Ahead of the G-20 Summit in London next week, the International Monetary Fund, on Friday urged the participating world leaders to make cleaning up the financial sector as their top priority and ensure that the stimulus money is available next year too.
Observing that the world is at a crossroads now as it faces the greatest economic crisis in 60 years, the IMF managing director Dominique Strauss-Kahn said at a news conference that the G-20 leaders have the opportunity to spur a recovery next year if they take the right action.
Asserting that cleaning up the balance sheets of banks and getting the financial sector working again was critical to reviving world growth, Strauss-Kahn said: "Countries can do it in different ways, but they have to do it and do it now."
Responding to questions from reporters in London, Paris and Washington through video conferencing, he said the governments around the world had done very well in announcing stimulus plans to counter the current downturn and create jobs.
But they now needed to ensure that efforts were sustained in 2010, he said.
Strauss-Kahn said though the crisis did not start with emerging markets, the collapse of trade finance and drying up of capital flows is hurting many emerging markets.
The IMF needs enough resources to assist emerging markets; otherwise a collapse in emerging economies would have a devastating impact on developed economies, reinforcing the crisis. He also called for aiding low-income countries.
Terming it a crucial meeting for resolving the world economic crisis, Strauss-Kahn said it is vitally important that the G-20 leaders reach agreement at the April 2 meeting in London. "If there's a big clash it will not be good for confidence," he declared.
Hoping that the meeting would show unity and leadership, the IMF chief said the changes agreed in London could amount to the same strategic shift that took place with the creation of the IMF and the World Bank at Bretton Woods, New Hampshire toward the end of World War II.
In addition to endorsing his five-point IMF agenda, he wanted to see steps agreed to start reforming the international financial system, including regulation of tax havens, rating agencies, and hedge funds. "I'm not expecting something very new. What I expect is the commitment of world leaders to take a step forward and to make it rapidly."
Global activity is now projected to contract by 0.5-1 per cent in 2009 on an annual average basis -- the first such fall in 60 years, the IMF has said.
Source
Showing posts with label IMF. Show all posts
Showing posts with label IMF. Show all posts
Sunday, March 29, 2009
Wednesday, February 25, 2009
Solving a global crisis
IMFRestarting the global economy through a widening of the US external deficit is not the best way forward.
The world saw a crisis coming. Just not this one. The widening US external deficit and the growing surpluses in China, Japan and other countries reflected major global imbalances that would eventually wreak havoc on the world. Some analysts predicted that the world would grow tired of funding the US deficit, causing the dollar to plunge, long-term rates on treasurys to skyrocket, and the US to go into a tailspin, bringing down the world.
A crisis did finally occur, but neither the dollar nor US treasurys tanked, yet things got really nasty anyway. The initial response to the crisis saw an unprecedented injection of liquidity by the Federal Reserve that was designed to normalize credit markets, but which others feared would cause inflation. Neither took place. Instead, things got worse.
So, what seems to be the problem? The best interpretation is that the 2008 aggravation of the crisis was triggered by major equity losses in key financial intermediaries, associated with a moderate correction in asset prices. These losses caused a rise in counter-party risk, triggering a major disintermediation process as investors fled towards safer assets. In the process, financial links were broken and spending collapsed precipitously.
During the previous boom years, the financial industry had become more concentrated (in terms of the number of players), more leveraged, and more globally diversified (in terms of assets), so that problems in the main players would be systemically large and have global impact.
So, what seems to be the game plan for dealing with the crisis? The investors’ flight to quality means that those issuing the safe assets are left as the sole remaining super-borrowers. These super-borrowers—the US and Japan, mainly—are the only ones left to re-establish financial links and rewire the system. Up to now, this has had two legs: propping up aggregate demand directly through fiscal reflation, and recapitalizing the banking system.
In the US, the recapitalization and reflation is planned mainly for the domestic economy. But the solution, to be effective, should also have a global character. Restarting the global economy through a widening of the US external deficit is not the best way forward.
A more sustainable alternative is to use the super-borrower capacity to reflate the global economy and to re-establish financial links globally. This can be done in several ways. First, multilateral development banks should be recapitalized—by issuing guarantees in the form of callable capital—allowing them to raise funds in global capital markets to lend to the developing world.
This would allow developing countries to compensate for the lost access to private markets. Loans should be disbursed quickly and conditional only on an ex- ante assessment of the soundness of their macro stance. They should be made in an amount sufficient to prevent the inefficient, pro-cyclical contractionary fiscal adjustment that is being caused by the lack of access to finance. Part of the capital raised could be invested in a diversified portfolio of private emerging market assets to provide for this asset class—what Ben Bernanke is doing to the US variety.
With this strategy, a global fiscal reflation can take place by preventing inefficient cutbacks in the countries shut out of finance because of the global crisis instead of relying solely on expansion in the structurally weak US fiscal position. Second, IMF should also be recapitalized so as to make sure that it has more than enough funds to help reconnect countries to finance.
The goal should be to convince countries that are currently hoarding large amounts of international reserves as insurance against future crisis that they need not sit on so much liquidity because they will have ample access to contingent funds if needed. This will allow countries to adopt policies that are more supportive of a global reflation effort.
If capital markets are impaired, the global and regional international institutions need to step up to a much bigger plate than is currently being envisioned.
Source
The world saw a crisis coming. Just not this one. The widening US external deficit and the growing surpluses in China, Japan and other countries reflected major global imbalances that would eventually wreak havoc on the world. Some analysts predicted that the world would grow tired of funding the US deficit, causing the dollar to plunge, long-term rates on treasurys to skyrocket, and the US to go into a tailspin, bringing down the world.
A crisis did finally occur, but neither the dollar nor US treasurys tanked, yet things got really nasty anyway. The initial response to the crisis saw an unprecedented injection of liquidity by the Federal Reserve that was designed to normalize credit markets, but which others feared would cause inflation. Neither took place. Instead, things got worse.
So, what seems to be the problem? The best interpretation is that the 2008 aggravation of the crisis was triggered by major equity losses in key financial intermediaries, associated with a moderate correction in asset prices. These losses caused a rise in counter-party risk, triggering a major disintermediation process as investors fled towards safer assets. In the process, financial links were broken and spending collapsed precipitously.
During the previous boom years, the financial industry had become more concentrated (in terms of the number of players), more leveraged, and more globally diversified (in terms of assets), so that problems in the main players would be systemically large and have global impact.
So, what seems to be the game plan for dealing with the crisis? The investors’ flight to quality means that those issuing the safe assets are left as the sole remaining super-borrowers. These super-borrowers—the US and Japan, mainly—are the only ones left to re-establish financial links and rewire the system. Up to now, this has had two legs: propping up aggregate demand directly through fiscal reflation, and recapitalizing the banking system.
In the US, the recapitalization and reflation is planned mainly for the domestic economy. But the solution, to be effective, should also have a global character. Restarting the global economy through a widening of the US external deficit is not the best way forward.
A more sustainable alternative is to use the super-borrower capacity to reflate the global economy and to re-establish financial links globally. This can be done in several ways. First, multilateral development banks should be recapitalized—by issuing guarantees in the form of callable capital—allowing them to raise funds in global capital markets to lend to the developing world.
This would allow developing countries to compensate for the lost access to private markets. Loans should be disbursed quickly and conditional only on an ex- ante assessment of the soundness of their macro stance. They should be made in an amount sufficient to prevent the inefficient, pro-cyclical contractionary fiscal adjustment that is being caused by the lack of access to finance. Part of the capital raised could be invested in a diversified portfolio of private emerging market assets to provide for this asset class—what Ben Bernanke is doing to the US variety.
With this strategy, a global fiscal reflation can take place by preventing inefficient cutbacks in the countries shut out of finance because of the global crisis instead of relying solely on expansion in the structurally weak US fiscal position. Second, IMF should also be recapitalized so as to make sure that it has more than enough funds to help reconnect countries to finance.
The goal should be to convince countries that are currently hoarding large amounts of international reserves as insurance against future crisis that they need not sit on so much liquidity because they will have ample access to contingent funds if needed. This will allow countries to adopt policies that are more supportive of a global reflation effort.
If capital markets are impaired, the global and regional international institutions need to step up to a much bigger plate than is currently being envisioned.
Source
Wednesday, December 17, 2008
12 steps to shock-and-awe Pakistan's economy
I did not anticipate the huge response my inbox received for the article slamming Pakistan. Many of those who wrote in have sought concrete steps to tackle the Terror Central.
The terror attack on world citizens at Mumbai has created revulsion and outrage all over the world. It is imperative that India seize the opportunity provided to destabilise Pakistan.
A stable Pakistan is not in the interest of world peace, leave alone India. Army controls the country and owns its economy.
A significant portion of its GDP is due to army-controlled entities (See: Military Inc - Inside Pakistan's Military Economy, by Ayesha Siddiqa; OUP; 2007). One can easily say that Pakistan economy and its Army/ISI are synonymous.
The terror attack on world citizens at Mumbai has created revulsion and outrage all over the world. It is imperative that India seize the opportunity provided to destabilise Pakistan.
A stable Pakistan is not in the interest of world peace, leave alone India. Army controls the country and owns its economy.
A significant portion of its GDP is due to army-controlled entities (See: Military Inc - Inside Pakistan's Military Economy, by Ayesha Siddiqa; OUP; 2007). One can easily say that Pakistan economy and its Army/ISI are synonymous.
Unless this elementary fact is internalised, we are not going anywhere. This implies we should stop talking of a stable Pakistan since a stable Pakistan means multiple attacks on many more cities of India by that rogue organisation ISI, which is the core of the Pakistan Army and the heart of Pakistan's economy.
Let us not even assume that Zardari is in control. Poor man -- he did not trust his own investigators to probe his wife's assassination -- he wanted Scotland Yard to do the job. Now he blabbers that if his investigators are satisfied, then he will initiate action against terrorists sitting inside Pakistan.
Periodically, the Pakistan Army likes to present some useful idiots (as Lenin would have called them) as elected representatives and we swoon over such events.
India should take the following steps to destabilise the economy of Pakistan:
1. Identify the major export items of Pakistan (like Basmati rice, carpets, etc) and provide zero export tax or even subsidise them for export from India. Hurt Pakistan on the export front.
2. Identify the major countries providing arms to Pakistan and arm twist them. Tell Brazil and Germany (currently planning to supply massive defense items to Pakistan) that it will impact their ability to invest in India. Tell Germany that retail license to Metro will be off and other existing projects will be in jeopardy.
3. Incidentally, after the arrival of Coke and Pepsi in China, the human rights violations of China are not talked about much by US government organs. Think it is a coincidence? Unless we use our markets to arm-twist arms exporters to Pakistan, we will not achieve our objectives.
4. Tell American companies that for every 5% increase in FDI limit for them, their government needs to reduce equipping Pakistan by $5 billion. That is real politics, not whining. Let us remember that funds are in desperate search of emerging markets and not the other way about. Let us also remember that international economics is politics by another name.
5. Create assets to print/distribute their currency widely inside their country. To some extent, Telgi types can be used to outsource this activity. Or just drop their notes in remote areas.
6. Pressurise IMF to add additional conditionality to the loans given to them or at least do not vote for their loans.
7. Create assets within Pakistan to destabilise Karachi stock market - it is already in a shambles.
8. Cricket and Bollywood are the opium of the Indian middle classes. Both have been adequately manipulated/ controlled by the D-company since the eighties. Chase the D-company money in cricket/ Bollywood and punish by burning D-assets in India instead of trying to have them auctioned by the IT department when nobody comes to bid for it.
9. Provide for capital punishment to those who fund terror and help in that. We have the division in the finance ministry to monitor money laundering, etc. It is important that terror financing is taken seriously and fully integrated into money laundering monitoring systems and this division is provided with much larger budget and human resources. And it should coordinate with RAW.
10. Encourage and allow scientists/ academicians/ elites of Pakistan to opt for Indian passport and widely publicise that fact since it will hurt their self-respect and dignity. There will be a long queue to get Indian passports -- many will jump to get our passport -- since they will not be stopped at international airports. It is rumoured that Adnan Sami wants one. Do not give passports to all -- make it a prized possession. Let it hurt the army- and ISI-controlled country. This one step will destroy their identity and self-confidence.
11. Discourage companies from India from investing in Pakistan, particularly IT companies, till Pakistan stops exporting its own IT (international terrorism).
12. In all these, it is important that we do not bring in the domestic religious issues. The target is the terror central, namely Pakistan, and if there are elements helping them here then they also should be punished -- irrespective of religious labels. If Pakistan is dismantled and the idea of Pakistan is gone, many of our domestic issues will also be sorted out.
Will the Indian elite go for the jugular or just light more candles and scream at the formless/ nameless political class before TV cameras?
It is going to be a long haul and may be in a decade or so, we can find a solution to our existential crisis of being attacked by barbarians from the West. We need to combine strategy and patience and completely throw to the dustbin the 'Gujral Doctrine' by that mumbling prime minister about treating younger brothers with equanimity. The doctrine essentially suggests that if we are slapped on both the cheeks we should feel bad that we do not have a third cheek to show.
He, according to security experts, seems to have dismantled our human intelligent assets inside Pakistan, which has resulted in the gory death of thousands of Indian citizens in the last few years.
Such is our strategic thinking in this complex world since our political class is not adequately briefed and the elite don't think through issues. Better to be simple in our talks and vicious in our actions rather than the other way.
Hopefully, this November attack will create a new vibrant India capable of taking care of its own interests.
Let us not even assume that Zardari is in control. Poor man -- he did not trust his own investigators to probe his wife's assassination -- he wanted Scotland Yard to do the job. Now he blabbers that if his investigators are satisfied, then he will initiate action against terrorists sitting inside Pakistan.
Periodically, the Pakistan Army likes to present some useful idiots (as Lenin would have called them) as elected representatives and we swoon over such events.
India should take the following steps to destabilise the economy of Pakistan:
1. Identify the major export items of Pakistan (like Basmati rice, carpets, etc) and provide zero export tax or even subsidise them for export from India. Hurt Pakistan on the export front.
2. Identify the major countries providing arms to Pakistan and arm twist them. Tell Brazil and Germany (currently planning to supply massive defense items to Pakistan) that it will impact their ability to invest in India. Tell Germany that retail license to Metro will be off and other existing projects will be in jeopardy.
3. Incidentally, after the arrival of Coke and Pepsi in China, the human rights violations of China are not talked about much by US government organs. Think it is a coincidence? Unless we use our markets to arm-twist arms exporters to Pakistan, we will not achieve our objectives.
4. Tell American companies that for every 5% increase in FDI limit for them, their government needs to reduce equipping Pakistan by $5 billion. That is real politics, not whining. Let us remember that funds are in desperate search of emerging markets and not the other way about. Let us also remember that international economics is politics by another name.
5. Create assets to print/distribute their currency widely inside their country. To some extent, Telgi types can be used to outsource this activity. Or just drop their notes in remote areas.
6. Pressurise IMF to add additional conditionality to the loans given to them or at least do not vote for their loans.
7. Create assets within Pakistan to destabilise Karachi stock market - it is already in a shambles.
8. Cricket and Bollywood are the opium of the Indian middle classes. Both have been adequately manipulated/ controlled by the D-company since the eighties. Chase the D-company money in cricket/ Bollywood and punish by burning D-assets in India instead of trying to have them auctioned by the IT department when nobody comes to bid for it.
9. Provide for capital punishment to those who fund terror and help in that. We have the division in the finance ministry to monitor money laundering, etc. It is important that terror financing is taken seriously and fully integrated into money laundering monitoring systems and this division is provided with much larger budget and human resources. And it should coordinate with RAW.
10. Encourage and allow scientists/ academicians/ elites of Pakistan to opt for Indian passport and widely publicise that fact since it will hurt their self-respect and dignity. There will be a long queue to get Indian passports -- many will jump to get our passport -- since they will not be stopped at international airports. It is rumoured that Adnan Sami wants one. Do not give passports to all -- make it a prized possession. Let it hurt the army- and ISI-controlled country. This one step will destroy their identity and self-confidence.
11. Discourage companies from India from investing in Pakistan, particularly IT companies, till Pakistan stops exporting its own IT (international terrorism).
12. In all these, it is important that we do not bring in the domestic religious issues. The target is the terror central, namely Pakistan, and if there are elements helping them here then they also should be punished -- irrespective of religious labels. If Pakistan is dismantled and the idea of Pakistan is gone, many of our domestic issues will also be sorted out.
Will the Indian elite go for the jugular or just light more candles and scream at the formless/ nameless political class before TV cameras?
It is going to be a long haul and may be in a decade or so, we can find a solution to our existential crisis of being attacked by barbarians from the West. We need to combine strategy and patience and completely throw to the dustbin the 'Gujral Doctrine' by that mumbling prime minister about treating younger brothers with equanimity. The doctrine essentially suggests that if we are slapped on both the cheeks we should feel bad that we do not have a third cheek to show.
He, according to security experts, seems to have dismantled our human intelligent assets inside Pakistan, which has resulted in the gory death of thousands of Indian citizens in the last few years.
Such is our strategic thinking in this complex world since our political class is not adequately briefed and the elite don't think through issues. Better to be simple in our talks and vicious in our actions rather than the other way.
Hopefully, this November attack will create a new vibrant India capable of taking care of its own interests.
Tuesday, November 18, 2008
G20 leaders agree to PM's plans; reject protectionism
In what indicates India's growing clout on the world stage, the leaders of the Group of Twenty agreed to act urgently upon each of the three major issues raised by Indian Prime Minister Manmohan Singh, namely:
the need for greater inclusivity for emerging markets in the international financial system,
need to ensure that the growth prospects of the developing countries are not hampered, and
the need to avoid protectionist tendencies
The response of the world's top leaders to the global financial storm -- the most severe since the Great Depression -- also points towards how India has managed to turn a crisis into an opportunity to smartly push through its agenda of accruing to itself a larger say in the world's economic matters.
the need for greater inclusivity for emerging markets in the international financial system,
need to ensure that the growth prospects of the developing countries are not hampered, and
the need to avoid protectionist tendencies
The response of the world's top leaders to the global financial storm -- the most severe since the Great Depression -- also points towards how India has managed to turn a crisis into an opportunity to smartly push through its agenda of accruing to itself a larger say in the world's economic matters.
The G20 leaders said in a draft communique on the Summit on Financial Markets and World Economy that they were determined to enhance co-operation and work together to restore global growth and achieve the much-needed reforms in the world's financial systems.
The G20 leaders said that rejection of protectionism and turning inward in such uncertain times was of critical importance, and agreed to refrain from raising new barriers to investment or trade in goods and services, or to impose new export restrictions, or implement inconsistent measures to stimulate exports. They would also striveto work on modalities that lead to a successful conclusion to the WTO's Doha Development Agenda.
Stating that they were mindful of the impact of the current crisis on developing countries, the G20 leaders reaffirmed the importance of Millennium Development Goals, the need to address critical challenges like energy security and climate change, food security, rule of law, and the battle against terrorism, poverty and disease.
The G20 leaders said that rejection of protectionism and turning inward in such uncertain times was of critical importance, and agreed to refrain from raising new barriers to investment or trade in goods and services, or to impose new export restrictions, or implement inconsistent measures to stimulate exports. They would also striveto work on modalities that lead to a successful conclusion to the WTO's Doha Development Agenda.
Stating that they were mindful of the impact of the current crisis on developing countries, the G20 leaders reaffirmed the importance of Millennium Development Goals, the need to address critical challenges like energy security and climate change, food security, rule of law, and the battle against terrorism, poverty and disease.
The G20 also agreed, as suggested by India, to comprehensively reform international financial institutions so that they reflect changing economic weights in the world economy and give greater voice to emerging and developing markets. The leaders said that IMF and other international organisations should provide capacity-building programmes for emerging markets
Agreeing upon the need for a broader policy response, based on closer macroeconomic cooperation, to restore growth, avoid negative spillovers and support emerging market economies and developing countries, the G20 put forth a 6-point agenda to face short- and long-term challenges. The G20 agreed to:
Help emerging and developing markets gain access to finance in the current difficult financial conditions, including through liquidity facilities and programme support.
Use fiscal measures to stimulate domestic demand to rapid effect while maintaining policy framework conducive to fiscal sustainability.
Recognise the importance of monetary policy support as deemed appropriate to domestic conditions.
Continue the vigorous efforts and whatever further actions are necessary to stabilise the financial system.
Encourage the World Bank and other multilateral development banks to use their full capacity in support of their development agenda, and the introduction of new facilities in the areas of infrastructure and trade finance.
Ensure that the International Monetary Fund, the World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the financial crisis.
Apart from this plan, the G20 also agreed to implement reforms that will strengthen financial markets and regulatory regimes to avoid future crises. The G20 pledged to:
Strengthen financial market transparency by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions.
Incentives should be aligned to avoid excessive risk-taking.
Towards this end:
The key global accounting standards bodies should work to enhance guidance for valuation of securities
Accounting standards setters should address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.
Regulators should enhance the required disclosure of complex financial instruments by firms to market participants.
The governance of international accounting standards body should be enhanced to promote financial stability.
Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices.
Strengthen regulatory regimes, prudential oversight and risk management, and ensure that all financial markets products and participants are regulated or subject to oversight as appropriate to their circumstances.
Strong oversight of credit rating agencies will be exercised consistent with agreed international code of conduct.
The IMF, expanded FSF, and other regulators should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends.
Protect the integrity of the world's financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities, and protecting against illicit finance risks arising from non-cooperative jurisdictions.
Formulate regulations at the national and regional levels and enhance coordination and cooperation among nations across all segments of financial markets. The FSF should expand to a broader membership of emerging economies.
The IMF and the FSF should strengthen collaboration to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.
The IMF should draw lessons form the current crisis.
The adequacy of IMF's resources should be reviewed and the World Bank and other MDBs should be ready to increase them when necessary.
Advance reform of the Bretton Woods Institutions (World Bank, IMF) so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness.
Expand the Financial Stability Forum and allow broader membership of emerging economies. The IMF, along with the expanded FSF and other bodes, should work to better identify vulnerabilities, anticipate potential stresses and act swiftly to play a key role in crisis response.
The G20 also set a deadline to completing high priority actions prior to March 31, 2009 The G20 decided to meet again by April 30, 2009 to review implementation of the principles and decisions agreed at the Washington Summit.
Help emerging and developing markets gain access to finance in the current difficult financial conditions, including through liquidity facilities and programme support.
Use fiscal measures to stimulate domestic demand to rapid effect while maintaining policy framework conducive to fiscal sustainability.
Recognise the importance of monetary policy support as deemed appropriate to domestic conditions.
Continue the vigorous efforts and whatever further actions are necessary to stabilise the financial system.
Encourage the World Bank and other multilateral development banks to use their full capacity in support of their development agenda, and the introduction of new facilities in the areas of infrastructure and trade finance.
Ensure that the International Monetary Fund, the World Bank and other MDBs have sufficient resources to continue playing their role in overcoming the financial crisis.
Apart from this plan, the G20 also agreed to implement reforms that will strengthen financial markets and regulatory regimes to avoid future crises. The G20 pledged to:
Strengthen financial market transparency by enhancing required disclosure on complex financial products and ensuring complete and accurate disclosure by firms of their financial conditions.
Incentives should be aligned to avoid excessive risk-taking.
Towards this end:
The key global accounting standards bodies should work to enhance guidance for valuation of securities
Accounting standards setters should address weaknesses in accounting and disclosure standards for off-balance sheet vehicles.
Regulators should enhance the required disclosure of complex financial instruments by firms to market participants.
The governance of international accounting standards body should be enhanced to promote financial stability.
Private sector bodies that have already developed best practices for private pools of capital and/or hedge funds should bring forward proposals for a set of unified best practices.
Strengthen regulatory regimes, prudential oversight and risk management, and ensure that all financial markets products and participants are regulated or subject to oversight as appropriate to their circumstances.
Strong oversight of credit rating agencies will be exercised consistent with agreed international code of conduct.
The IMF, expanded FSF, and other regulators should develop recommendations to mitigate pro-cyclicality, including the review of how valuation and leverage, bank capital, executive compensation, and provisioning practices may exacerbate cyclical trends.
Protect the integrity of the world's financial markets by bolstering investor and consumer protection, avoiding conflicts of interest, preventing illegal market manipulation, fraudulent activities, and protecting against illicit finance risks arising from non-cooperative jurisdictions.
Formulate regulations at the national and regional levels and enhance coordination and cooperation among nations across all segments of financial markets. The FSF should expand to a broader membership of emerging economies.
The IMF and the FSF should strengthen collaboration to better integrate regulatory and supervisory responses into the macro-prudential policy framework and conduct early warning exercises.
The IMF should draw lessons form the current crisis.
The adequacy of IMF's resources should be reviewed and the World Bank and other MDBs should be ready to increase them when necessary.
Advance reform of the Bretton Woods Institutions (World Bank, IMF) so that they can more adequately reflect changing economic weights in the world economy in order to increase their legitimacy and effectiveness.
Expand the Financial Stability Forum and allow broader membership of emerging economies. The IMF, along with the expanded FSF and other bodes, should work to better identify vulnerabilities, anticipate potential stresses and act swiftly to play a key role in crisis response.
The G20 also set a deadline to completing high priority actions prior to March 31, 2009 The G20 decided to meet again by April 30, 2009 to review implementation of the principles and decisions agreed at the Washington Summit.
Monday, November 17, 2008
'Balance of economic power is shifting to emerging nations'-PM
The balance of economic power is now increasingly shifting in favour of the emerging economies, said Prime Minister Manmohan Singh on Saturday on his way back to India from the Summit on Financial Markets and World Economy called for G20 leaders in Washington by President George Bush.
He described the meeting held to find ways to tackle the financial hurricane that has ravaged the global economy as "a very successful affair."
He described the meeting held to find ways to tackle the financial hurricane that has ravaged the global economy as "a very successful affair."
"We were previously also, for the last couple of years, being invited to the G8 meetings, but consultations were mere formalities. Our views were not really taken into account, while they were formulating their viewpoints. This is for the first time that a genuine dialogue was held between the major developed and major emerging countries. I believe this is one reflection of the shifting balance of economic power and the Western world, at long last has got to realise this reality. That is a positive gain."
He said his apprehensions -- about the meeting not being well prepared, the possibility of dissension between the Americans and the Europeans, and the likelihood of emerging countries' point of view may not receiving required attention -- had been totally laid to rest.
"There was no attempt to score partisan points. It was recognised that the world was faced with a major financial crisis and it was now threatening to spill over to the real economy of both the developed and developing countries," said the prime minister.
He said that the world leaders recognised that although developing countries had done nothing to contribute to the current financial crisis, they were probably the worst sufferers, with dwindling exports, slowdown in flow of capital and direct investment and foreign capital flying out.
"All the developing countries were united in making this demand that this crisis should not become an occasion to divert the world's attention from the development dimension of the human condition. There our point of view was that in a situation where private capital was not available for various reasons, there was need to mount a considerable fiscal stimulus to make good for the deficiency in private demand," said the prime minister.
He said that there was complete agreement that a considerable fiscal stimulation was called for. In the present time, inflation was much less of a danger, and deflation was the real concern, which the world had to grapple with.
Therefore those countries which have the maneuverability should use fiscal stimulus to boost demand.
It was also agreed that as far as the developing countries are concerned, infrastructure investment and its protection will be a major contributory factor to sustaining growth rates and therefore the international financial institutions, both the World Bank and IMF and the regional development banks must come out with facilities to increase their assistance to these countries, he added.
He also said that there was unanimity at the meeting that international financial institutions must be provided with adequate resources to meet the challenge of the crisis as far as developing countries are concerned.
Singh also said that the leaders also agreed on a work programme -- short-term, medium-term, and long-term. It agreed to meet again in April, to take stock of the situation.
The tackling and containment of the crisis will take time, but work is in progress. Improvement of standards, reform of the supervision and management systems, and governance structure, particularly that of the international financial institutions, and giving greater weightage to the emerging countrieswere some of the concerns that were taken on board.
He said that President Bush, in his closing remarks did touch on the subject of his relationship with the incoming administration. He said that the coming administration has been fully briefed about what was happening and its outcome. Stating that he was, therefore, hopeful that there will be broad convergence of views, the prime minister added that, "..but I am not an expert on American politics to predict what will be the shape of things when the new administration takes over."
The prime minister, however, cautioned that the situation was so serious that one cannot wait until January 20 (when Barack Obama will take over as the 44th President of the US), because the financial crisis is now spilling over to the real economy and for the world to say that it will do nothing until then 'would not be a very responsible act so'.
So despite all the uncertainties associated with the change of administration, Singh, said it was clear from the Summit meetings that the world leaders are truely concerned and are committed to find practical, pragmatic solutions to this problem.
In a media briefing that was held on board his special aircraft the prime minister took a few questions from the travelling media. Excerpts:
You had predicted that growth rate would be impacted...
Well, I don't take credit, but Finance Minister, Mr (P) Chidambaram, and I had anticipated that there is likely to be a global slowdown this year. Therefore, in preparing for the Budget for the current year, we budgeted for a very substantial amount of deficit, precisely to take care of the slack that may emerge.
So as far as our economy is concerned, I think, our fiscal stimulus is already on. The fact that we have given record prices to the producers of wheat and rice; that Rs 71,000 crores (Rs 710 billion) of loans have been written off, we have set in motion a very extensive programme for social service and infrastructure expansion.
So as far as India is concerned, fiscal stimulus is by and large already in place. We have already taken steps to provide more liquidity, and ready to provide even more, if required.
Is there anything else which is being given apart from what is already provided for? What is the next fiscal stimulus package that can be expected?
Well, I think this is not a once and for all process. We are keeping the situation under review on a day-to-day basis. The Reserve Bank of India [Get Quote] is at it, the finance ministry is at it... I'm heading a committee with the finance minister and Commerce Minister (Kamal Nath). So whatever is needed to keep the economy on an even keel will be done.
Fortunately inflation is now becoming less of a problem and if you look at the inflation from a different angle, it is de-seasonlized data.
The situation is turning out to be much better on the inflation front than is evident from this year-on-year figures. That will give us greater maneuverability to deal with the economic situation.
Should we be more proactive in cutting interest rates?
I think as far as interest rates are concerned, that is the preserve of the Reserve Bank of India. It would not be proper for me to comment on this but as I said this is an evolving situation, if inflation rate comes down, if we feel confident that inflation will not be a problem, there is scope for maneuverability, both in more aggressive use of monetary policy and more aggressive use of fiscal policy.
Is the global crisis a failure of capitalism as an ideology or a mistake
Well, financial capital certainly has shown weaknesses. There has been lack of supervision, there has been too much faith that self-interest will make people behave in an enlightened manner. So these are weaknesses of the system, the financial system regulation has been ineffective. But I don't believe that these are inherent in the system.
The Left is saying that they have saved the nation by not allowing the pension bill. Your comment please.
But what has that got to do with this. Even if the pension bill was not there, I don't see the world situation would have been different. We are a small player. Global meltdown is not a crisis which is the result of wrong policies of the Government of India. It is a crisis made outside India. We are the victims of it, not the cause.
Oil prices have come down. Do you intend to respond?
Well we will look at all the options. We have still a considerable deficit on the oil account. This is as I said an evolving situation.
Was there consensus on your point on protectionism?
Yes there is a general agreement that protectionism would be a wrong response to the present situation. It would only accentuate the crisis. Such 'beggar thy neighbor policies' have never worked in the past. They only slowdown and lead to decline of economic activity all around. There is in the communiqu�, I think, a reaffirmation that all countries will resist a recourse to protectionist tendencies.
Would there be an impact on the Doha round of WTO talks?
Yes. A part of the same communiqu� states that this gives urgency to the task of completing the Doha round as early as possible.
Your comments on the capital account convertibility and banking review as stated in your speech at RBI in 2006
When I went to the Reserve Bank some two years ago, I had said that the whole issue of capital account convertibility needs to be relooked at. There was a Tarapore Committee Report, so I suggested that maybe Tarapore should be asked to relook and revisit it. I did not pronounce anything about if we were going to have capital account convertibility or when. It was a suggestion and Reserve Bank followed it up. And that report is a public document.
What about banking sector review?
This is a question about FDI (foreign direct investment) in banking- (indicates to FM)...
Finance minister: The notification was made towards the end of the NDA Government in January-February 2004. All that we said was that since the notification has been made, we will allow foreign capital in private-sector banks. If any Indian investor wants to buy shares in a private-sector bank, he is subject to a voting cap. As long as there is a voting cap new capital will not come into a private-sector bank. We plan to remove the voting cap.
That amendment (reviewing the voting cap) had been introduced in the parliament. Whether it is foreign capital or Indian capital into a private-sector bank, as long as this cap is there no capital is going to come.
Is the government satisfied with the way it has handled the situation (financial crisis)? Will the people of this country vote the government back?
Well, I think we have done reasonably well and I sincerely hope that the people of India would repose their confidence in us.
When would this crisis get over?
I am not an astrologer. I think there are apprehensions that we haven't seen the worst of the crisis. There are conflicting viewpoints. Our efforts must be to contain and rollback the crisis. But how long will it take, I am afraid, I cannot pronounce with any sense of authority.
Are there any apprehensions in India about Obama regime?
No, no. From whatever feedback I have, I think we have no reason to be apprehensive about the change of regime in the United States. There is general recognition in the US regarding the role that India can play, ...India should play. There is considerable appreiciation of the way Indian economy is managed. And more recently, also Obama did send Madeleine Albright and former Congressman Leach to interact with us. They have given us all the positive indication, so there is no reason to have any doubts about the intentions of the Obama administration towards India.
Your response to the approaching elections and the crisis...
Well, as I said the crisis is not our making. What I would like is for the people of India to judge us by the response of our government to this crisis. We acted in time, and while the rest of the world is in doom and gloom, we will still maintain a growth rate of 7.5 per cent. Growth with stability, more socially inclusive growth is a reality and will remain a reality despite the onslaught of the adverse turn in our external environment.
Will the crisis postpone or hasten elections?
It has no bearing on the elections. Elections will be held on schedule.
What has been to IMF's role, as far as the crisis is concerned?
It has been endorsed that more resources should be provided to the International Monetary Fund and the World Bank. At the meeting itself, the Japanese government announced a loan of hundred billion dollars to the IMF. So on the whole I think, the climate in the developed world is to recognise that international institutions need extra resources if they are to come to the rescue of the emerging countries and other developing countries.
He said his apprehensions -- about the meeting not being well prepared, the possibility of dissension between the Americans and the Europeans, and the likelihood of emerging countries' point of view may not receiving required attention -- had been totally laid to rest.
"There was no attempt to score partisan points. It was recognised that the world was faced with a major financial crisis and it was now threatening to spill over to the real economy of both the developed and developing countries," said the prime minister.
He said that the world leaders recognised that although developing countries had done nothing to contribute to the current financial crisis, they were probably the worst sufferers, with dwindling exports, slowdown in flow of capital and direct investment and foreign capital flying out.
"All the developing countries were united in making this demand that this crisis should not become an occasion to divert the world's attention from the development dimension of the human condition. There our point of view was that in a situation where private capital was not available for various reasons, there was need to mount a considerable fiscal stimulus to make good for the deficiency in private demand," said the prime minister.
He said that there was complete agreement that a considerable fiscal stimulation was called for. In the present time, inflation was much less of a danger, and deflation was the real concern, which the world had to grapple with.
Therefore those countries which have the maneuverability should use fiscal stimulus to boost demand.
It was also agreed that as far as the developing countries are concerned, infrastructure investment and its protection will be a major contributory factor to sustaining growth rates and therefore the international financial institutions, both the World Bank and IMF and the regional development banks must come out with facilities to increase their assistance to these countries, he added.
He also said that there was unanimity at the meeting that international financial institutions must be provided with adequate resources to meet the challenge of the crisis as far as developing countries are concerned.
Singh also said that the leaders also agreed on a work programme -- short-term, medium-term, and long-term. It agreed to meet again in April, to take stock of the situation.
The tackling and containment of the crisis will take time, but work is in progress. Improvement of standards, reform of the supervision and management systems, and governance structure, particularly that of the international financial institutions, and giving greater weightage to the emerging countrieswere some of the concerns that were taken on board.
He said that President Bush, in his closing remarks did touch on the subject of his relationship with the incoming administration. He said that the coming administration has been fully briefed about what was happening and its outcome. Stating that he was, therefore, hopeful that there will be broad convergence of views, the prime minister added that, "..but I am not an expert on American politics to predict what will be the shape of things when the new administration takes over."
The prime minister, however, cautioned that the situation was so serious that one cannot wait until January 20 (when Barack Obama will take over as the 44th President of the US), because the financial crisis is now spilling over to the real economy and for the world to say that it will do nothing until then 'would not be a very responsible act so'.
So despite all the uncertainties associated with the change of administration, Singh, said it was clear from the Summit meetings that the world leaders are truely concerned and are committed to find practical, pragmatic solutions to this problem.
In a media briefing that was held on board his special aircraft the prime minister took a few questions from the travelling media. Excerpts:
You had predicted that growth rate would be impacted...
Well, I don't take credit, but Finance Minister, Mr (P) Chidambaram, and I had anticipated that there is likely to be a global slowdown this year. Therefore, in preparing for the Budget for the current year, we budgeted for a very substantial amount of deficit, precisely to take care of the slack that may emerge.
So as far as our economy is concerned, I think, our fiscal stimulus is already on. The fact that we have given record prices to the producers of wheat and rice; that Rs 71,000 crores (Rs 710 billion) of loans have been written off, we have set in motion a very extensive programme for social service and infrastructure expansion.
So as far as India is concerned, fiscal stimulus is by and large already in place. We have already taken steps to provide more liquidity, and ready to provide even more, if required.
Is there anything else which is being given apart from what is already provided for? What is the next fiscal stimulus package that can be expected?
Well, I think this is not a once and for all process. We are keeping the situation under review on a day-to-day basis. The Reserve Bank of India [Get Quote] is at it, the finance ministry is at it... I'm heading a committee with the finance minister and Commerce Minister (Kamal Nath). So whatever is needed to keep the economy on an even keel will be done.
Fortunately inflation is now becoming less of a problem and if you look at the inflation from a different angle, it is de-seasonlized data.
The situation is turning out to be much better on the inflation front than is evident from this year-on-year figures. That will give us greater maneuverability to deal with the economic situation.
Should we be more proactive in cutting interest rates?
I think as far as interest rates are concerned, that is the preserve of the Reserve Bank of India. It would not be proper for me to comment on this but as I said this is an evolving situation, if inflation rate comes down, if we feel confident that inflation will not be a problem, there is scope for maneuverability, both in more aggressive use of monetary policy and more aggressive use of fiscal policy.
Is the global crisis a failure of capitalism as an ideology or a mistake
Well, financial capital certainly has shown weaknesses. There has been lack of supervision, there has been too much faith that self-interest will make people behave in an enlightened manner. So these are weaknesses of the system, the financial system regulation has been ineffective. But I don't believe that these are inherent in the system.
The Left is saying that they have saved the nation by not allowing the pension bill. Your comment please.
But what has that got to do with this. Even if the pension bill was not there, I don't see the world situation would have been different. We are a small player. Global meltdown is not a crisis which is the result of wrong policies of the Government of India. It is a crisis made outside India. We are the victims of it, not the cause.
Oil prices have come down. Do you intend to respond?
Well we will look at all the options. We have still a considerable deficit on the oil account. This is as I said an evolving situation.
Was there consensus on your point on protectionism?
Yes there is a general agreement that protectionism would be a wrong response to the present situation. It would only accentuate the crisis. Such 'beggar thy neighbor policies' have never worked in the past. They only slowdown and lead to decline of economic activity all around. There is in the communiqu�, I think, a reaffirmation that all countries will resist a recourse to protectionist tendencies.
Would there be an impact on the Doha round of WTO talks?
Yes. A part of the same communiqu� states that this gives urgency to the task of completing the Doha round as early as possible.
Your comments on the capital account convertibility and banking review as stated in your speech at RBI in 2006
When I went to the Reserve Bank some two years ago, I had said that the whole issue of capital account convertibility needs to be relooked at. There was a Tarapore Committee Report, so I suggested that maybe Tarapore should be asked to relook and revisit it. I did not pronounce anything about if we were going to have capital account convertibility or when. It was a suggestion and Reserve Bank followed it up. And that report is a public document.
What about banking sector review?
This is a question about FDI (foreign direct investment) in banking- (indicates to FM)...
Finance minister: The notification was made towards the end of the NDA Government in January-February 2004. All that we said was that since the notification has been made, we will allow foreign capital in private-sector banks. If any Indian investor wants to buy shares in a private-sector bank, he is subject to a voting cap. As long as there is a voting cap new capital will not come into a private-sector bank. We plan to remove the voting cap.
That amendment (reviewing the voting cap) had been introduced in the parliament. Whether it is foreign capital or Indian capital into a private-sector bank, as long as this cap is there no capital is going to come.
Is the government satisfied with the way it has handled the situation (financial crisis)? Will the people of this country vote the government back?
Well, I think we have done reasonably well and I sincerely hope that the people of India would repose their confidence in us.
When would this crisis get over?
I am not an astrologer. I think there are apprehensions that we haven't seen the worst of the crisis. There are conflicting viewpoints. Our efforts must be to contain and rollback the crisis. But how long will it take, I am afraid, I cannot pronounce with any sense of authority.
Are there any apprehensions in India about Obama regime?
No, no. From whatever feedback I have, I think we have no reason to be apprehensive about the change of regime in the United States. There is general recognition in the US regarding the role that India can play, ...India should play. There is considerable appreiciation of the way Indian economy is managed. And more recently, also Obama did send Madeleine Albright and former Congressman Leach to interact with us. They have given us all the positive indication, so there is no reason to have any doubts about the intentions of the Obama administration towards India.
Your response to the approaching elections and the crisis...
Well, as I said the crisis is not our making. What I would like is for the people of India to judge us by the response of our government to this crisis. We acted in time, and while the rest of the world is in doom and gloom, we will still maintain a growth rate of 7.5 per cent. Growth with stability, more socially inclusive growth is a reality and will remain a reality despite the onslaught of the adverse turn in our external environment.
Will the crisis postpone or hasten elections?
It has no bearing on the elections. Elections will be held on schedule.
What has been to IMF's role, as far as the crisis is concerned?
It has been endorsed that more resources should be provided to the International Monetary Fund and the World Bank. At the meeting itself, the Japanese government announced a loan of hundred billion dollars to the IMF. So on the whole I think, the climate in the developed world is to recognise that international institutions need extra resources if they are to come to the rescue of the emerging countries and other developing countries.
Monday, November 3, 2008
12 steps that will help India avoid a collapse
The world financial crisis has turned into a global economic slump. Fear about future job and income security has spread more rapidly in all countries than anyone thought possible.
In a few days, people have reined in spending, more swiftly than central banks had contemplated. So have companies. Volvo reported that its total global orders for new trucks in Q3-08 were 115, vs. 42,000 for Q3-07, when things were turning bad. Auto firms are gearing for a 25-40 per cent fall in global demand. So, steel mills are shutting down furnaces across Europe (not least Mr Mittal).
Those two examples are cascading in every manufacturing and service industry (except government services) into an implosive tsunami.
In a few days, people have reined in spending, more swiftly than central banks had contemplated. So have companies. Volvo reported that its total global orders for new trucks in Q3-08 were 115, vs. 42,000 for Q3-07, when things were turning bad. Auto firms are gearing for a 25-40 per cent fall in global demand. So, steel mills are shutting down furnaces across Europe (not least Mr Mittal).
Those two examples are cascading in every manufacturing and service industry (except government services) into an implosive tsunami.
The UK economy shrank by 0.5 per cent in Q3-08. The US economy has shrunk likewise. It would be surprising if numbers for continental EU and Japan did not look similar or worse. Contrary to expectations, China will be lucky to register a growth of 8 per cent in 2008-09. India will be fortunate to hit 7 per cent.
But the issue is not whether growth in OECD in the next few quarters is minus 0.5 per cent or minus 2.0 per cent, or whether Indian growth turns out to be 7 per cent or 8 per cent.
The Reserve Bank of India's [Get Quote] latest credit review suggests that the authorities are in denial about how rapidly unwinding could occur with a change in public sentiment, despite our robust domestic market.
The issue right now is whether governments and central banks realise the magnitude of the economic implosion they risk (through complacency or fright, even in relatively robust economies like India) without decisive action; even if it seems to traditionalists to be over the top.
The facts have changed dramatically. Governments and central banks must respond accordingly. Right now, perception and signalling are even more important than reality in ensuring that the public's fearful sentiments are allayed.
But governments and central banks seem in denial about the ineffectual impact of their Herculean exertions last month, which saw unprecedented financial rescue and liquidity pump-priming packages being put in place.
Yet, despite these efforts, which were necessary (if too little too late), the second shoe has dropped. The effects of that are likely to be large and contagious, as sudden concern about the vulnerability of ALL emerging markets suggests.
The financial crisis of 2007-08 required bank balance sheets to be propped up through measures unimaginable two months ago. But those rescues were based on harm done by sub-prime debt, toxic securitisation, and uncertainty about coverage in the credit-default swap market, which unzipped after the demise of Lehman Brothers and (virtually) of AIG.
With a full-blown global recession now under way for 2008-10, even prime loan portfolios will turn sour until economies turn around. That will result in increasing non-performing assets in portfolios that were until two months ago regarded as secure.
So banks will go into a second round of provisioning, write-downs and reserve accretion, requiring more capital. But government rescues have exhausted the ammunition available to fight this new scourge. The Brown Plan will make it more, not less, difficult to raise more bank capital.
National governments, having mutilated their budgets with financial rescues, are now talking up plans to launch counter-recessionary public capex programmes; even as demands on social security safety net financing increases with rising unemployment.
But, as Japan showed in 1990-2005, large public capex can be ineffectual, even counter-productive. What may be better is inducing private consumption through direct and indirect tax cuts, along with expenditure incentives, to ensure that private consumption does not fall through the floor.
But, with governments having stretched their fiscal deficits beyond tolerable limits, those measures seem counter-intuitive and dangerous. If a first-order problem has been created by spending and borrowing too much (whether by individuals, families, banks, companies or governments), can it be solved by spending and borrowing even more?
The answer intuitively is NO. But the consensus among global policymakers seems to be YES - at least until panic subsides and normalcy returns. Even if one agrees, it cannot be without deep concern about mortgaging the future.
In this scenario, what must Indian policymakers do to make sure that growth does not drop below a 5-6 per cent floor over the next two years? Odd as it may seem, and contrary to the complacency of the RBI's opaque and obfuscating credit policy review, my suggestions include:
(1) an immediate cut of 2 per cent in the RBI repo rate, with a corresponding cut in the reverse repo rate;
(2) a further cut of 1.5 per cent in the cash reserve ratio and 5 per cent in the statutory liquidity ratio;
(3) full, unimpeded access to all investors (foreign and domestic) in government securities and treasury bills;
(4) cessation of the RBI managing the exchange rate and focusing instead on financial stability and ensuring sufficient liquidity throughout the system;
(5) crash introduction of exchange traded currency options and interest-rate futures and options;
(6) pooling of government equity holdings in state-owned banks (SOBs) in a Public Bank Equity Fund (PBEF) which the IMF, International Finance Corporation and Asian Development Bank [Get Quote] should be invited to augment by $15 billion, through equity ($5 billion), convertibles ($5 billion) and long-term loans ($5 billion); this would increase and anchor the capital base of SOBs without widening the fiscal deficit;
(7) moving in a series of steps toward full market pricing of oil, diesel and kerosene;
(8) dispensing with RBI approval for branch expansion by local or foreign banks;
(9) removal of other petty restrictions on foreign banks expanding in India;
(10) attracting IFC, Asian Development Bank and sovereign wealth fund (SWF) investment in UTI to the equivalent of 40 per cent of its extant capital base so that it can buy grossly under-valued equities in the market;
(11) auctioning to all domestic banks, and Indian transnational corporations with ECB (external commercial borrowing) exposure, $15 billion of RBI reserves with daily tranche auctions of $3 billion;
(12) entering into rupee-dollar swap arrangements with the IMF, US Fed, Bank of Japan, the Saudi Monetary Authority and the People's Bank of China for up to $100 billion; not that the RBI would need to use these but it would settle the market to know the artillery is there if needed.
These measures should be taken before they are needed, for us to be ahead of the curve rather than after an unanticipated unwinding occurs - as it has in the US, EU and Japan with extraordinary suddenness - and threatens to engulf the developing world through no fault of its own.
The government should also boldly accelerate the reform process along the lines suggested by the Rajan and Mistry Reports rather than be timid because it may be the wrong time in the global economic and domestic political cycles.
But the issue is not whether growth in OECD in the next few quarters is minus 0.5 per cent or minus 2.0 per cent, or whether Indian growth turns out to be 7 per cent or 8 per cent.
The Reserve Bank of India's [Get Quote] latest credit review suggests that the authorities are in denial about how rapidly unwinding could occur with a change in public sentiment, despite our robust domestic market.
The issue right now is whether governments and central banks realise the magnitude of the economic implosion they risk (through complacency or fright, even in relatively robust economies like India) without decisive action; even if it seems to traditionalists to be over the top.
The facts have changed dramatically. Governments and central banks must respond accordingly. Right now, perception and signalling are even more important than reality in ensuring that the public's fearful sentiments are allayed.
But governments and central banks seem in denial about the ineffectual impact of their Herculean exertions last month, which saw unprecedented financial rescue and liquidity pump-priming packages being put in place.
Yet, despite these efforts, which were necessary (if too little too late), the second shoe has dropped. The effects of that are likely to be large and contagious, as sudden concern about the vulnerability of ALL emerging markets suggests.
The financial crisis of 2007-08 required bank balance sheets to be propped up through measures unimaginable two months ago. But those rescues were based on harm done by sub-prime debt, toxic securitisation, and uncertainty about coverage in the credit-default swap market, which unzipped after the demise of Lehman Brothers and (virtually) of AIG.
With a full-blown global recession now under way for 2008-10, even prime loan portfolios will turn sour until economies turn around. That will result in increasing non-performing assets in portfolios that were until two months ago regarded as secure.
So banks will go into a second round of provisioning, write-downs and reserve accretion, requiring more capital. But government rescues have exhausted the ammunition available to fight this new scourge. The Brown Plan will make it more, not less, difficult to raise more bank capital.
National governments, having mutilated their budgets with financial rescues, are now talking up plans to launch counter-recessionary public capex programmes; even as demands on social security safety net financing increases with rising unemployment.
But, as Japan showed in 1990-2005, large public capex can be ineffectual, even counter-productive. What may be better is inducing private consumption through direct and indirect tax cuts, along with expenditure incentives, to ensure that private consumption does not fall through the floor.
But, with governments having stretched their fiscal deficits beyond tolerable limits, those measures seem counter-intuitive and dangerous. If a first-order problem has been created by spending and borrowing too much (whether by individuals, families, banks, companies or governments), can it be solved by spending and borrowing even more?
The answer intuitively is NO. But the consensus among global policymakers seems to be YES - at least until panic subsides and normalcy returns. Even if one agrees, it cannot be without deep concern about mortgaging the future.
In this scenario, what must Indian policymakers do to make sure that growth does not drop below a 5-6 per cent floor over the next two years? Odd as it may seem, and contrary to the complacency of the RBI's opaque and obfuscating credit policy review, my suggestions include:
(1) an immediate cut of 2 per cent in the RBI repo rate, with a corresponding cut in the reverse repo rate;
(2) a further cut of 1.5 per cent in the cash reserve ratio and 5 per cent in the statutory liquidity ratio;
(3) full, unimpeded access to all investors (foreign and domestic) in government securities and treasury bills;
(4) cessation of the RBI managing the exchange rate and focusing instead on financial stability and ensuring sufficient liquidity throughout the system;
(5) crash introduction of exchange traded currency options and interest-rate futures and options;
(6) pooling of government equity holdings in state-owned banks (SOBs) in a Public Bank Equity Fund (PBEF) which the IMF, International Finance Corporation and Asian Development Bank [Get Quote] should be invited to augment by $15 billion, through equity ($5 billion), convertibles ($5 billion) and long-term loans ($5 billion); this would increase and anchor the capital base of SOBs without widening the fiscal deficit;
(7) moving in a series of steps toward full market pricing of oil, diesel and kerosene;
(8) dispensing with RBI approval for branch expansion by local or foreign banks;
(9) removal of other petty restrictions on foreign banks expanding in India;
(10) attracting IFC, Asian Development Bank and sovereign wealth fund (SWF) investment in UTI to the equivalent of 40 per cent of its extant capital base so that it can buy grossly under-valued equities in the market;
(11) auctioning to all domestic banks, and Indian transnational corporations with ECB (external commercial borrowing) exposure, $15 billion of RBI reserves with daily tranche auctions of $3 billion;
(12) entering into rupee-dollar swap arrangements with the IMF, US Fed, Bank of Japan, the Saudi Monetary Authority and the People's Bank of China for up to $100 billion; not that the RBI would need to use these but it would settle the market to know the artillery is there if needed.
These measures should be taken before they are needed, for us to be ahead of the curve rather than after an unanticipated unwinding occurs - as it has in the US, EU and Japan with extraordinary suddenness - and threatens to engulf the developing world through no fault of its own.
The government should also boldly accelerate the reform process along the lines suggested by the Rajan and Mistry Reports rather than be timid because it may be the wrong time in the global economic and domestic political cycles.
Monday, October 20, 2008
What the world's big guns say about the meltdown
The financial crisis -- that has ravaged global markets, bankrupted many investment banks, brought about a tectonic shift in world economies, turned many a topcat into a homeless tramp and caused thousands to lose their livelihood -- is said to be the most horrific fiscal calamity ever to have visited mankind.
Worse, the full impact of this onrushing tsunami has not even been felt yet: experts promise more pain in the coming months and years. Pain that will take years to fade away.
And here's what the world's top leaders and economic brains have to say about the global meltdown. Read on. . .
We are right now teetering on the verge of panic: George Soros, billionaire investor, head of Soros Fund Management
The government's intervention is not intended to take over the free market, but to preserve it: George W Bush, president, US .
It's wrong to ask teachers, farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons: John McCain, Republican presidential hopeful .
Washington has to recognise that economic recovery requires that we act not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America: Barack Obama, Democrat presidential hopeful .
The Masters of the Universe have bitten the dust, the same dust that is now in the mouths of the rest of us. The impact on the developing world would be profound. Projects are already stopping because of the lack of liquidity and financing. The debt crisis would become worse. The decline in commodity prices and exports would hurt the developing world: Nirupam Sen, India's permanent representative at the UN .
Worse, the full impact of this onrushing tsunami has not even been felt yet: experts promise more pain in the coming months and years. Pain that will take years to fade away.
And here's what the world's top leaders and economic brains have to say about the global meltdown. Read on. . .
We are right now teetering on the verge of panic: George Soros, billionaire investor, head of Soros Fund Management
The government's intervention is not intended to take over the free market, but to preserve it: George W Bush, president, US .
It's wrong to ask teachers, farmers and small-business owners to fill the gas tanks of the helicopters of Wall Street tycoons: John McCain, Republican presidential hopeful .
Washington has to recognise that economic recovery requires that we act not just to address the crisis on Wall Street, but also the crisis on Main Street and around kitchen tables across America: Barack Obama, Democrat presidential hopeful .
The Masters of the Universe have bitten the dust, the same dust that is now in the mouths of the rest of us. The impact on the developing world would be profound. Projects are already stopping because of the lack of liquidity and financing. The debt crisis would become worse. The decline in commodity prices and exports would hurt the developing world: Nirupam Sen, India's permanent representative at the UN .
I can say with certainty that if investment banks were still private partnerships, where the partners have all their personal capital at risk, the financial meltdown would never happen. They would not let another Lloyds of London capital call happen, ever: Mark Cuban, US billionaire.
The financial tsunami we now face is a global crisis. Its destructive force is much stronger and more widespread than the Asian financial turmoil in 1997. The recovery will take longer, be more difficult and certainly cannot be taken lightly: Donald Tsang, chief executive, Hong Kong .
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further: Economic Nobel laureate Paul Krugman.
What we needed and didn't have two or three weeks ago was a good diagnostic of the problem: It was not a liquidity problem; it was a solvency problem. And once you start from that position, the British solution is the only way forward: Philippe Martin, professor of economics, the Sorbonne, Paris
I'm a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course, but these are not normal circumstances: George W Bush, President, US .
The financial tsunami we now face is a global crisis. Its destructive force is much stronger and more widespread than the Asian financial turmoil in 1997. The recovery will take longer, be more difficult and certainly cannot be taken lightly: Donald Tsang, chief executive, Hong Kong .
What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further: Economic Nobel laureate Paul Krugman.
What we needed and didn't have two or three weeks ago was a good diagnostic of the problem: It was not a liquidity problem; it was a solvency problem. And once you start from that position, the British solution is the only way forward: Philippe Martin, professor of economics, the Sorbonne, Paris
I'm a strong believer in free enterprise, so my natural instinct is to oppose government intervention. I believe companies that make bad decisions should be allowed to go out of business. Under normal circumstances, I would have followed this course, but these are not normal circumstances: George W Bush, President, US .
For the poor, the costs of the crisis could be lifelong. The poorest and most vulnerable groups risk the most serious -- and in some cases permanent -- damage. 100 million people have already been driven into poverty this year and that number will grow: Robert Zoellick, president, World Bank
Wall Street had it coming. . . The nature of America's financial crisis is the failure of Wall Street's business model in and of itself: Japanese columnist Hideo Tamura .
We live in an interdependent world and the fate of all countries is related to the international financial system. Our value markets are opened to the world and, if they are affected, this will affect our capacity to finance our development. If the financial crisis causes a recession in the main economies, this will compromise our exports: Manmohan Singh, Prime Minister, India
The age of Reaganism is over. The no-regulation, low-taxes philosophy has broken the back of our economy: Former Harvard University economist Jeffrey Sachs, now special adviser to the UN Secretary-General Ban Ki-moon
Where was the IMF? This is the sort of crisis that should be at the heart of what the IMF was set up to do, but no one in the U.S. or in other G-7 countries seems to turn to the IMF for advice: Mohamed El-Erian, co-CEO, investment firm PIMCO, and a former IMF economist who was in the running to head the fund four years ago.
Wall Street had it coming. . . The nature of America's financial crisis is the failure of Wall Street's business model in and of itself: Japanese columnist Hideo Tamura .
We live in an interdependent world and the fate of all countries is related to the international financial system. Our value markets are opened to the world and, if they are affected, this will affect our capacity to finance our development. If the financial crisis causes a recession in the main economies, this will compromise our exports: Manmohan Singh, Prime Minister, India
The age of Reaganism is over. The no-regulation, low-taxes philosophy has broken the back of our economy: Former Harvard University economist Jeffrey Sachs, now special adviser to the UN Secretary-General Ban Ki-moon
Where was the IMF? This is the sort of crisis that should be at the heart of what the IMF was set up to do, but no one in the U.S. or in other G-7 countries seems to turn to the IMF for advice: Mohamed El-Erian, co-CEO, investment firm PIMCO, and a former IMF economist who was in the running to head the fund four years ago.
Seeing big American banks saved by privatisations, one almost wants to scream, 'Marx, come back, they've gone crazy!' We're seeing, in renewed form, the most debatable aspects of Anglo-Saxon capitalism called into question: Arnaud Lagardere, general partner and CEO, Lagardere Group
I know too well how disastrous these slumps can be. During the 1991 recession I was basically bankrupt -- it all happens very quickly. So what's the use in finger-pointing? I don't want to see the Americans go down the pan. Everyone knows that we'll follow: Stephen Brown, British citizen
The financial world still has a number of serious problems. However, time and money will eventually heal them: Barton Biggs, Wall Street strategist
Although a great many policy actions have since been taken, they have been neither comprehensive nor global. Indeed, the approaches taken have been so varied and inconsistent, especially with regard to deposit guarantees, that they are intensifying problems for other countries: Dominique Strauss-Kahn, head, IMF
The situation is going to get better when you feel good about buying Citigroup stock. Right now, nobody feels good about buying it: John Catsimatidis, supermarket billionaire and New York mayoral hopeful .
I know too well how disastrous these slumps can be. During the 1991 recession I was basically bankrupt -- it all happens very quickly. So what's the use in finger-pointing? I don't want to see the Americans go down the pan. Everyone knows that we'll follow: Stephen Brown, British citizen
The financial world still has a number of serious problems. However, time and money will eventually heal them: Barton Biggs, Wall Street strategist
Although a great many policy actions have since been taken, they have been neither comprehensive nor global. Indeed, the approaches taken have been so varied and inconsistent, especially with regard to deposit guarantees, that they are intensifying problems for other countries: Dominique Strauss-Kahn, head, IMF
The situation is going to get better when you feel good about buying Citigroup stock. Right now, nobody feels good about buying it: John Catsimatidis, supermarket billionaire and New York mayoral hopeful .
It's a good warning for the Chinese economy, but I believe China will make the exact same mistake in future: Kelly Yu, Chinese citizen
You can't just blame the banks, you also can blame the people that took out mortgages... We were brought up that you first had to put some savings together and then enjoy. But this whole society has gotten to the fact that we're a 'now, give it to me today' kind of society. I think regulation has not been adequate. There's no one person to blame other than all of us: Mike Bloomberg, mayor, New York, former Wall Streeter, founder, financial services company Bloomberg
My own view right now is that cash is king; liquidity is king: Don Marron, US billionaire
The Wall Street crisis has been caused by the years of excesses and the fee-based economy where the only goal is to make fees at any cost without any benefit to the economy: Carl E Berg, US billionaire
We have counted on emerging economies, which collectively account for half of global GDP, to hold up. However, with the credit crisis reaching shores of emerging market countries, their growth is now likely to fall well below trend by the end of the year: Moody's Economy.com
You can't just blame the banks, you also can blame the people that took out mortgages... We were brought up that you first had to put some savings together and then enjoy. But this whole society has gotten to the fact that we're a 'now, give it to me today' kind of society. I think regulation has not been adequate. There's no one person to blame other than all of us: Mike Bloomberg, mayor, New York, former Wall Streeter, founder, financial services company Bloomberg
My own view right now is that cash is king; liquidity is king: Don Marron, US billionaire
The Wall Street crisis has been caused by the years of excesses and the fee-based economy where the only goal is to make fees at any cost without any benefit to the economy: Carl E Berg, US billionaire
We have counted on emerging economies, which collectively account for half of global GDP, to hold up. However, with the credit crisis reaching shores of emerging market countries, their growth is now likely to fall well below trend by the end of the year: Moody's Economy.com
Saturday, October 18, 2008
Why India is worse off today than in 2006
The Sensex, below 10,000 again, may have caught up with key economic indices that suggest India is worse off now in many ways than it was 28 months ago.
India’s benchmark stock index, the Bombay Stock Exchange’s Sensex, fell below 10,000 Friday, a level it hasn’t seen since 20 June 2006, finally catching up to macro-economic indicators that point to a rather stark conclusion: the country, and by extension, its people, are worse off now than they were 28 months ago.
The same 28 months that saw the Sensex cross the 21,000 mark had also witnessed other dramatic changes in factors affecting India’s economy and its standing as an investment for foreign companies and investors.
The prevailing sentiment in June 2006 was greed. In October 2008 it is fear supported in part by worsening economic data.
The Sensex closed at 9,975.35 on Friday. The rupee at Rs48.89. And, on Thursday, the government announced that inflation, as measured by a rise in wholesale prices was 11.44%.
In June 2006, inflation was 5.21%. And the rupee was trading at Rs46.06 to the dollar. The currency would go on a twisting ride that would see it touch Rs39 to the greenback in 2007 before threatening to touch Rs50 in recent weeks. The rupee has lost more than 19% this year, the most since 1991 when an acute balance-of-payments crisis forced the nation to pawn its gold with the International Monetary Fund to pay for imports.
And the country’s industrial growth has slid from 9.6% in June 2006 to 4.9% now.
In 2006, not too many people in India were familiar with the term subprime mortgage, or housing loans extended to people with poor credit history that were bundled into complex securities and sold, and which eventually resulted in the collapse of several US investment banks and the ongoing credit crisis across the world.
But, while politicians and bulls caught flatfooted would like to point to the US, not all of India’s ailments can be blamed on the US-led markets meltdown alone.
For instance, the country’s fiscal deficit now is Rs116,890 crore sharply above the June 2006 level of Rs77,740 crore.
Meanwhile, key economic reforms, many requiring parliamentary approval, have languished as the ruling United Progressive Alliance government lurched from one political crisis to another, the latest being a trust vote that it won on 22 July for the India-US nuclear deal.
Now, with five states going to the polls in the next two months and Lok Sabha elections scheduled to happen sometime in the first half of 2009, analysts agree that the next few months are unlikely to see a change in pace of policy making.
Despite inflation being where it is—and higher in recent months—some economists blame the Reserve Bank of India’s (RBI) tight monetary policy. As inflation soared on the back of growth and a global boom in commodity markets with the consequent increase in prices, the central bank had, until now, sought to control it.
Source
India’s benchmark stock index, the Bombay Stock Exchange’s Sensex, fell below 10,000 Friday, a level it hasn’t seen since 20 June 2006, finally catching up to macro-economic indicators that point to a rather stark conclusion: the country, and by extension, its people, are worse off now than they were 28 months ago.
The same 28 months that saw the Sensex cross the 21,000 mark had also witnessed other dramatic changes in factors affecting India’s economy and its standing as an investment for foreign companies and investors.
The prevailing sentiment in June 2006 was greed. In October 2008 it is fear supported in part by worsening economic data.
The Sensex closed at 9,975.35 on Friday. The rupee at Rs48.89. And, on Thursday, the government announced that inflation, as measured by a rise in wholesale prices was 11.44%.
In June 2006, inflation was 5.21%. And the rupee was trading at Rs46.06 to the dollar. The currency would go on a twisting ride that would see it touch Rs39 to the greenback in 2007 before threatening to touch Rs50 in recent weeks. The rupee has lost more than 19% this year, the most since 1991 when an acute balance-of-payments crisis forced the nation to pawn its gold with the International Monetary Fund to pay for imports.
And the country’s industrial growth has slid from 9.6% in June 2006 to 4.9% now.
In 2006, not too many people in India were familiar with the term subprime mortgage, or housing loans extended to people with poor credit history that were bundled into complex securities and sold, and which eventually resulted in the collapse of several US investment banks and the ongoing credit crisis across the world.
But, while politicians and bulls caught flatfooted would like to point to the US, not all of India’s ailments can be blamed on the US-led markets meltdown alone.
For instance, the country’s fiscal deficit now is Rs116,890 crore sharply above the June 2006 level of Rs77,740 crore.
Meanwhile, key economic reforms, many requiring parliamentary approval, have languished as the ruling United Progressive Alliance government lurched from one political crisis to another, the latest being a trust vote that it won on 22 July for the India-US nuclear deal.
Now, with five states going to the polls in the next two months and Lok Sabha elections scheduled to happen sometime in the first half of 2009, analysts agree that the next few months are unlikely to see a change in pace of policy making.
Despite inflation being where it is—and higher in recent months—some economists blame the Reserve Bank of India’s (RBI) tight monetary policy. As inflation soared on the back of growth and a global boom in commodity markets with the consequent increase in prices, the central bank had, until now, sought to control it.
Source
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