Monday, March 30, 2009
Two forces that until recently turbo-charged US consumer spending—growing household debt and a falling savings rate—have gone into reverse. In late 2008, as households started reducing their indebtedness and saving more, consumption tumbled.
New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers have accounted for more than three-quarters of US GDP growth since 2000 and for more than one-third of global growth in private consumption since 1990. These trends were fueled by a surge in household debt, particularly after 2000 (Exhibit 1), and a decline in the personal savings rate—to a low of –0.7 percent, in 2005. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
New research from the McKinsey Global Institute shows that the economic impact of further US consumer deleveraging will depend on income growth. Without it, each percentage point increase in the savings rate would reduce spending by more than $100 billion—a serious drag on any recovery. Relatively healthy income growth, on the other hand, would help households reduce their debt burden without trimming consumption as much.
The significance of any fall in consumption could be profound. US consumers have accounted for more than three-quarters of US GDP growth since 2000 and for more than one-third of global growth in private consumption since 1990. These trends were fueled by a surge in household debt, particularly after 2000 (Exhibit 1), and a decline in the personal savings rate—to a low of –0.7 percent, in 2005. From 2000 to 2007, US household debt grew as much, relative to income, as it had during the previous 25 years.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
A Chinese view of governance and the financial crisis: An interview with ICBC's chairman
0 comments Posted by PD at 9:24 PMRegulators struggling to fix the world’s troubled financial institutions may take heart from the experience of China’s large state-owned banks. In the late 1990s, Chinese state lenders were all but insolvent, with nonperforming loan ratios at many banks exceeding 50 percent. A decade later, China’s state banks have found their footing—and have managed to keep it amid a global financial crisis that has their European and US counterparts reeling. The bad-loan ratio has been reduced, and this year China’s state banks expect solid profits and continued rapid growth—despite the global downturn. What’s more, top bank executives express confidence in their capacity to heed government instructions to boost lending while effectively controlling credit risk.
Industrial and Commercial Bank of China (ICBC) is generally regarded as the strongest of China’s state-owned bank giants. It is also the largest bank by market capitalization and total profits—both in China and the world—with total assets of more than $1.4 trillion. ICBC chairman Jiang Jianqing met recently with McKinsey’s Dominic Barton, Yi Wang, and Mei Ye to share his thoughts on corporate governance, risk management, and the origins of the financial crisis.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Industrial and Commercial Bank of China (ICBC) is generally regarded as the strongest of China’s state-owned bank giants. It is also the largest bank by market capitalization and total profits—both in China and the world—with total assets of more than $1.4 trillion. ICBC chairman Jiang Jianqing met recently with McKinsey’s Dominic Barton, Yi Wang, and Mei Ye to share his thoughts on corporate governance, risk management, and the origins of the financial crisis.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Prospects for a global deal on climate change: Three European views
0 comments Posted by PD at 9:01 PMWill governments negotiate an agreement on reducing carbon emissions at the December 2009 UN Climate Change Conference?
Economists Nicholas Stern and Michael Grubb, along with European Commissioner Janez Potočnik, discuss their views on prospects for a global climate deal at the United Nations Climate Change Conference, to be held in Copenhagen in December 2009. These interviews were conducted by McKinsey’s Matt Hirschland in Brussels on January 26, 2009. Watch the video, or read the transcript HERE. You may need to register at the McKinsey website. Its Free.
For the foreseeable future, the global financial-services sector will be wrestling with the grim realities of credit losses, deleveraging, and challenges to traditional business models. With dramatic industry restructuring already underway and a clear need for players to concentrate on the here and now, it would be easy to lose sight of a nascent but significant long-term opportunity: facilitating carbon trading.
By placing a value on greenhouse gas emissions, regulators have created a new asset class—carbon allowances. The European Union, for instance, issues allowances to companies in the industrial and energy sectors, stipulating that companies can emit capped levels of carbon emissions during the year. Enterprises that overshoot their allowances can buy supplementary ones from companies that have a surplus. China is discussing plans for a similar scheme, and the United States may introduce one soon as well.
Many banks, including Barclays, Merrill Lynch, and Deutsche Bank, already profit from trade in this new asset class, which had a market value of about €65 billion in 2007. By participating in those transactions, banks earned around €500 million in revenues last year. Trading volume could grow to €2 trillion by 2020—more than double the size of the global commodities derivatives market...
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
By placing a value on greenhouse gas emissions, regulators have created a new asset class—carbon allowances. The European Union, for instance, issues allowances to companies in the industrial and energy sectors, stipulating that companies can emit capped levels of carbon emissions during the year. Enterprises that overshoot their allowances can buy supplementary ones from companies that have a surplus. China is discussing plans for a similar scheme, and the United States may introduce one soon as well.
Many banks, including Barclays, Merrill Lynch, and Deutsche Bank, already profit from trade in this new asset class, which had a market value of about €65 billion in 2007. By participating in those transactions, banks earned around €500 million in revenues last year. Trading volume could grow to €2 trillion by 2020—more than double the size of the global commodities derivatives market...
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Climate change has businesses, governments, and nonprofits examining how to stabilize atmospheric greenhouse gases while still maintaining economic growth. In plotting the course to a low-carbon economy, they will weigh a number of methods for addressing the various risks and opportunities. Carbon capture and storage (CCS)—or more accurately, the sequestration of carbon dioxide—is an important topic in the emerging field of climate change. It represents one possible approach for stabilizing atmospheric greenhouse gases—although there are many economic, technical, and legal barriers to its implementation. As background for informed discussion, McKinsey offer an interactive depiction of the technologies involved in CCS.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Read the full article HERE. You may need to register at the McKinsey website. Its Free.
Sunday, March 29, 2009
The recent bailout of Romania by the International Monetary Fund puts the spotlight back on the East European block of countries and what it means for the Western European banking sector. If evidence is anything to go by, things are turning for the worse. In fact, if a block of countries could be termed 'sub-prime', Eastern Europe seems to qualify as the countries seem to have been battered and bruised big time by the ongoing global financial turmoil.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
With the financial contagion going beyond the developed West, few countries seem to be as hard hit as these are. These are the countries that had earlier benefited tremendously from the cheap global credit which helped them finance the consumption and investment boom.
They ratcheted up large external debts to fund their ambitious growth. And now they are feeling the pain. The freezing of money markets in the United States and Western Europe, followed by a sharp increase in credit risk subsequent to the Lehman Brothers bankruptcy, drove investors into a liquidity scramble.
In Eastern Europe, these events translated into capital repatriations, lower foreign investment and higher risk premiums. The slowdown in the developed economies and, finally, the onset of the recession in the second part of last year brought a fall in Eastern European exports, which further exacerbated the downfall.
This is amply evident from the fact that for most of these economies, current account balance has deteriorated like nobody's business over the last few years.
In fact, IMF data shows that, on an average, the current account deficit for this region more than doubled between 2003 and 2008.
Current account deficit as percentage of GDP
Consequently, the region's currencies also plummeted. Banks in Hungary and the Baltic states fueled consumer boom in recent years by lending heavily in foreign currency, most notably Euro and the Swiss Franc. Sometime, more than 50 per cent of a local bank's loan portfolio was in foreign currency.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Consumers were demanding loan in foreign currency simply because these carried lower interest rates. Things were fine as long as the currency remained stable or even appreciating. But a sharp depreciation in the values of the local currency over the past year has increased the loan burden substantially, leading to deeper recessions and the banks facing heavy loss. Not surprisingly these economies are skating downhill.
Hungary and Ukraine has already turned to the IMF for multi-billion-dollar bailouts, and Romania turned out to be third in the list as IMF said on Wednesday (March 25, 2009) that it would come to the rescue of Romania as part of a Euro 20 billion financing package to help it weather the financial crisis.
Next in line seem to be the Baltic countries which are suffering one of the most severe recessions of any region. Estonia and Latvia are expected to have seen their economy recording negative growth in 2009, while for Latvia the growth rate was down by nearly 60 per cent.
This is a frightening development indeed. As mentioned earlier, we are virtually staring at a group of countries that are looking increasingly like sub-prime.
Recently, Credit Suisse released a scorecard which is called Vulnerability Scorecard for countries. This scorecard ranks a number of countries around the world on factors usually taken into consideration when assessing the credit quality of sovereign debt. The same is produced below.
Country Vulnerability Scorecard
Country Vulnerability Scorecard
Not surprisingly Iceland is at the top. This country has become a poster boy of doom invited by reckless policies. But what is more important to note is that in the top 14 countries in the above lists, eight are from Eastern Europe. Fortunately for us Indians, we are in a much better position at 25.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
This brings to fore, the question of the likely implication of the deteriorating condition in Eastern Europe on the Western European financial sector.
Before we go into this, a brief recounting of history is in order. In Eastern Europe, banks were privatised during the 1990s and early 2000s. The preferred method of privatization was the sale of a majority stake in a local state-owned bank to a big foreign banking group, deemed capable of restructuring it and making it profitable.
Consequently, nowadays most banks in the region -- and especially in those countries that are now members of the European Union -- are owned by big Western Europe groups. The Eastern European subsidiaries of all of these banks, often among the largest in their home countries, form a significant share of their assets.
What also led to this scenario is the European regulation which has allowed European banks to take on much more leverage than their American counterparts.
In Europe, unlike in the United States, it is only risk-weighted assets which matter to the regulators, not the total leverage ratio. European banks can therefore apply a lot more leverage than their US counterparties, provided they load their balance sheets with higher rated assets.
This is what they have been doing. Problem is, what was AAA couple of years earlier is possibly a junk now. And, clearly that's a problem.
Data from Bank for International Settlements (BIS) puts things in perspective.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
And because of this huge exposure, the growing crisis in Eastern Europe is now proving critical to their financial health. Furthermore, a fall of any one of these banks due to losses on their operations in Eastern Europe will add a new threat to the stability of the European financial system.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
The next chart produced, identifies the Western European countries that have more exposure to East Europe.
Exposure of West European banks to East European Countries (As on Sept'08)
Source: BIS (Figures denote US dollars in millions)
Going by this, Austria is the country most at risk. It is followed by Germany and Italy. However, to understand the real problem, it is important to bring the size of the economy to focus which will give the extent of risk at relative level. Doing so brings about an interesting situation.
Exposure of Western European banks to Eastern Europe as percentage of GDP (2008)
Source: GDP data from IMF (2008 estimate), banking sector exposure data from BIS
Clearly, Austria is the country that is at maximum risk with exposure topping 60 per cent. Their top four exposures are in Czech Republic, Romania, Hungary and Slovakia. Of these, Romania and Hungary are already facing problems.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Banks of other Western European countries are at relatively less risk. However, at 20 per cent plus, Belgium and Sweden are still at high risk. Sweden, in particular, is at more risk because they have maximum exposure to Baltic countries which has been impacted the most by the recent turmoil.
To conclude, it turns out that Eastern Europe has now become the sub-prime borrower of Western Europe. As was the case with the US mortgage borrowers, both the public and private sector in Eastern European countries are highly leveraged while falling currencies and declining output mean lower income in the immediate future.
Because of the deepening recession in the United States and Western Europe, the Eastern European countries are moving quickly into negative growth rates as well. And with them comes the increased risk of default on debts. Seemingly, there is a long way to go before all the risk plays out in Europe.
Saturday, March 28, 2009
I found this great article from the Pepperdine University's website. This article lists the top 10 (Not in the order of importance) issues that may erode the economy of United States. Here they are:
- Government Expenditures and Deficits
- Social Security
- Concentration of Wealth
- Median Family Income
- The Savings Rate
- Consumption Binge
- No Retirement Funds
- High Family Debt
- Healthcare
- The Current Account Deficit
Very Good Explanations of Finance Basics Related to Current Crisis
0 comments Posted by PD at 2:40 PMHere are some of the good videos explaining the finance fundamentals and most of these explanations are related to the financial crisis that started in 2007.
Why "Fallout" for the financial crisis
Write-downs
Leveraging and de-leveraging
Toxic assets
Crisis explainer
Mark to market
Quantitative easing
Untangling credit default swaps (CDS)
Why "bad banks" might be a good thing
How credit cards became asset backed bonds
Over the counter over the top
Margin calls and the financial market's decline
A look inside hedge funds
Friday, March 27, 2009
This story almost certainly force us think that is the building more debt ridden society over last few decades a disaster in making for the future? May be or may be not. At least a columnist of Reuters, John Kemp, thinks that it is a disaster in making.
Here is the snapshot of the data the author talks about. Just look at the table below and draw your own conclusions or read the full story HERE.
Table: United States Public and Private Debt
Here is the snapshot of the data the author talks about. Just look at the table below and draw your own conclusions or read the full story HERE.
Table: United States Public and Private Debt
The global trade is declining. WTO estimates that the global trade will decline 9% this year against a 2% increase in 2008. It was even at a 6% increase 15 months ago. Is it because of protectionism that made the 1930s recession a great depression or is it because of falling demand. Thankfully it is because of falling demand.
Read the full article HERE
Thursday, March 26, 2009
UK's Story (March 25th 2009):
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
In a reminder of how bad things are across the globe, the U.K. failed to find enough buyers for $2.55 billion (1.75 billion pounds) in gilt-edge bonds, Bloomberg is reporting. This is debt that the U.K. is attempting to sell to raise money to help the country out of its recession. The snub marks the third time in the past 10 years Britain has been unable to complete a debt auction. This is bad news on its face, but it could be worse news going forward: Prime Minister Gordon Brown hopes to sell $214 billion worth of debt this year and an additional $215 billion next year. The Treasury was able to sell $2.4 billion worth of the 40-year securities, leaving some $100 million worth of debt unsold. The failed auction could be a bad sign for a number of nations that hope to sell debt to raise money to dig out of the recession. The United States plans to triple its debt sales this year to a record $2.5 trillion. Germany, by comparison, plans a far more modest $470 billion debt offering this year.
Ireland's Story (March 25th 2009):
Ireland's successful sale of €1bn in bonds, in its first auction since 2005, showed investor concern about the risk of default is overblown and the securities offer value, investment bank ING said yesterday. The National Treasury Management Agency (NTMA) sold the bonds to raise cash as the economic slump hoovers up tax revenue. Irish 10-year bonds rose after the auction, reducing the spread between the securities and German benchmark notes to the narrowest in three weeks. The cost of insuring against a government default also declined, credit-default swap prices showed. "This is an opportunity to buy," said Padhraic Garvey, head of investment-grade bond strategy at ING in Amsterdam. "Ireland's bond spread overshot and talk about the country potentially defaulting on its debt was just ridiculous and far-fetched." The three-year €300m bond was 3.8 times oversubscribed while the 10-year €700m was 2.7 times over, the NTMA said. "The healthy demand is really good news," said Rossa White, chief economist at Davy Stockbrokers. Moreover, spreads on the 2020 note have tightened by 30 basis points in the secondary market already, he added. Analysts added that the CDS went too far in February when worries about Ireland were at their highest, and it has now converged with the cash market. The spread between Irish and German 10-year debt narrowed 24 basis points yesterday to 249. The average spread during the past 10 years between Irish and German 10-year debt was 18 basis points, according to Bloomberg analysis. However, market watchers added that the key event in the Irish economic calender is the April 7 Budget. "If hard decisions are made on current Government spending, we could see a significant further tightening of Irish spreads vis-a-vis Germany," Mr White said. Although this was the first auction in some time, Ireland has already had several fund raisings via syndication whereby governments use banks to find buyers for the securities rather than offer the debt through auction. In January and February the NTMA raised €10bn in two bond sales via syndication. Other commentators were also cheered by the latest news. "Ireland chose a fantastic time to put their toes back in the water," said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking unit of Credit Agricole SA. "Risk appetite has improved and the spread is pulling in, suggesting the auction inspired a lot of confidence."
Analysis:
Clearly amidst the doom and gloom this is excellent news, without wanting to understate the serious challenges that lie ahead - they obviously see something we don't! But the markets seem to be suggesting that either Brown is complete nuts if the UK cannot raise 1.75bn at a gilt auction and he is hoping for 150bn of borrowing or Ireland is taking the pain quick and fast for their liking. Me thinks the latter is of utmost importance. Ireland is x4 over subscribed on it's debt raising! This is extremely good news. The markets are willing to lend to trusty Ireland in vast amounts. The borrowing plans of the UK look shaky and ridiculous now and the risk of default has suddenly shifted from Ireland onto UK. Mervin King, the head of the Bank of England, before this auction warned that not only where the public finances out of control but that a second stimulus plan was unaffordable. This means the UK, having failed to raise debt, is having to print that money right now...that means inflation is becoming a risk in a declining economy which in turn raises the horrid specter of hyper inflation should the BOE go too far. It is all a big game of chess. The UK has to take action should a second gilt raising exercise fail and dramatically cut down on spending like Ireland has done. Brown won't be able to keep his stimulus in full after this fiasco. Unlike Ireland which has received a huge boost - this was a pretty big warning shot for the UK. "Don't take the markets for granted".
Please share your views.
The plan announced this week by the US Treasury secretary Tim Geithner is designed to clear away a large load of so-called “toxic assets” clogging up America’s financial system. But what are these assets? And how will the plan work?
Financial Times provides a very good video explanation that even the beginners can understand.
Financial Times provides a very good video explanation that even the beginners can understand.
McKinsey mapped the decline and recovery of many sectors in past 4 recessions. According to the analysis, McKinsey says
Particularly in hard times, it’s crucial to make the right assumptions in strategic planning. Despite claims that the current recession is “unprecedented,” it seems to be following many of the same patterns the four previous ones did—patterns that may offer insights into the performance of sectors in the coming months and years. All four recessions, like the current one, began with falling sales and EBITA in the consumer discretionary sector and three with similar declines in IT. Consumer staples didn’t suffer significantly in the last three or health care in the last two. The energy sector was among the latest to be hit in three of the recessions, though it was among the latest to recover in all four of them. The exhibit shows the sequence of decline and recovery in these and other sectors.
Particularly in hard times, it’s crucial to make the right assumptions in strategic planning. Despite claims that the current recession is “unprecedented,” it seems to be following many of the same patterns the four previous ones did—patterns that may offer insights into the performance of sectors in the coming months and years. All four recessions, like the current one, began with falling sales and EBITA in the consumer discretionary sector and three with similar declines in IT. Consumer staples didn’t suffer significantly in the last three or health care in the last two. The energy sector was among the latest to be hit in three of the recessions, though it was among the latest to recover in all four of them. The exhibit shows the sequence of decline and recovery in these and other sectors.
Hans Rosling provides a eye opening presentation regarding the development of the world in past few decades and how this presentation changes our pre-conceived notions. The video is superior not only the by content but also by the way of presentation: a mix of wisdom and sense of humor. A great watch.
About Hans Rosling: As a doctor and researcher, Hans Rosling identified a new paralytic disease induced by hunger in rural Africa. Now the global health professor is looking at the bigger picture, increasing our understanding of social and economic development with the remarkable trend-revealing software he created.
To read more about him CLICK HERE
About Hans Rosling: As a doctor and researcher, Hans Rosling identified a new paralytic disease induced by hunger in rural Africa. Now the global health professor is looking at the bigger picture, increasing our understanding of social and economic development with the remarkable trend-revealing software he created.
To read more about him CLICK HERE
Wednesday, March 25, 2009
TUMBLING exchange rates, gaping current-account deficits, fearsome foreign-currency borrowings and nasty recessions: these sound like the ingredients of a distant third-world-debt crisis from the 1980s and 1990s. Yet in Europe the mess has been cooked up closer to home, in east European countries, many of them now members of the European Union. One consequence is that older EU countries will find themselves footing the bill for clearing it up.
Many west Europeans, faced with severe recession at home, will see this as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?
Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shriveled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.
Many west Europeans, faced with severe recession at home, will see this as outrageously unfair. The east Europeans have been on a binge fuelled by foreign investment, the desire for western living standards and the hope that most would soon be able to adopt Europe’s single currency, the euro. Critics argue, with some justice, that some east European countries were ill-prepared for EU membership; that they have botched or sidestepped reforms; and that they have wasted their borrowed billions on construction and consumption booms. Surely they should pay the price for their own folly?
Yet if a country such as Hungary or one of the Baltic three went under, west Europeans would be among the first to suffer (see article). Banks from Austria, Italy and Sweden, which have invested and lent heavily in eastern Europe, would see catastrophic losses if the value of their assets shriveled. The strain of default, combined with atavistic protectionist instincts coming to the fore all over Europe, could easily unravel the EU’s proudest achievement, its single market.
Indeed, collapse in the east would quickly raise questions about the future of the EU itself. It would destabilize the euro—for some euro members, such as Ireland and Greece, are not in much better shape than eastern Europe. And it would spell doom for any chance of further enlarging the EU, raising new doubts about the future prospects of the western Balkans, Turkey and several countries from the former Soviet Union.
Read the full article HERE
Before reading further just make a guess after glancing at the headline of this post.
According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".
Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.
The following table provides as precise an accounting of the crisis as the public record presently permits. After calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion! Now match this figure with the guess you made at the start of this post. Did it match? I am sure it did not; at least mine didn't.
According to the Bank for International Settlements, the notional value of over-the-counter derivatives worldwide reached a mind-boggling $684 trillion last summer. That's more than six times the scale they had reached by 2002 when Warren Buffett dubbed derivatives "financial weapons of mass destruction".
Perhaps the trillions pledged can plug the leaks from subprime mortgages and failed auto loans, but can we reasonably expect to keep a derivatives market afloat that is at least eight times the size of a contracting global economy? I don't know, but I sure hope Bernanke and Geithner do.
The following table provides as precise an accounting of the crisis as the public record presently permits. After calculations, the combined total of existing, announced, and potential outlays from the Federal Reserve and U.S. government agencies that are directly attributable to the financial crisis will breach $13 trillion! Now match this figure with the guess you made at the start of this post. Did it match? I am sure it did not; at least mine didn't.
*"Other loans" total from the Fed's statistical release as of March 18, 2009, which includes discount window lending to banks and brokerages, and the Asset-Backed Commercial Paper Money Market Liquidity Facility.
The adopted strategy of spending to bring United States out of this mess by propping up the system with loans and guarantees has now been etched into stone ... there is no turning back. To the contrary, experts fear the only path ahead implies still further commitments of public funds and woeful undermining of the U.S. dollar. Lets keep our fingers crossed and hope this plan doesn't go underwater otherwise not only US but whole world will sink along with this titanic ship called United States.
Tuesday, March 24, 2009
This is awesome. It costs only $350 even in the lab made with off the shelf components. Your hand, wall, any surface is a screen. It’s a digital prototype called “sixth sense” that is currently being evaluated by major companies like Microsoft, Google, Hewlett-Packard and Samsung. The brain behind this device is the 28-year-old Indian-born Pranav Mistry, a researcher at the Media Lab, Massachusetts Institute of Technology (MIT).
The “Sixth Sense” device (patented by MIT) comprises a pocket projector, mirror and web camera bundled in a wearable pendant-like mobile. The projector can turn anything into a touch screen. The web cam (and color-coded finger-gloves worn on the index finger and thumb) can recognize the movements of a user's hands, which enables gesture-commands.
Watch this youtube video below. Believe me, this is jaw dropping and worth watching:
The “Sixth Sense” device (patented by MIT) comprises a pocket projector, mirror and web camera bundled in a wearable pendant-like mobile. The projector can turn anything into a touch screen. The web cam (and color-coded finger-gloves worn on the index finger and thumb) can recognize the movements of a user's hands, which enables gesture-commands.
Watch this youtube video below. Believe me, this is jaw dropping and worth watching:
Will The G20 Summit in April 2009 Fail Just Like The One in 1933?
0 comments Posted by PD at 7:37 PM As delegates gather for the G20 summit in London on 2 April, it is worth looking to the last time London hosted a world economic summit. In June 1933, delegates from 66 countries gathered in London to try and agree plans to revive the world economy in the midst of the Great Depression. The author of this report from BBC argues that though the crisis this time is different but need of political will and the global nature of both recessions are same. If correct lessons are not drawn from the 1993 conference failure then it may happen again. The author also aomments that being the largest economy, US has to be have the political will to solve the world's problem rather than having a double agenda just like that of FDR. April 2nd is not far. Lets see what happens.
Read the full BBC article HERE
Read the full BBC article HERE
Did you know (At least I didn't know) that another not so well known financial crisis happened a century ago? In early 1906, the US banker Jacob Schiff told a group of colleagues that if the United States did not modernize its banking and currency systems, its economy would, in effect, fall off a cliff — that the country would “have such a panic ... as will make all previous panics look like child’s play.”
Yet the United Sates failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.
In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.
J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.
Sounds interesting? Read the full story HERE
Yet the United Sates failed to reform its financial institutions, and conditions deteriorated steadily over the next 20 months. There was a worldwide credit shortage. The American stock market crashed twice. The young Dow Jones industrial average lost half of its value.
In October 1907, when a panic started among trust companies in New York and terrified depositors lined up to get their money out, Schiff’s dire prediction seemed about to come true. The United States had no Federal Reserve, the Treasury secretary did not have much political authority, and the president, Theodore Roosevelt, was off shooting game in Louisiana.
J. Pierpont Morgan, a 70-year-old private banker, quietly took charge of the situation.
Sounds interesting? Read the full story HERE
China's central bank governor Zhou Xiaochuan has suggested that a new currency should be created in order to reduce the dependence on dollar. As most of the world trade is done in the Dollar, Euro and Yen, there is growing concern that world has become a hostage to these currencies. Mr. Zhou argues that most nations concentrate their assets in those reserve currencies(Show below), which exaggerates the size of flows and makes financial systems overall more volatile.
Moving to a reserve currency that belongs to no individual nation would make it easier for all nations to manage their economies better, he argued, because it would give the reserve-currency nations more freedom to shift monetary policy and exchange rates. It could also be the basis for a more equitable way of financing the IMF, Mr. Zhou added. China is among several nations under pressure to pony up extra cash to help the IMF.
Mr. Zhou's proposal is surely going to spark a debate in the coming G20 summit in London.
You can read the full article at Wall Street Journal HERE
Monday, March 23, 2009
OK it took me a long time to compile and to properly present this data. The data shows all the countries holding the US treasury securities as of Jan 2009. Showing the data not in a meaningful way would have defeated the purpose. So I am showing on three parameters.
1. By dollar value
2. By % change from Jan 2008
3. By % of nominal GDP(2008)
1. By dollar value
2. By % change from Jan 2008
3. By % of nominal GDP(2008)
The conclusions that I would draw from these three charts are
CHART1: The countries having largest foreign exchange reserves are buying the US treasury securities are the largest holders
CHART2: Countries whose economies are relatively smaller in GDP terms and are doing relatively OK in the current market don't mind holding more US treasury holders. China is an exception here.
CHART3: Countries that need more money at home are selling the US treasury securities and hence reduced their holdings since Jan 2008
Please do share what you conclude from the data and these charts.
Though I also looked at various government sources of many countries individually but this data has been complied primarily from www.ustreas.gov, wikipedia.org, www.cia.gov (the world factbook) and www.imf.org
CHART1: The countries having largest foreign exchange reserves are buying the US treasury securities are the largest holders
CHART2: Countries whose economies are relatively smaller in GDP terms and are doing relatively OK in the current market don't mind holding more US treasury holders. China is an exception here.
CHART3: Countries that need more money at home are selling the US treasury securities and hence reduced their holdings since Jan 2008
Please do share what you conclude from the data and these charts.
Though I also looked at various government sources of many countries individually but this data has been complied primarily from www.ustreas.gov, wikipedia.org, www.cia.gov (the world factbook) and www.imf.org
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