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
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