Friday, October 31, 2008

New U.S. Nuclear Trade With India: Liability Of The Provider

The U.S. had barred American companies from selling nuclear reactors, fuel, services and technology to India after India's atomic bomb test in 1974. Congress passed legislation lifting that ban earlier this month. Thereafter there has been a rally between U.S based General Electric Co. (GE), Paris based Areva SA, and Russia's Rosatom Corp. to clench the deal to sell nuclear-energy supplies to India.

The question is should the UPA government ratify that suppliers of nuclear plants and technology be granted a legal safeguard? India has a very bad experience already with a disaster caused by the Union Carbide factory in Bhopal in 1984, which had claimed 3,800 lives. Thus, it's essential that there be some kind of liability regime in place. It is agreed that this form of liability is extraordinary because there's no private market to purchase insurance against a nuclear incident. Yet, any agreement for the provision of nuclear reactors from any country, including the United States, has to carry with it the most important aspect -- the liability of the provider. 

The liability treaty is known as the Convention on Supplementary Compensation for Nuclear Damage. It makes plant operators, usually a utility, responsible for damages from any accident and shields suppliers from liability. Operators must set aside about $450 million for compensation in case of damage, and governments that sign the treaty would cover additional claims.

To my opinion there should be some sovreign immunity cover on the supplier through partial or full control by governments. In absence of it, we may probably have to recount the story of Bhopal disaster in the event of a nuclear accident.

Wednesday, October 29, 2008

FINANCIAL STRESS: A SYMPTOM OR A CAUSE

Greg Mandel, the chief economist for BusinessWeek has raised a question "Is the market and economic turmoil nothing more than a crisis of confidence?" His question is in response to what has been told by Ben Bernanke to the Economic Club of New York on Oct. 15:
"At the root of the problem is a loss of confidence by investors and the public in the strength of key financial institutions and markets."

The Bernanke-Paulson paradigm is based on the rationale that the financial turbulence will cease as the confidence of the investors are restored, and they start putting money back into the stock markets and companies around the world. Here Mandel once again challenges the view. He asks "what if the Bernanke-Paulson view is wrong? What if financial stress is a symptom, not a cause?"

It is highly likely that over the years people have realized that the way cross-border technological transfer, foreign trade and financial integration have taken place cannot be maintained over a longer period of time. The U.S transferred technology and business know-how to other low-wage emerging economies like India and China. The goods and services produced on a massive scale in these emerging economies were moved to the U.S assuming that there will be perpetual consumption demand. And, the financial flow was from the rest of the world to the U.S to finance their trade deficit.

This is good till such time your consumption demand is backed by your earning potential. You cannot pay back your debt with falling income. By BusinessWeek's calculations, in the U.S, real weekly earnings for college grads without an advanced degree have dropped every year since 2002.

Thus the panacea to the current crisis is not just restoration of investors' confidence but, developing innovative new products and services that the U.S can produce and sell in the global markets. It's high time for the U.S policymakers to get back to action to reduce the external borrowings the country has to do, and help create a sustainable global economy.

Tuesday, October 28, 2008

U.S. Consumer Confidence Plunges To Record Low In October

Wounded by the financial crisis, U.S. consumer confidence plunged in October, reaching an all-time low, the Conference Board reported Tuesday. The October consumer confidence index fell to 38 from an upwardly revised September reading of 61.4. Economists had expected an October reading of 52. Expectations turned "significantly more pessimistic," with the percentage of consumers expecting business conditions to worsen over the next six months rising to 36.6% from 21%, and those expecting fewer jobs rising to 41.5% from 26.9%.

Refer: http://www.marketwatch.com

Monday, October 27, 2008

With The Fall In Oil Prices, The Gulf Economies Now Appear Vulnerable


According to few oil analysts the Gulf countries are not immune to the overall problems in financial system. If they get below $60 a barrel, some of these countries will suffer. This is evident to an extent when the benchmark indexes in Qatar and Oman fell more than 8 percent Sunday. Kuwait stocks fell 4.4 percent and Saudi Arabia's main index, which fell 8.7 percent Saturday, fell an additional 1.7 percent Sunday.

Stocks in the Gulf region are off about 40 percent so far this year, in line with the decline in the Standard & Poor's 500-stock index on Wall Street and the 45 percent decline in the Dow Jones Euro Stoxx 600 index.

On Saturday, finance ministers from the Gulf Cooperation Council and central bankers met in Riyadh, the Saudi capital, to discuss a more coordinated response to the crisis. In their communiqué, officials "underlined their confidence in the stability of the monetary system in their countries," and said their economies should continue to grow.

But they also expressed concern that the downturn in the world economy would hit home. "We should all work to avoid the negative effects and reduce their impact on our economies by coordinating policies and measures," the Saudi finance minister, Ibrahim al-Assaf, told the Saudi Press Agency. In addition to Saudi Arabia, the Gulf Cooperation Council includes Bahrain, Qatar, Kuwait, Oman and United Arab Emirates.

Globally, banks have posted losses and write-downs totaling $681 billion since the start of the credit crisis, according to Bloomberg News. But so far the damage has been limited in the Middle East. Any big ratcheting up of losses in the region could require governments to bail out their own lenders and dash hopes that sovereign wealth funds from the region would be able to help rescue troubled institutions in the West. Gulf Bank's chief executive, Louis Myers, said the loss would have "no major effects on the soundness of the bank's financial position, and will not affect its ability to continue business."

KPMG International, the accounting firm, warned last week that financial fraud in the region could run into the billions of dollars a year. Colin Lobo, a KPMG partner said the financial crisis was creating an environment "where the risk of fraud will increase as businesses come under pressure to show results. Likewise, individuals will also be tempted where costs are rising and income levels are flat."

Sunday, October 26, 2008

Increasing Concern In Gibraltar About The Financial Crisis

An increasing number of people in Gibraltar are expressing concern about bank deposits in the wake of the unending world financial crisis. People are in fact worried about losing their money or having it slashed, and are resorting to withdrawing deposits and opening accounts elsewhere. This could lead to a financial crisis of Gibraltar's own making, and you cannot blame the public given the lack of information and guidance that reigns supreme.

All that people hear is what is being said elsewhere. They watch satellite television channels and hear that the crisis is not going away. They read UK papers and there in front of them are sad stories and how people are being affected. While elsewhere meetings are taking place and information is forthcoming, in Gibraltar nothing is being said.

The public, understandably, in increasingly more and more concerned - and prepared to take action on what they hear about in other places. They ask: Why are deposits in Gibraltar guaranteed up to £18,000, when it is 40,000 euros in the EU, and in the UK they have been increased to £50,000? There is a case for a major public relations exercise to explain the situation and how Gibraltar is affected. The sooner explanations are given the better for the state of the financial situation in Gibraltar itself.

Saturday, October 25, 2008

India To Ride The Crisis ...

The World Bank report on "Global Financial Crisis: Implications for South Asia" released on Thursday shows that even as India is relatively more exposed to the contagion effects of global financial markets, risks associated with it are countered by a fundamentally strong macro economy including prudent foreign debt management, high savings rate, solid financial sector health, and a pro-active monetary policy management. These steps will allow India to ride the crisis without destabilizing the financial sector.

Further, the report indicated that the main effects of the global financial crisis will be to reduce the availability of funds leading to higher interest rates and lower public and private investment that will hurt growth.

As far as India is concerned, the report said the current account widened sharply from a surplus of more than 2% of GDP in 2004 to a deficit of over 3% in 2008. Moreover, the report indicates that India had made good progress in reducing fiscal deficit between 2003 and 2007.

Thursday, October 23, 2008

Is It Time To Rejoice For Zimbabwe?

The hyperinflationary situation in the Zimbabwean economy is known to most of us. The "gross economic mismanagement" by the Zimbabwean government has led to the collapse of the economy. Inflation is officially running at an annual pace of 231 million percent, but some experts put it more at about 20 trillion percent.

Given this dilapidated situation and in the face of the world’s biggest capital markets going for a toss, the Zimbabwean stock market has been seeing record gains as citizens turn to equities in a desperate attempt to protect their money from the country's hyperinflation. The benchmark Industrial Index soared 257 percent on Tuesday up from a previous one day record of 241 percent on Monday with some companies seeing share prices increase by up to 3,500 percent.


Now the question is whether it is time to rejoice or not. To my opinion these figures do not substantiate any sustainable growth - they are just another representation of Zimbabwe's collapsing economy and are almost meaningless in real terms. The ZSE has managed to survive despite the tough environment probably because of Zimbabwe's isolation from the international world — and therefore protection from the financial turmoil – somewhat similar to what the Indian stock markets looked like.


The unofficial exchange rate of Zimbabwean dollars to U.S $ rose from 30 million/$ to 100 million/$. This is probably happening because of shortage of cash and people are resorting to equities trying to hedge against inflation. Market performance was also being driven by strong, cheap assets which are offering returns that were more than matching inflation. The market was largely overvalued in Zimbabwean dollar terms but undervalued in U.S. dollars. The market value of the ZSE being about $2.5 billion compared to South Africa's JSE, which is worth about $460 billion. That evidently tells us there is nothing to be too much optimistic, till such time there is political instability.

Tuesday, October 21, 2008

Macroprudential Analysis

A method of economic analysis that evaluates the health, soundness and vulnerabilities of a financial system. Macroprudential analysis looks at the health of the underlying financial institutions in the system and performs stress tests and scenario analysis to help determine the system's sensitivity to economic shocks. Macroeconomic and market data are also reviewed to determine the health of the current system. The analysis also focuses on qualitative data related to financial institutions' frameworks and the regulatory environment to get an additional sense of the strength and vulnerabilities in the system.

When looking at the health of the underlying financial institutions in the system, macroprudential analysis uses indicators that provide data on the health of these institutions as a whole including capital adequacy, asset quality, management performance, profitability, liquidity and sensitivity to systematic risks. Macroeconomic data used includes gross domestic product (GDP) growth rates, inflation, interest rates, balance of payments, exchange rates, asset prices and the correlation of markets within the system. Finally, macroprudential analysis looks at key components of the financial markets, including prevailing credit ratings and the yields and market prices of financial instruments. Scenario analysis and stress tests are major component of this analysis. For example, the analysis may look at how the system would cope with a steadily declining currency value and its impact on GDP, interest rates and underlying institution profitability.

Monday, October 20, 2008

FIIs Selling Heavily Amid The Index Rising

Foreign institutional investors sold off equities worth Rs 816.79 crore, amid the barometer index gaining over 200 points on Monday.

FIIs invested in shares worth Rs 1,934.53 crore and shed stocks valued Rs 2,751.32 crore, resulting in a net sale of Rs 816.79 crore as per provisional data available on the BSE.

According to information available on SEBI website, FIIs shed of equities worth Rs 215.10 crore on Friday. However, domestic institutional investors show confidence in the Indian market and offloaded stocks worth Rs 216.43 crore on the day's trade.

Among other categories, brokers invested in shares valued Rs 98.96 crore on behalf of their clients and retail investors. Proprietors and non-resident Indian entities purchased equities worth Rs 53.33 crore and 5.88 crore respectively. The Bombay Stock Exchange 30-share index settled at 10,223.09 points, up 247.74 points or 2.48 per cent.

Bubble Economy

Bubble Economy is an economy in which trade takes place in large volumes with a discrepancy between the price and the intrinsic value of the product. The intrinsic value reflects the fair value, which takes into account the hypothetical calculation of the risks and future returns. The prices in economic bubble waver easily and cannot be calculated only in terms of demand and supply. The economic bubble is normally followed by a period of deterioration of prices. This crashing phenomenon is known as bubble burst or crash. The boom and the burst period in bubble economy are considered to be a positive feedback mechanism.

Bubble economy can lead to disastrous consequence as it occurred in the 1930s in the form of Great Depression and during the 1990s in Japan. The condition misallocates resources. The period of crash following this condition adds to the devastation. It is seen that this economic condition has far fetched effects. This phenomenon also casts a negative impact on the buying capability of the richer class. They spend more for the products that might be a trifle. The housing market in US, UK, Spain and Australia is an example of this kind of market. The bursting of the bubble aggravates economic slowdown. The occurrence of this kind of phenomenon in the stock market is known as stock market bubble, which is usually difficult to differentiate from an ordinary bull market.

The reasons behind the occurrence of such a phenomenon can be various according to the experts. The first one is the greater fool’s theory. According to which a buyer buys a product at a higher rate than its actual worth and waits to sell it off to some other person at an even higher rate. Another school of experts believe that it occurs when the number of potential buyers increase. In an economic condition where people have lots of disposable money this type of situation can occur. However, other experts observe that this situation may arise due to the avarice and irrationality of bullish investors. Therefore it can be deduced that there is no unanimity in the observations of experts regarding the cause of bubble economy. But it is a common belief that all assets have a fundamental value and however bubble takes place the value of those assets again return to that value.

Friday, October 17, 2008

No Matter What They Tell Us ...

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

Thursday, October 16, 2008

India; Rank: 120

India has the world's fourth largest gross domestic product at $4.726 trillion. India's per capita income is $977. Indian economy is among the fastest growing in the world and the country also has the world's second largest labour force. However, the ongoing financial sector crisis in the United States and its repercussions on developed markets worldwide result in lower capital inflows into India, it is feared. And this in turn is expected to slow down investment growth in the months ahead.

With the Indian economy exhibiting distinctive signs of slowdown, Indian economists predict a real growth rate of 7 per cent for the current financial year. The Doing Business Report said it takes 30 days to set up a business in India, 73 in Bangladesh and 38 in Sri Lanka. Interestingly, the report added that an entrepreneur can start a business in 9 days in Afghanistan and Maldives, and in 24 days in Pakistan.

Monday, October 13, 2008

Krugman: The New Nobel Laureate In Economics

Princeton University Professor Paul Krugman, known as much for his criticism of George W. Bush's policies as for his academic work, won the Nobel Prize in economics for his theories on world trade. The Princeton economist's academic work analyzed how world trade came to be dominated by countries that both import and export similar products -- automobiles, for example.

In 1991, Krugman was awarded the John Bates Clark Medal by the American Economic Association, which gives the prize to the best economist under the age of 40. Krugman was born in Long Island and studied economics at Yale University. He obtained a Ph.D. from the Massachusetts Institute of Technology in 1977 before joining Princeton University. From 1982 to 1983 he served on the White House Council of Economic Advisers, during the presidency of Ronald Reagan.

Alfred Nobel, the Swede who invented dynamite, in his will in 1896 established awards for achievements in physics, chemistry, medicine, peace and literature. The economics prize was set up by Sweden's central bank in 1968. The prize consists of 10 million Swedish kronor ($1.41 million), a gold medal and a diploma.

Sunday, October 12, 2008

Just Don't Borrow Money To Buy Your Piece

Warren Buffett's Reassuring Words On the Future

As the stock market's wild moves downward have average investor worried about their financial futures & looking for leadership, it's important to keep Warren Buffett's reassuring words about the long-run in mind. Here's what he said live on CNBC just a few weeks ago: "You know, five years from now, ten years from now, we'll look back on this period and we'll see that you could have made some extraordinary (stock market) buys. That doesn't mean it won't get more extraordinary a week or a month from now. I have no idea what the stock market is going to do next month or six months from now. I do know that the American economy, over a period of time, will do very well, and people who own a piece of it will do well." Just don't borrow money to buy your piece.

Warren Buffett's Three Rules for Investing In a Crisis:

1. "Cash combined with courage in a crisis is priceless"

2. "Dont invest in things you don't understand"

3. "Don't try to catch a falling knife until you have a handle on the risk"

Saturday, October 11, 2008

India: Its Growth Dynamics

Dismissing fears of global financial contagion impacting India, the International Monetary Fund has said that the country's economy will continue to perform well. According to Oliver Blanchard, Economic Counselor and Director of International Monetary Fund (IMF) Research Department it seems that overall, the Indian economy is going to continue to perform well.

According to the projections made by the World Economic Outlook (WEO) released recently by the IMF, India is likely to register a Gross Domestic Product (GDP) growth of 7.9 per cent in 2008-09, which may slip to 6.9 per cent in 2009-10. It is projected that the growth in India will come down from eight per cent in 2008 to seven per cent in 2009. But seven per cent is still a strong rate of growth as per IMF officials. A likely seven per cent growth rate at a time when the world economy is on a downhill path, would reflect India's internal growth dynamics.

Giving reasons for relatively mild impact on India of the ongoing financial turmoil, Blanchard said, "India is still largely a closed economy, has strong internal growth dynamics, from rapid productive growth, from its process of integration into the global economy that is still continuing".

India has registered a growth of nine per cent during 2007-08 and according to Prime Minister Manmohan Singh it is likely to register a growth of 7.5-8 per cent during the current financial year.

Thursday, October 9, 2008

Do India Still Expect To Emerge Unscathed?

India's corporate optimism has sunk on worries about the global economy and weakening demand, according to a new survey on Monday, as the stock market and rupee fell to fresh lows. Some 57 percent of the 348 firms in the cross-sector survey reported Asia's third-largest economy had grown "moderately to substantially worse" in the first quarter of the financial year. In the same April-June period last year, just 12 percent believed the business climate had deteriorated, said the survey by the Federation of Indian Chambers of Commerce and Industry (FICCI). The findings came days ahead of the start of India's quarterly reporting season and as the stock market fell to a two-year-low amid concerns about the world credit crisis while the rupee hit a five-year low against the dollar.
The BSE benchmark 30-share Sensex index tumbled 469.65 points or 3.75 percent on Monday to hit an intraday low of 12,056.67 -- a level last seen in October 2006 -- as risk-adverse investors continued to pull out funds. The outward flow of investment pushed the rupee down to 47.35 to the dollar, its weakest level since April 2003. As of Friday, Indian shares had lost more than 38 percent so far this year on overseas fund outflows of 9.17 billion dollars. During the same period last year, overseas funds bought 13.62 billion dollars' worth of Indian stocks.

More than 50 percent of those companies surveyed forecast India's economy would remain the same or worsen over the next two quarters. The global financial crisis along with the high cost of credit, reduced availability of funds and weak demand have created added hardship for the Indian corporates in a globalised market.

Earlier, Indian policymakers insisted it would largely escape fallout from the US-led financial turmoil thanks to its still mainly insulated economy. But lately, policymakers have changed their tune, with the government's Economic Advisory Council warning no country can "expect to emerge unscathed." Interest rates at seven-year peaks aimed at wrestling down double-digit domestic inflation have hit borrowing costs, weakening demand and corporate expansion.

Friday, October 3, 2008

What The New Bailout Bill Won't Fix

If Monday’s rejection of the president’s bailout bill means one thing, this is it: You must take action to protect yourself from the next 777-point collapse because it’s abundantly clear that Congress won’t. Today’s 300-point decline that comes on the back of the Senate’s new bill proves what I mean.

Congress’s bungling of the bailout bill out has me shaking in my boots. But not because of another impending disaster. I’m shaking because the no vote and today’s sell-off isn’t the end of the line for America—it’s actually the beginning of a better deal for taxpayers and investors.

Hard to believe? You bet. But not when you see what will happen when a new and improved bailout bill passes. As you’ll see…

The market will reverse its 777-point decline as the U.S. financial markets—and the whole world—sighs a breath of relief. Just look at how the market jumped 450-points higher on Tuesday hopes a new improved plan is in the works!

Mark my words—the same thing will happen again Monday when Congress votes to approve compromise legislation on Friday! The chain reaction will result in more stable and responsible financial .

What’s more, the strong companies will get stronger. You needn’t take my word. Just look at Bank of America’s takeover of Merrill Lynch, JP Morgan’s takeover of Washington Mutual and Citibank’s take over of Wachovia, and you’ll see what’s headed your way.

MOST IMPORTANT: Cash will be king on Wall Street again as banks no longer pass out credit like pancakes at a fireman’s picnic. Despite what the Feds want you to believe, the NEW and IMPROVED bailout bill that’s ultimately passed will not only make credit tougher for individuals to get, but also tougher for businesses, as well.

Wednesday, October 1, 2008

Now We Need Him More Than Ever Before

Mohandas Karamchand Gandhi (aka Mahatma Gandhi) is probably the rarest among all those personalities who is loved the most as well as criticized the most. Though he virtually enjoyed a unchallenged position during India's freedom struggle, his economic formulations failed to impress us - even his closest confidants (J.L Nehru & J.P Narayan).

Gandhiji felt that the key to the country's progress lay in the strengthening of the decentralised, self-sufficient village economies. Fundamentally Gandhi opposed machinery because he thought it displaced labour and it concentrated production and distribution in the hands of a few. This is an old question in classical political economy with which Ricardo grappled at length.


The "Gandhian Economics" enlightens us as to how development choices should be made keeping in mind the poorest and the weakest and further recommends that while the basic needs of all people should be met, there should also be consciousness regarding placing a limit on consumption. Probably this was the principle that even "Buddha" preached thousands of years ago.


We more often confuse Economic Index with Happiness Index. One may be poor yet remain always happy. Contrarily, a rich man may not necessarily be happy. Those who view and evaluate "Gandhian Economics" from materialistic level may not get impressed with its philosophy but the kind of real challenges a developing country like India faces, it is only Gandhian responses which can help us out. We should not continue to make the mistake of falling into trap of IMF/World Bank loans and MNCs Foreign Investments and live in a virtual world but instead adopt "Gandhian Economics" and live in real world.

Value at Risk

How do you weigh up the risks when you make an investment? In the financial world, the measure used to judge the pros and cons of a financial decision is called the "value at risk" (VaR). Rather obviously, it is only as reliable as the factors you plug into it, but this is often forgotten.

VaR summarises the expected maximum loss from a financial position during a given time and to a given level of confidence. For example, a risk manager who says that his position has a daily VaR of $20 million to a 99 per cent confidence level means that he expects the losses from the position to be higher than $20 million on no more than 1 in 100 trading days. This is hugely valuable to banking because it allows a great variety of risks to be described in comparable terms.

However, as this measure has come to be applied to more complicated financial instruments it has started to break down. What's more, the methods by which the VaR number is calculated - and their relative merits - are often ignored.

A number can be created using a variety of techniques, from historical time series to complex "Monte Carlo" mathematical modelling. The choice of methodology, underlying statistical data, and the modeller's implementation skills are all extremely important in determining whether the resulting VaR numbers are useful or misleading.