Greek Tragedy: Default to Survive


In 1999, the European Union (EU), an economic and political community of 27 nations, established a monetary union, the ‘Eurozone’. All EU member nations who were part of this zone had the freedom to decide their individual fiscal policies. However, the European Central Bank (ECB) decided a common monetary policy. It dealt with establishing a common currency (the Euro) and the supply of money in the zone by targeting rate of interest to propel or control growth.

While this worked well during times of economic prosperity during the global financial crisis, the ECB’s one-size-fits-all policy  looks suspect.

As a formal structure bridging the ECB’s monetary policy with the fiscal policy of individual nations is non-existent, there is a chasmic difference in how different nations handle their public finances. This has led to a chary Germany and a profligate Greece on the same side of the table, both bound by the same monetary policy.

Though a few riders exist to protect member nations from their wastrel neighbours, (EU Treaties have a ‘no bail out’ clause for member nations with financial difficulty) it is easier said than done. In an economy as intertwined as the EU, there is little choice but to bailout member nations, as in the case of Greece.

However, the bailout’s harsh provisos of slashing public spending and stabilizing national debt, will adversely affect an already recessionary Greek economy. Reduction in public spending reduces money in the economy and results in lesser money in the hands of the people. This shrinks investments and reduces demand; thereby stifling growth. Without growth, Greece cannot possibly earn any revenue to repay its loans. Increasing taxes, especially in the current scenario will lead to civil unrest and the kind of political instability that Greece cannot afford. In such a scenario, the Greeks have little choice but to default.

Hypothetically, the immediate effect of the $400 billion sovereign debt default will lead to global financial markets entering into a double-dip recession. Banks heavily exposed to toxic Greek debt will close down, à la American subprime crisis all over again. Investors will panic and short EU nations’ bonds, especially Italy and Spain as they seem to be heading the Greek way.

Another perspective could be that a Greek default is imminent. While no one discounts its cascading effect, what works for it is that the global financial markets and investors are anticipating a Greek default. They are already mitigating or hedging their losses. Moreover, the EU’s repeated bailouts seem to have little effect on the actual problem, Greece’s national debts.

Instead of squandering huge sums of money on Greece, the EU should shore up European banks most exposed to the toxic debt. Alternatively, it can bailout Italy and Spain, both bigger and more powerful economies than Greece which are on the periphery of a Greece style downward spiral.

Meanwhile Greece must use the crisis to cobble together political will to restructure its public finances and rewrite its policies. If necessary, it should leave the eurozone, give up the euro, and return to the Greek drachm. Only then, can it control its monetary policy, devalue its currency and kick start its exports, all of which will eventually in time lead to positive growth.

For Greece and the European Union, the only choices are; the two must work out a closely integrated and orchestrated default wherein everyone takes a hit or a complete collapse of the Union and with it the very idea of an integrated Europe. There is no third way.


Rate hikes: The story continues


As expenses continue to rise without subsequent rise in income, the plight of a salaried individual worsens day by day. With soaring food prices and transport costs, the interest rates on borrowing from banks also hit another high. The RBI hiked the repo rate by 25 bp points to 8.25% last week, making it the 12th straight rate hike since March 2010, the longest rate cycle hike in nearly a decade.

The Short term lending (repo) rate, the rate at which the banks borrow money from the RBI has been on a steady rise and is expected to rise further by 25 bp in October.  Even the short-term borrowing (reverse repo) rate at which banks park their funds with the RBI has climbed to 7.25 per cent.

The automobile sector is worst affected, facing the possibility of even slower growth and lower revenues with the hike in fuel prices adding to its woes. Most rate sensitive sectors in the stock market like banking and real estate are also expected to suffer, since loans become more expensive with higher EMIs. In other sectors, companies which are expanding and in need of capital are going to suffer with credit availability becoming difficult. With growth seemingly out of the question, the only reprieve for a long market in heavy infrastructural investment is that the hike can be yet another round of speculative rumblings bound to perish with the same alacrity.

As the last few weeks have seen the Eastern European currencies and Latin American currencies weaken, it increasingly seems like the global recessionary pressure is getting to us.  Investors are now waking up to the truth that Asia is no longer immune to what happens in the Western world. Indeed, more than that, since Asia is suffering, growth is taking a hit owing to their policy actions. India’s rise in interest rates is now beginning to impact growth domestically.

The industry and even a section in the Finance Ministry, led by the Chief Economic Adviser to the FM Kaushik Basu, were of the view that the central bank should desist from hiking rates yet again as the slowdown is more serious than previously visualised. Many analysts have assumed that there might be a disagreement between the finance ministry and the RBI on managing inflation.

Had the Government acted earlier, RBI would not have had to resort to such consistent hikes. The government on the other hand continues to act irresponsibly, with eyes on the vote bank. Projects are at a standstill, especially in the power sector and capital goods. If the rupee continues to depreciate, inflationary pressures will only go up.

As the monetary authority continues its war on inflation, Pranab Mukherjee feels it is imperative on the part of the government to take this decision.

The monetary tightening effected so far by the Reserve Bank may have helped in containing inflation and anchoring inflationary expectations, but  has added to the common man’s dilemmas once again.

Air India: The Maharaja of disasters


The National Carrier is in deep trouble and the man trying to turn it around probably has the toughest job. With all the problems surrounding Air India, Civil Aviation Minister Valayar Ravi is quite literally begging his way out of financial issues.

Air India has the infrastructure and the personnel required for it to be revived. However, faulty management decisions and poor governance has resulted in heavy losses and the current pathetic condition of the airline. Air India has been in financial trouble for a while now; however the biggest issue to be resolved is the acquisition of a huge number of aircrafts by the Aviation ministry.

The Comptroller and Auditor General report, tabled in the Parliament earlier this month, strongly criticised the Civil Aviation Ministry and its aircraft acquisition terming it risky and pointless.

The report concentrates on the deal of 28 new aircrafts in 2004 which grew to 68 after the Congress took over. This purchase was to be paid off with the help of loans and debts. An organization which was already under a debt of Rs 29 crore was pushed up to approximately Rs 38000 crore in just a year. Air India also took a loan of Rs 200 crore with an extremely high interest to fund its expansion plans.. This deal with Boeing has turned into a nightmare as the delivery has not only been delayed by three years but the hasty plan has also ensured that there is no money to pay even after the delivery.

In 2004, Air India had only 93 aircrafts which were all around 20 years old. This, clubbed with the decision to purchase 111 aircrafts to be able to compete internationally, has been a ‘recipe for disaster’. Not to mention, the call for the merger of Air India and Indian Airlines further added to the woes of the airlines. This merger also caused problems a few months back when the AI pilots went on a strike for pay parity. The six day strike led to a loss of Rs 5-6 crore per day which pushed Air India into a financial abyss. These financial issues brought about the thought of privatisation of Air India.

It seems that the government hid the ailing health of the Maharaja for too long. But now that the CAG report is available on a public forum, the government has to come up with the solutions to all the issues being faced. Privatisation of the airline is clearly out of the running, so other ways have to be found out and implemented before it is too late.

The main concern now is recovering debts and putting a stop on further losses. A competent and experienced team of people should be given the task of marketing and human resources. These are the two main areas where efforts need to be increased. The AI pilots have been unhappy about the way the management has treated them, it is time to bring about changes in the managerial ways. Another area that needs immediate attention is infrastructure.

It is important that the products provided to the clients are of superior quality and capable of competing with the international standards. If the service is of a defined standard then fares do not need much of a subsidy. This will be contrary to the present low fares that have often resulted in decreased revenue for the airlines.

For a long time now private airlines have been favoured by the majority of ministers. It is time to stop such biased benefitting immediately. Whether it is preference in the airport bays or route networks, private airlines use their clout which plays out as a major disadvantage to the National Carrier.

If the merger of Air India and Indian Airlines merger can be turned into a success story, it would provide the airlines with a huge number of motivated employees.

With these employees and the acquired infrastructure, the Maharaja can be brought back from the dead.


Merging and Acquiring

Pronoy Nath Banerji | SIMC Ink

The year 2010 has seen a whole gamut of mergers and acquisitions across sectors. With the advent of this trend, private equity firms of the world have stood up and taken notice of the immense potential that lies in investing in India. With 66$ bn. worth of deals being inked, the year gone by has breached the limit in terms of value, posting a Year-on-Year (YOY) gain of 200%.

Following are some of the major deals of the year:

Pharmaceuticals – Indian healthcare major Piramal Healthcare Ltd. sold its branded generic drug business to US based Abbott Laboratories. The deal was secured at a valuation of $3.72 bn. (INR 17,484 cr.).  This was the second largest M&A contract by valuation in this sector, the largest being the Ranbaxy – Daiichi Sankyo deal ($4.6 bn.) in the year 2008. The cash funding constituted of an upfront payment of $2.12 billion and $400 million a year for four years.

Banking – The Axis – Enam deal in the banking space made headlines when the institutional and retail broking arms and the investment banking division of the latter were merged with Axis bank. It was an all share deal at a valuation of INR 2,067 cr. with Axis bank issuing 5.7 shares for every share held in Enam Securities.

Steel – (JSW – Ispat)- Coming towards the fag end of the year, this acquisition has made JSW Steels the largest private steel producer by capacity. The deal has been placed at a valuation of INR 2,157 cr.  Ispat Industries will issue 108.66 cr. of fresh equity at Rs 19.85 a share (20% discount) on a preferential basis to JSW Steel, which will then make an open offer to the minority shareholders of Ispat.

Telecom – The Bharti – Zain telecom deal was sealed at a valuation of $10.7 bn. Following the acquisition, Bharti Airtel has expanded its presence in Africa in a major way. Its clientele now extends to 18 countries across Asia and Africa with an ever increasing consumer base leading to greater ARPU (Average Revenue Per User) and healthier toplines. With this, Bharti has completed the largest ever cross border deal in emerging markets and has forayed into the elite league of the five largest mobile operators of the world.

With such bright prospects for the M&A business, things seem to be looking up in the years to come. However, one cannot deny hurdles like regulatory barriers, tax issues, laws and compliance based roadblocks, barriers to entry, competitive impediments etc.  Also, the approval process for most M&As is a big deterrent, something that the Ministry for Corporate Affairs needs to sort out and lend greater clarity to, and of course a clear scam – free conscience is of utmost significance.


A record year for public floats

Abhishek Ranjan | SIMC Ink

As we enter a new year and look back to gauge our performance in the previous one, “all’s well that ends well”, doesn’t seem to be true for India. The end is what has probably pushed us to the back foot. Towards the year end we witnessed some mega scams being unearthed, be it the Commonwealth Games, the 2G spectrum or the fake loans to Indian corporates. To add to the woes, inflation was an evil that kept the country and policy makers perennially worried.


However, activities in the capital markets have a different story to tell. 2010 proved to be a record year in terms of money mobilized through Initial Public Offers (IPOs) and Follow-on Public Offers (FPOs). The year saw INR 67, 595 cr. being raised in the primary market, the highest ever in a calendar year. The country’s equity market also witnessed its largest ever IPO. Public sector heavy weight, Coal India, raised INR 15, 199.44 cr. through a primary offering in October.

The total number of issues so far in the year has touched 67 which comprise of 59 IPOs and 8 FPOs. The number of issues is way below the figure of 106 that was scaled in the year 2007. But the issue amount is where 2010 has completely outplayed 2007. The issue amount rocketed to INR 67,594.62 cr. in 2010 v/s INR 45, 141.59 cr. in 2007.

In the next 180 days, over INR 80,000 cr. is expected to be raised through the IPO route alone, thus adding a great deal to the Government kitty. However, scams, inflationary pressures in India and China and the resurgent sovereign debt crisis in the euro zone have been spreading panic among the investing community in India. Lastly, indices have shed weight in a short span and at a time when India Inc. is all set to take the IPO route, volatility seems to have taken centre stage, as always, concealing more than it reveals.


Dark clouds over India’s largest FDI project

Abhishek Ranjan | SIMC Ink

In a setback to the Rs 54000-crore POSCO project, India’s largest FDI, the Forest Advisory Committee (FAC) – a panel under the Ministry of Environment and Forests (MoEF) – on November 2, 2010, recommended scrapping of the forest clearance given to the project.

The FAC has claimed that it has found ample evidence of violations of the Forest Rights Act (FRA) at the POSCO project site. The FRA requires that rights of tribal and other traditional forest dwellers be settled before the land is given to any private or public project. It is also essential to secure concurrence of the affected gram sabhas for such diversion of forests where the villagers had traditional rights.

Having made the recommendation for cancellation of the forest clearance in its assessment report submitted, the ministry is likely to soon deliver a decision on POSCO. The FAC’s recommendation follows similar observations as those of the Saxena committee and the four – memberMeena Gupta Committee.

A tale of three committees :

Saxena Committee: The environment minister had earlier stayed the clearance for POSCO after the violations of the Forest Rights Act by the Orissa government were pointed out.

Gupta Committee: Three out of the four members of the Gupta committee pointed to grave violations of FRA and other green legislations as well as collusion and fabrication by the state government in an attempt to secure the forest clearance.

Forest Advisory Committee: The report was referred by the ministry to the FAC to take a view on the  forest-related violations. The brief for the FAC was clear, if it agreed with the Saxena and Gupta panel reports that the Orissa government had not settled rights of forest dwellers under the FRA and evidence for the same was not presented to ministry, it would have to withdraw the clearance as per the ministry’s directive.

Scampering for liquidity

Pronoy Nath Banerji | SIMC Ink

The Reserve Bank of India has decided to conduct Open Market Operations (OMO) to the tune of INR 12,000 cr.  An open market operation is a monetary policy tool involving the process of buying and selling of government bonds and securities. This OMO involves buying back of Government Securities worth    Rupees 12,000 cr. from other commercial banks, a move that will leave banks with funds available for use.  The RBI exercises this option from time to time in order to ease out or tighten money supply, as the situation may demand.

This move is in light of the ongoing liquidity crunch that banks are currently facing on account of advance corporate tax payments by companies. These tax payments, which are due to the Income Tax Department, are likely to suck out between INR 40,000 to 50,000 cr. from the system. Therefore this buy back will inject liquidity into the system in order to partly compensate for the shortfall created by the tax dues.

It is for the second time in the last fortnight that the RBI has announced such a step, the previous one fuelling INR 10,120 cr. The RBI also left INR 5,000 cr. in the system on account of a reduction in an auction amount of a Government Security auction (the amount was cut from 11,000 cr. to 6,000 cr.). Further, on Thursday, the apex bank also announced an infusion of INR 48,000 cr. through OMOs and held key policy rates to existing levels (save for the SLR).

The remaining deficit (the difference between the tax dues and the buy- back amounts) is being financed by deposit rate hikes. Big public sector banks like SBI, Bank of India and more recently IDBI, IOB, Indian Bank, Dena Bank and Allahabad Bank are attracting deposits from retail customers by offering higher returns on fixed deposits. Also banks are currently borrowing over Rs. 1 lakh cr. each day from the RBI through the repo route.

As far as the outlook for the sector goes, the elbow room for banks to increase loan rates (a potential source income) is restricted. Owing to this dichotomy, the gap in cost and earnings is likely to push margins down in times to come.

Further, since sectorally, deposits are growing slower than loans, the fortunes of the domestic banking space are rife with uncertainties, at least in the short run.

To add to the woes of the major banks in dire need of loanable funds, the real effect of such stimuli will only take shape with a lag.

The seeds of policy intervention bear fruit only when these funds are absorbed by the system. Therefore, there is still some more time before cheer returns to the major players of this space and these infusions translate into healthier margins and tangibly surface on quarterly balance sheets.