure until the global economy recovers.
While the assets largely originated in the U.S. financial system, top American banks have moved faster than their European counterparts to rid themselves of the majority of such detritus.
Sixteen top European banks are holding a total of about €386 billion ($532 billion) of potentially suspect credit-market and real-estate assets, according to a recent report by Credit Suisse analysts. That's more than the €339 billion of Greek, Irish, Italian, Portuguese and Spanish government debt that those same banks were holding at the end of last year, according to European "stress test" data.
The banks are in the spotlight largely because of the political and financial turmoil racking the Continent. In the latest upheaval, Greece's prime minister agreed Sunday to step down as the country's main political parties announced plans for a unity government. Meanwhile, the future of Italian Prime Minister Silvio Berlusconi's government appeared increasingly uncertain as some members of his own party threatened to pull their support.
Greek Prime Minister Agrees to Step Down European Bonds Lure U.S. Bargain Hunters
The Outlook: U.S. at Risk if Europe Goes Bad Berlusconi Stands on Shakier Ground
German Coalition Plans Income-Tax Cuts France to Unveil Cuts in Spending
The old credit-market assets might turn out to be harmless for the banks. If real-estate markets hold steady or strengthen, for example, instruments made up of home loans could gain value and generate a steady stream of cash payments for their holders.
Still, the hefty holdings of debt from before the 2008 financial crisis compound the challenge facing the Continent's banks.
Many are holding tens of billions of euros of bonds issued by financially shaky countries. They are holding hundreds of billions more in loans to customers in those same countries, which are likely to go bad at an increasing clip if Europe's economy continues to struggle.
The Royal Bank of Scotland is sitting on €79.6 billion in credit-market assets dating back to the first round of the financial crisis.
The situation is heightening fears that the banks lack enough capital to absorb potential losses and could require government support.
The banks generally have been holding the assets since before the financial crisis got under way four years ago, a time when real-estate assets in general had much higher prices. Some banks haven't fully written down these loans to reflect their current market values.
European banks, on average, have roughly halved their stockpiles of the legacy assets since 2007, the Credit Suisse analysts found. Meanwhile, the top three U.S. banks—Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co.—have slashed such assets by well over 80% over a similar period.
"There's been very much a pattern of just holding them," said Carla Antunes-Silva, head of European banks research at Credit Suisse. "It will be another drag" on the banks' capital and returns on equity.
Bank executives in Europe play down such concerns. They say they have reduced their exposures to risky assets and have enough capital to soak up any losses.
They add that investors seem preoccupied with the euro-zone mess and haven't been asking questions lately about the banks' lingering credit-market exposures.
"It's not at all a concern," said a top official at France's BNP Paribas SA, which is sitting on €12.5 billion of asset-backed securities and collateralized debt obligations tied to real-estate markets. The assets are liquid and "priced very conservatively."
The assets could lose value due to a wave of selling by the banks. Last month, regulators instructed many European lenders to come up with a total of about €106 billion in new capital by next summer. Bankers, analysts and other experts say that dumping leftover credit assets is likely to be an attractive method of finding the funds.
French banks in particular have pointed to such sales as a key part of their plan to address a cumulative €8.8 billion capital shortfall.
If the banks sell the assets at a loss, it erodes their profits and can dent their capital bases. But if they don't sell them, they're stuck with assets that consume significant quantities of capital.
The large amount of structured-credit assets still on European banks' books "clearly heightens the importance of capital that banks need," said Kian Abouhossein, head of European banks research at J.P. Morgan. Until now, "they just haven't taken the hits."
Banks in the U.K., France and Germany are the biggest holders of such assets, even after chipping away at their exposures. The four biggest British banks reduced their holdings by more than half since 2007, while four French banks trimmed theirs by less than 30%.
Barclays PLC, for example, is sitting on about £17.9 billion as of Sept. 30, down from £23.9 billion at the start of the year. The assets, which landed on the giant U.K. bank's books before mid-2007, include collateralized debt obligations, composed of securities backed by assets like mortgages, commercial real-estate loans and leveraged loans that helped finance boom-era corporate buyout deals. Barclays executives say they have made good progress reducing their portfolio by selling assets or letting them mature.
At roughly €28 billion, Crédit Agricole SA has the biggest portfolio of such assets among French banks, according to Credit Suisse. The bank's June 30 financial report includes €8.6 billion of CDOs backed by U.S. residential mortgages.
On top of that, Crédit Agricole also has at least €1 billion of U.S. mortgage-backed securities, some composed of subprime loans. With the U.S. real-estate market still hurting, further losses are possible in all these securities.
A Crédit Agricole spokeswoman declined to comment.
Legacy assets are also haunting Deutsche Bank AG. The Frankfurt-based bank is holding €2.9 billion in U.S. residential mortgage assets, including subprime loans. It has an additional €20.2 billion tied up in commercial mortgages and whole loans. The bank says it has hedged nearly all of its residential mortgage exposure.
Analysts at Mediobanca estimate that Deutsche's exposure to such assets amounts to more than 150% of its tangible equity—a key measure of its ability to absorb unexpected losses.
Deutsche Bank said it plans to let most of its legacy assets mature, so it won't face losses selling them at discounted prices.
Compared with European banks, U.S. lenders have moved faster to dump such assets. Citigroup, which required $45 billion of government aid in 2008, faced intense pressure from regulators to rid itself of risky assets, many linked to mortgages, that got the New York bank in trouble. Its stockpile of such assets was down by 86% to $45 billion at Sept. 30.
"It's a very cultural difference," said Mr. Abouhossein, the J.P. Morgan analyst. "In the U.S., you take the hits, raise equity, and move on…In Europe, it's more, 'Let's see more normalized pricing and then let's get rid of it.' "
source: http://online.wsj.com/article/SB10001424052970203716204577017863239915378.html?mod=ITP_businessandfinance_0
Sunday 16 October 2011
G-20 Tells Europe to Deal ‘Decisively’ With Debt Crisis at Oct. 23 Summit
Europe’s revamped strategy to beat its two-year sovereign debt crisis won the backing of global finance chiefs, who urged the region’s leaders to deal “decisively” with the turmoil when they meet for emergency talks in a week’s time.
European officials yesterday outlined the initiatives they’re considering at a meeting in Paris of finance ministers and central bankers from the Group of 20 economies. With the continent’s fiscal woes rattling financial markets and threatening the world economy, governments were urged to complete the plan at their Oct. 23 summit in Brussels and to tame the threat of contagion by maximizing the firepower of their 440 billion-euro ($611 billion) bailout fund.
“The plan has the right elements,” U.S. Treasury Secretary Timothy F. Geithner told reporters in Paris. Bank of Canada Governor Mark Carney said that “some of what is being considered, if fully implemented, would be sufficient in our opinion.”
Policy makers held out the possibility of rewarding European action with more aid from the International Monetary Fund, while splitting over whether the Washington-based lender needs a fillip of cash.
‘Substantial Arsenal’
“The IMF has a substantial arsenal of financial resources, and we would support further use of those existing resources to supplement a comprehensive, well-designed European strategy alongside a more substantial commitment of European resources,” Geithner said. He added that the U.S. would back more money for the IMF only if a “compelling case” was made as its current $390 billion war chest is “very, very substantial.”
Europe’s strategy, which has still to be made public, currently includes writing down Greek bonds by as much as 50 percent, establishing a backstop for banks and multiplying the strength of the newly-enhanced European Financial Stability Facility, people familiar with the matter said Oct. 14. Optimism the crisis may soon be tamed spurred stocks higher last week and pushed the euro to its biggest gain against the dollar in more than two years.
European officials “will have left Paris under no misunderstanding that there is a huge amount of pressure on them to deliver a solution,” U.K. Chancellor of the Exchequer George Osborne told reporters. Next weekend “is the moment people are expecting something quite impressive.”
Agreement ‘Close’
German Finance Minister Wolfgang Schaeuble said his G-20 counterparts welcomed Europe’s “confirmation that we’re aware of our responsibility and we’ll solve the problems in the euro zone.” European Union Economic and Monetary Affairs Commissioner Olli Rehn told Bloomberg Television that euro-area authorities are “close” to an agreement on how to capitalize banks.
The G-20 officials -- who met to prepare for a Nov. 3-4 gathering of leaders in Cannes, France -- said the world economy faces “heightened tensions and significant downside risks” that must be addressed.31
They vowed to keep banks capitalized and financial markets stable, while reiterating an aversion to excess currency volatility. They also considered shortly naming as many as 50 banks as systemically important, two officials said.
Almost two years to the day since Greece set the crisis in motion by announcing it had underestimated its budget deficit, Europe’s latest strategy hinges on putting it on a viable path. Austerity has plunged Greece deeper into recession and provoked civil unrest that threatens political stability.
Italy Targeted
Failure to curb the pain has led to Portugal and Ireland requiring bailouts, and markets are now targeting larger debt- strapped nations such as Italy. Investors are concerned that if the crisis is allowed to fester, the world economy could face a repeat of the chaos that followed the 2008 collapse of Lehman Brothers Holdings Inc. Geithner warned three weeks ago that failure by Europe to act would risk “cascading default, bank runs and catastrophic risk.”
In the works is a five-point plan foreseeing a solution for Greece, bolstering of the EFSF rescue fund, fresh capital for banks, a new push to boost competitiveness and consideration of European treaty amendments to tighten economic management.
The Greek bond losses now envisaged in the plan may be accompanied by a pledge to rule out debt restructurings in other countries that received bailouts, such as Portugal, to persuade investors that Europe has mastered the crisis, said the people on Oct. 14.
Options Discussed
Options include tweaking a July accord struck with investors for a 21 percent net-present-value reduction in Greek debt holdings. One variant would take that reduction up to 50 percent, the people said.
Under a more aggressive proposal, investors would exchange Greek bonds for new debt at a lower face value collateralized by the euro area’s AAA-rated rescue fund, the people said. The ultimate option is a restructuring involving writedowns without collateral, they said.
The bank-aid model under discussion is to set up a European-level backstop capitalized by the rescue fund, the people said. It would have the power to take direct equity stakes in banks and provide guarantees on bank liabilities.
Officials are considering seven ways of multiplying the strength of Europe’s temporary rescue fund. The options break down into two broad categories: enabling it to borrow from the European Central Bank or using it to partly insure new bonds issued by distressed governments. The ECB has all but ruled out the first method, making bond insurance more likely, the people said.
EFSF Guarantees
EFSF guarantees of new bonds might range from 20 percent to 30 percent, a person familiar with those deliberations said. Recourse to bond insurance suggests the central bank will need to maintain its secondary-market purchases for an unspecified “interim” period, people said.
ECB President Jean-Claude Trichet, who attended his last G- 20 meeting before he retires Oct. 31, reiterated the central bank hopes to stop purchasing government bonds once the EFSF is able to take over.
A consensus is emerging to accelerate the setup of a permanent aid fund planned for July 2013, the European Stability Mechanism. This week’s discussions will focus on creating it a year earlier, in July 2012, and easing unanimity rules that permit solitary countries to block bailouts.
Officials divided over whether Europe’s travails meant the IMF should be handed more cash, beyond agreeing it must have “adequate resources to fulfil its systemic responsibilities.” Emerging markets such as China are considering whether the lender needs more money, while officials from the U.S., Germany and Canada were among those to say either that the euro area must fix for its problems first or the IMF already has plentiful and untapped resources.
Source: Bloomberg
Source: Bloomberg
Friday 14 October 2011
Why the Greek Debt Crisis Matters??
With Greece on the brink of default - and hanging over the global economy like a financial sword of Damocles - investors the world over are asking themselves the very same question, day after day: Just what is the Greek debt crisis, and what does it mean to me?
It means a lot.
In fact, the Greek debt crisis could prove to be the first in a series of sovereign-debt defaults that could even infect the U.S. economy, tipping it into a "double-dip" recession and reprising the bear market of 2009.
In short, this crisis is one you need to watch and understand.
Given the stakes, we decided to work with our panel of global-investing experts and put together this Money Morning special report: "What is the Greek Debt Crisis, and What Does it Mean for Investors?"
Our goal was to provide you with answers to some of the key questions about the Greek debt crisis - how it started, what's actually taking place, how it could affect the U.S. economy, and how we expect it to play out.
And with the help of experts Keith Fitz-Gerald, Shah Gilani and Martin Hutchinson, we also answer the most important debt-crisis question of all: "What should you do about it?"
Question: What is the Greek Debt Crisis?
The Greek debt crisis is an expensive lesson in the importance of fiscal discipline - that comes with a multi-billion-dollar price tag.
Due to decades of overspending, Greece is currently receiving a bailout package of $159 billion (110 billion euros) from European governments and the International Monetary Fund (IMF) to meet payment obligations. Greece received its first installment in May 2010, and needs its next $17.3 billion (12 billion euros) loan by mid-July or it won't be able to pay wages or pensions at the end of the month.
Nor does it end there: The European Commission has said Greece will need an extra $166 billion (115 billion euros) through the middle of 2014.
Through the involvement of other countries and financial institutions, this is no longer simply a "Greek" debt crisis - it's becoming a global one. Similar problems plague Portugal, Spain, Italy and Ireland. With the debt contagion spreading, other worldwide players - including the United States - might not escape unscathed.
Q: How Did Greece Get Into This Mess?
Greece certainly didn't create this epic mess all by itself - it had help. Aiding and abetting Greece's own miscues were budgetary machinations by Goldman Sachs Group Inc. (NYSE: GS), a failure by the Eurozone to hold countries accountable for their finances, and credit default swaps that bet against Greece meeting its debt obligations.
But ultimately Greece is to blame.
"Greece lied to get into the European Union [EU]," said Money Morning's Shah Gilani, a former hedge-fund manager who's an expert at "reading" global-capital-movement trends. "After they were in, they used world markets to borrow from investors who bought their bonds, knowing that the EU/IMF would bail them out when it came time to repay. It was a calculated gamble to keep stuffing themselves and raising their GDP/per capita productivity to levels equal to Germany and France. [Greece] doesn't have the productive means to grow to anywhere near the per capita income of the French or Germans. It has olive oil and tourism, what else?"
Under an agreement called the Maastricht Treaty, to adopt the euro as their currency countries had to cap annual budget deficits at 3% of gross domestic product (GDP), and total government debt had to remain at or below 60% of GDP. To appear compliant, Greece failed to book billions of dollars of military expenses, and Goldman Sachs arranged a currency-swap deal in 2001 that effectively cut the country's deficit.
After Eurozone acceptance, Greece violated the terms of the Maastricht Treaty from 2001 to 2006, running excessive budget deficits in each of those years.
Greece's financial mismanagement had been ongoing for decades. Many problems started when the country joined the EU in 1981 - during the administration of then-Prime Minister Andreas Papandreou (father of current Prime Minister George Papandreou).
"Instead of steering the Greek economy to reap the enormous potential benefits of its premature EU membership, the internationally sophisticated Papandreou manipulated the EU system of slush funds so as to keep a gigantic stream of resources flowing to the bloated Greek public sector," said Money Morning Contributing Editor Martin Hutchinson, a former global merchant banker who in the past has helped some European nations restructure their finances. "The result was an economy focused almost entirely on the public sector and tourism (which also benefited from innumerable EU grants), with the populace enjoying living standards far in excess of their ability to pay their way."
The bottom line: Greece spent years borrowing from Europe without offering any real returns to the global economy, creating a country of citizens living well beyond their means.
Q: Will the Bailouts Really Halt a Default?
While European leaders continue to discuss a second round of bailout plans, Gilani said Greece could avoid default - if lenders remain willing to help.
"There won't be any big victims if Greece gets bailed out and their debts rolled out another 30 years," said Gilani. "Were any of the big U.S. banks victims of their own fraud in the subprime smackdown? No. They got bailed out and liquefied. The same could happen to Greece and theoretically there may not be any big victims. As long as there are fingers in the dykes we'll muddle through."
But the country's low economic productivity means Greece will require infusions of external financing every year for years to come. Greece's economy is set to shrink by an additional 3.8% to 4% this year after contracting 4.5% in 2010. Plus, the bailouts have let Greece believe it can lean on the EU to fix its problems.
Many experts, including Money Morning Chief Investment Strategist Keith Fitz-Gerald, believe Greece should be forced to face up to its lack of fiscal discipline - meaning the bailouts should end. But if that happens, the fallout - and the pain - will be widespread.
The bottom line: The risk of default is much greater than the headlines would have you believe. And if there is a default, the U.S. economy won't escape the fallout.
Q: What Does This Mean for the Euro?
One of the lessons we've learned from the Greek debt crisis is that the Eurozone is not as strong or stable as most believed. Eurozone members attempted a monetary union without united fiscal policy. Now it must strengthen membership standards to prevent future crises.
"If the EU wishes to make the euro work, it must demonstrate that the fiscal rules of euro membership have teeth," said Hutchinson.
That's been tried before - to no avail.
The euro's stability was based on a pact among members to keep their finances in order. In 1996, countries voted on imposing fines on countries that didn't adhere to the Eurozone's standards. But that motion was struck down and no "punishment" ever came about.
The bottom line: Greece isn't the only euro "bad boy." Other countries also have failed to meet the Eurozone standards at least once; but certainly none as extreme and frequent as Greece. In fact, the Eurozone as a whole has never met the 60% of GDP government target. And Eurozone policies weren't enforced.
Q: What's Next in the Greek Debt Crisis?
As you're no doubt beginning to see, the question "what is the Greek debt crisis?" may actually be too narrow a query.
Moody's Investors Inc. (NYSE: MCO) just cut Portugal's debt rating to below-investment-grade status ("junk" in the parlance of Wall Street). And that move roiled the bonds of Spain and Italy, two other high-debt nations that have been the focus of major solvency worries. Ireland is also causing lots of sleepless nights for debt-holders.
"The real problem is that Greece is only the first domino," Gilani said. "In order to support the rest of the ailing peripheral Eurozone countries, the European Central Bank, all the European banks, the IMF, the U.S. and China are going to have to come to the rescue. Unless there is some new model for achieving solvency with liquidity that comes from the Chicago School of Impossible Economics, the euro is toast and the whole experiment of European Union will be tested from the corners and its center."
Hutchinson said Portugal and Ireland are productive enough to solve their problems through austerity, although there's no guarantee. Italy will be a tight squeeze. In an ideal world, Spain would get a badly needed new government - one that would put in place the measures needed to avoid default. And Greece would be booted out of the Eurozone, he said.
The bottom line: The Greek debt crisis is more of a Eurozone debt crisis.
Q: Could the Greek Debt Crisis ‘Infect' the U.S. Economy?
Let's just cut to the chase here: The answer is a resounding "yes."
Greek's debt problems have an excellent chance of going global, not just because of an economic ripple effect, but because other countries like the United States are also getting carried away with high debt loads.
"What's happening in Europe is already happening here," said Gilani. "So, it's not so much a problem of infestation, it's more a matter of manifest destiny."
All of this is widely known. But the largely untold "rest of the story" is this: If the European banking sector implodes, the U.S. financial system could take an unqualified beating.
Big U.S. banks have been lending generously to banks across Europe. Close to 29% of their lending books during the past two years have gone to their heavyweight European counterparts. While they have pulled back considerably as a result of recent turmoil, U.S. banks are widely believed to have $41 billion of direct exposure to Greece.
The amount of exposure to the rest of Europe is not easily quantifiable. And this U.S. financial system link doesn't end there: U.S. money-market funds have a hefty European exposure, too.
The bottom line: The U.S. Federal Reserve and other regulators are right now reviewing "contingency plans" in case the widening European debt crisis fires off another run on the $2.7 trillion money-fund sector - a situation we saw back in 2008. But insiders admit that it may be a lot tougher to craft an effective response this time around.
Q: As an Investor, What Should I Do?
Although it's not clear how the Greek debt crisis will play out, you should run through a "Greece safety" checklist to avoid exposure to the heart of the crisis and increase holdings in safer and more protective investments.
Our experts suggest taking the following steps:
Stay away from European banks - they're on the hook for $100 billion.
Avoid southern European debt, as well as U.S. Treasuries and Japanese government bonds - they're no safe haven.
Don't ignore Europe entirely - there are some worthy German and Swedish non-bank stocks.
Look to energy-related investments, commodities and precious metals, all of which have bullish long-term outlooks.
Use protective stops.
Source: http://moneymorning.com/2011/07/07/special-report-what-is-the-greek-debt-crisis-and-what-does-it-mean-for-investors/
It means a lot.
In fact, the Greek debt crisis could prove to be the first in a series of sovereign-debt defaults that could even infect the U.S. economy, tipping it into a "double-dip" recession and reprising the bear market of 2009.
In short, this crisis is one you need to watch and understand.
Given the stakes, we decided to work with our panel of global-investing experts and put together this Money Morning special report: "What is the Greek Debt Crisis, and What Does it Mean for Investors?"
Our goal was to provide you with answers to some of the key questions about the Greek debt crisis - how it started, what's actually taking place, how it could affect the U.S. economy, and how we expect it to play out.
And with the help of experts Keith Fitz-Gerald, Shah Gilani and Martin Hutchinson, we also answer the most important debt-crisis question of all: "What should you do about it?"
Question: What is the Greek Debt Crisis?
The Greek debt crisis is an expensive lesson in the importance of fiscal discipline - that comes with a multi-billion-dollar price tag.
Due to decades of overspending, Greece is currently receiving a bailout package of $159 billion (110 billion euros) from European governments and the International Monetary Fund (IMF) to meet payment obligations. Greece received its first installment in May 2010, and needs its next $17.3 billion (12 billion euros) loan by mid-July or it won't be able to pay wages or pensions at the end of the month.
Nor does it end there: The European Commission has said Greece will need an extra $166 billion (115 billion euros) through the middle of 2014.
Through the involvement of other countries and financial institutions, this is no longer simply a "Greek" debt crisis - it's becoming a global one. Similar problems plague Portugal, Spain, Italy and Ireland. With the debt contagion spreading, other worldwide players - including the United States - might not escape unscathed.
Q: How Did Greece Get Into This Mess?
Greece certainly didn't create this epic mess all by itself - it had help. Aiding and abetting Greece's own miscues were budgetary machinations by Goldman Sachs Group Inc. (NYSE: GS), a failure by the Eurozone to hold countries accountable for their finances, and credit default swaps that bet against Greece meeting its debt obligations.
But ultimately Greece is to blame.
"Greece lied to get into the European Union [EU]," said Money Morning's Shah Gilani, a former hedge-fund manager who's an expert at "reading" global-capital-movement trends. "After they were in, they used world markets to borrow from investors who bought their bonds, knowing that the EU/IMF would bail them out when it came time to repay. It was a calculated gamble to keep stuffing themselves and raising their GDP/per capita productivity to levels equal to Germany and France. [Greece] doesn't have the productive means to grow to anywhere near the per capita income of the French or Germans. It has olive oil and tourism, what else?"
Under an agreement called the Maastricht Treaty, to adopt the euro as their currency countries had to cap annual budget deficits at 3% of gross domestic product (GDP), and total government debt had to remain at or below 60% of GDP. To appear compliant, Greece failed to book billions of dollars of military expenses, and Goldman Sachs arranged a currency-swap deal in 2001 that effectively cut the country's deficit.
After Eurozone acceptance, Greece violated the terms of the Maastricht Treaty from 2001 to 2006, running excessive budget deficits in each of those years.
Greece's financial mismanagement had been ongoing for decades. Many problems started when the country joined the EU in 1981 - during the administration of then-Prime Minister Andreas Papandreou (father of current Prime Minister George Papandreou).
"Instead of steering the Greek economy to reap the enormous potential benefits of its premature EU membership, the internationally sophisticated Papandreou manipulated the EU system of slush funds so as to keep a gigantic stream of resources flowing to the bloated Greek public sector," said Money Morning Contributing Editor Martin Hutchinson, a former global merchant banker who in the past has helped some European nations restructure their finances. "The result was an economy focused almost entirely on the public sector and tourism (which also benefited from innumerable EU grants), with the populace enjoying living standards far in excess of their ability to pay their way."
The bottom line: Greece spent years borrowing from Europe without offering any real returns to the global economy, creating a country of citizens living well beyond their means.
Q: Will the Bailouts Really Halt a Default?
While European leaders continue to discuss a second round of bailout plans, Gilani said Greece could avoid default - if lenders remain willing to help.
"There won't be any big victims if Greece gets bailed out and their debts rolled out another 30 years," said Gilani. "Were any of the big U.S. banks victims of their own fraud in the subprime smackdown? No. They got bailed out and liquefied. The same could happen to Greece and theoretically there may not be any big victims. As long as there are fingers in the dykes we'll muddle through."
But the country's low economic productivity means Greece will require infusions of external financing every year for years to come. Greece's economy is set to shrink by an additional 3.8% to 4% this year after contracting 4.5% in 2010. Plus, the bailouts have let Greece believe it can lean on the EU to fix its problems.
Many experts, including Money Morning Chief Investment Strategist Keith Fitz-Gerald, believe Greece should be forced to face up to its lack of fiscal discipline - meaning the bailouts should end. But if that happens, the fallout - and the pain - will be widespread.
The bottom line: The risk of default is much greater than the headlines would have you believe. And if there is a default, the U.S. economy won't escape the fallout.
Q: What Does This Mean for the Euro?
One of the lessons we've learned from the Greek debt crisis is that the Eurozone is not as strong or stable as most believed. Eurozone members attempted a monetary union without united fiscal policy. Now it must strengthen membership standards to prevent future crises.
"If the EU wishes to make the euro work, it must demonstrate that the fiscal rules of euro membership have teeth," said Hutchinson.
That's been tried before - to no avail.
The euro's stability was based on a pact among members to keep their finances in order. In 1996, countries voted on imposing fines on countries that didn't adhere to the Eurozone's standards. But that motion was struck down and no "punishment" ever came about.
The bottom line: Greece isn't the only euro "bad boy." Other countries also have failed to meet the Eurozone standards at least once; but certainly none as extreme and frequent as Greece. In fact, the Eurozone as a whole has never met the 60% of GDP government target. And Eurozone policies weren't enforced.
Q: What's Next in the Greek Debt Crisis?
As you're no doubt beginning to see, the question "what is the Greek debt crisis?" may actually be too narrow a query.
Moody's Investors Inc. (NYSE: MCO) just cut Portugal's debt rating to below-investment-grade status ("junk" in the parlance of Wall Street). And that move roiled the bonds of Spain and Italy, two other high-debt nations that have been the focus of major solvency worries. Ireland is also causing lots of sleepless nights for debt-holders.
"The real problem is that Greece is only the first domino," Gilani said. "In order to support the rest of the ailing peripheral Eurozone countries, the European Central Bank, all the European banks, the IMF, the U.S. and China are going to have to come to the rescue. Unless there is some new model for achieving solvency with liquidity that comes from the Chicago School of Impossible Economics, the euro is toast and the whole experiment of European Union will be tested from the corners and its center."
Hutchinson said Portugal and Ireland are productive enough to solve their problems through austerity, although there's no guarantee. Italy will be a tight squeeze. In an ideal world, Spain would get a badly needed new government - one that would put in place the measures needed to avoid default. And Greece would be booted out of the Eurozone, he said.
The bottom line: The Greek debt crisis is more of a Eurozone debt crisis.
Q: Could the Greek Debt Crisis ‘Infect' the U.S. Economy?
Let's just cut to the chase here: The answer is a resounding "yes."
Greek's debt problems have an excellent chance of going global, not just because of an economic ripple effect, but because other countries like the United States are also getting carried away with high debt loads.
"What's happening in Europe is already happening here," said Gilani. "So, it's not so much a problem of infestation, it's more a matter of manifest destiny."
All of this is widely known. But the largely untold "rest of the story" is this: If the European banking sector implodes, the U.S. financial system could take an unqualified beating.
Big U.S. banks have been lending generously to banks across Europe. Close to 29% of their lending books during the past two years have gone to their heavyweight European counterparts. While they have pulled back considerably as a result of recent turmoil, U.S. banks are widely believed to have $41 billion of direct exposure to Greece.
The amount of exposure to the rest of Europe is not easily quantifiable. And this U.S. financial system link doesn't end there: U.S. money-market funds have a hefty European exposure, too.
The bottom line: The U.S. Federal Reserve and other regulators are right now reviewing "contingency plans" in case the widening European debt crisis fires off another run on the $2.7 trillion money-fund sector - a situation we saw back in 2008. But insiders admit that it may be a lot tougher to craft an effective response this time around.
Q: As an Investor, What Should I Do?
Although it's not clear how the Greek debt crisis will play out, you should run through a "Greece safety" checklist to avoid exposure to the heart of the crisis and increase holdings in safer and more protective investments.
Our experts suggest taking the following steps:
Stay away from European banks - they're on the hook for $100 billion.
Avoid southern European debt, as well as U.S. Treasuries and Japanese government bonds - they're no safe haven.
Don't ignore Europe entirely - there are some worthy German and Swedish non-bank stocks.
Look to energy-related investments, commodities and precious metals, all of which have bullish long-term outlooks.
Use protective stops.
Source: http://moneymorning.com/2011/07/07/special-report-what-is-the-greek-debt-crisis-and-what-does-it-mean-for-investors/
Wednesday 12 October 2011
Weak rupee benefits Infosys despite uncertainty
A 10 per cent rupee depreciation against US dollar during the second quarter (July-Sep) has benefitted Indian IT bellwether Infosys, helping it in revising its revenue guidance for the entire fiscal (2011-12) once again.
"Guidance for this fiscal (FY 2012) has been revised upwards to Rs 33,795 crore from earlier estimates of Rs 31,999 crore due to rupee depreciating 10 per cent to Rs 48.98 during the second quarter from Rs 44.55 in the first quarter (April-June)," Infosys chief financial officer V Balakrishnan told IANS Wednesday.
Though mark-to-market, the global software major lost Rs 246 crore due to hedging the dollar at Rs 44.55, a weakening rupee helped it to reduce the loss to Rs 108 crore on currency conversion from dollar to rupee.
"If rupee appreciates again during this (third) or next (fourth) quarter, we will revise the outlook accordingly," Balakrishnan said on the margins of the company's briefing on its financial performance for the quarter ( Q2) under review.
Admitting that uncertainty remained at the macro-economic level due to sovereign debt crisis in Europe and slow recovery in the US, the financial executive said the company had still headroom to grow business in key verticals such as BFSI (banking, financial services and insurance), retail, energy, utilities and manufacturing in the developed markets, which account for over 80 per cent of its exports.
"If the US economy goes into double dip, it will be a challenge for pricing though it has been stable during the first two quarters of this fiscal. If the recovery is slow, we have to wait and watch to see how IT budgets and spending in 2012 will fare," Balakrishnan, who has also become a board member, pointed out.
Noting that uncertainty in the macro-economic environment could impact the Indian IT industry though not to the extent the global recession had in 2008-10, Infosys chief executive S.D. Shibulal said high unemployment rate and slow recovery in the US were a cause for concern, while the situation in Europe was getting worse due to sovereign debt crisis and turbulence in its financial markets.
"We remain cautious due to worries arising out of the prevailing situation in Europe and the US. Our clients are very cautious, taking only short-term decisions while holding up or hesitant in taking decisions for the long term," Shibulal told.
Referring to the double-digit topline growth in the first two quarters (April-Sep) of this fiscal, the chief executive said the company was focusing on implementing its 'Infosys 3.0' strategy to sustain and drive business by taking up transformational process and innovation.
"We are bracing up for any eventuality, be it downturn, upturn or going sideways by strengthening strategic relations with our global clients, who demand greater efficiency, higher productivity and creating differentiation to remain competitive" Shibulal asserted.
Denying media reports on acquiring the Thomson Reuters' healthcare unit in the US, Shibulal said there was no acquisition for the time being though the company was always on the lookout for strategic buy-out.
"We are only dating and not engaged yet. As of now, no acquisitions on the table though we continue to explore for strategic take-overs," he quipped.
The company is on course to hire 45,000 people during this fiscal and made 23,000 campus offers for next fiscal (2012-13).
"Guidance for this fiscal (FY 2012) has been revised upwards to Rs 33,795 crore from earlier estimates of Rs 31,999 crore due to rupee depreciating 10 per cent to Rs 48.98 during the second quarter from Rs 44.55 in the first quarter (April-June)," Infosys chief financial officer V Balakrishnan told IANS Wednesday.
Though mark-to-market, the global software major lost Rs 246 crore due to hedging the dollar at Rs 44.55, a weakening rupee helped it to reduce the loss to Rs 108 crore on currency conversion from dollar to rupee.
"If rupee appreciates again during this (third) or next (fourth) quarter, we will revise the outlook accordingly," Balakrishnan said on the margins of the company's briefing on its financial performance for the quarter ( Q2) under review.
Admitting that uncertainty remained at the macro-economic level due to sovereign debt crisis in Europe and slow recovery in the US, the financial executive said the company had still headroom to grow business in key verticals such as BFSI (banking, financial services and insurance), retail, energy, utilities and manufacturing in the developed markets, which account for over 80 per cent of its exports.
"If the US economy goes into double dip, it will be a challenge for pricing though it has been stable during the first two quarters of this fiscal. If the recovery is slow, we have to wait and watch to see how IT budgets and spending in 2012 will fare," Balakrishnan, who has also become a board member, pointed out.
Noting that uncertainty in the macro-economic environment could impact the Indian IT industry though not to the extent the global recession had in 2008-10, Infosys chief executive S.D. Shibulal said high unemployment rate and slow recovery in the US were a cause for concern, while the situation in Europe was getting worse due to sovereign debt crisis and turbulence in its financial markets.
"We remain cautious due to worries arising out of the prevailing situation in Europe and the US. Our clients are very cautious, taking only short-term decisions while holding up or hesitant in taking decisions for the long term," Shibulal told.
Referring to the double-digit topline growth in the first two quarters (April-Sep) of this fiscal, the chief executive said the company was focusing on implementing its 'Infosys 3.0' strategy to sustain and drive business by taking up transformational process and innovation.
"We are bracing up for any eventuality, be it downturn, upturn or going sideways by strengthening strategic relations with our global clients, who demand greater efficiency, higher productivity and creating differentiation to remain competitive" Shibulal asserted.
Denying media reports on acquiring the Thomson Reuters' healthcare unit in the US, Shibulal said there was no acquisition for the time being though the company was always on the lookout for strategic buy-out.
"We are only dating and not engaged yet. As of now, no acquisitions on the table though we continue to explore for strategic take-overs," he quipped.
The company is on course to hire 45,000 people during this fiscal and made 23,000 campus offers for next fiscal (2012-13).
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