Thursday, October 7, 2010

Competitive Non Appreciation?

It has been two months since i last posted something on exchange rate stuff...but off late things are heating up across the Central Banks about related to currency.Almost all the developed economies are struggling to reduce the unemployment rate and trying hard to increase there GDP rate.

 They attribute much of current exchange rate stress is emergence of china and its willingness to peg Yuan to American dollar at a undervalued value. Which is giving unfair advantage to Chinese producers to export more out of china and making other countries suffer job loss and loss of export competitiveness 
Two years ago, the world economy was in the grip of an economic crisis on a scale not seen since the Great Depression.The United States and its partners in other leading economies, in an unprecedented feat of peacetime economic cooperation, joined forces to launch a powerful, dramatic response.    
Together, we put in place a powerful program of financial support – classic fiscal measures of tax cuts and investment, combined with monetary policy actions by central banks, and a variety of creative actions to stabilize our financial systems – to bring the global economy out of freefall and on a path to growth. 
We mobilized hundreds of billions of dollars in financial support for and through the international financial institutions for investments in emerging and developing economies.We committed to keep markets open to trade and investment, and together we honored that commitment in the face of strong political pressure.
We passed sweeping reforms of the U.S. financial system, and the world's central banks and supervisors reached agreement just two weeks ago on a very tough set of global standards for capital to limit leverage in the major global financial institutions. 
He is talking about Basel III norms which got finalized some time back and here is the link of my previous post to understanding-basel-iii-accord

These decisions required considerable trust and political resolve.  And they have been effective in restarting economic growth and stabilizing financial markets.  Global trade is now almost back to pre-crisis levels.
Look at the Baltic Dry index over which tracks the movement of ships in Sea which is pseudo indicator for economic activity or trade happening and clearly its not up to the levels of pre-crisis 
Each of our economies is stronger today than would otherwise have been possible, because of the effectiveness of this joint strategy. And the financial reforms now underway will substantially reduce the risk of damage from future financial crises.
Financial reforms which they made are just delaying the crisis and passing it on to future. Reforms in fact made money into pockets of rich and as long as Global imbalances are there we can expect another crisis any time from now :)

The Growth Challenge
What are the main challenges ahead?

The most important policy question we confront together is how to strengthen the pace of growth and repair, and how to do so in a way that provides the basis for a more balanced and therefore more sustainable global economic recovery.
I guess he is talking about the employment growth which is not happening in US can be seen in the latest ADP report  which says The decline in private employment in September confirms a pause in the economic recovery already evident in other data. 
And that is what is worrying economists across the globe as they think this is period is growth led recovery with no improvement in unemployment. Which is very dangerous and crisis may be back with a bang if this continues  
This is not a challenge that is best resolved by nations acting independently.  In the heat of the crisis, we all recognized that our actions would be more powerful if we acted together.  Even though the most dangerous part of the crisis is behind us, we are still in a place where we can achieve better overall growth outcomes if we make policy in a cooperative framework.

 a few suggestions on the policy challenges ahead in three areas: growth, exchange rate cooperation, and reform of the architecture of economic cooperation.

First, on economic growth.  The IMF forecasts the world economy will grow at a respectable annual rate of around four percent in 2011.  Growth is very strong in many of the major emerging economies.  In the major advanced economies, however, output and employment are still substantially below the pre-crisis levels, and the pace of recovery has been slower, with economic growth now running at a pace that is close to potential growth rates and not rapid enough to repair quickly the substantial economic damage remaining from the crisis.

Economic recoveries that follow financial crises are typically slower than those that follow other types of recessions.  This is because of the headwinds to growth that are generated by the necessary adjustments in asset prices and in reducing financial leverage.  As financial institutions rebuild their balance sheets and households reduce debt and raise savings, spending is slower to recover.  Firms, cautious after being burned by the financial panic, are less willing to invest and to hire because of uncertainty about future strength in demand for their products.  

The greatest risk to the world economy today is that the largest economies underachieve on growth.  We need to continue providing well-targeted support for the recovery in the near term even as we put in place plans to help ensure fiscal sustainability over the longer term.

And for the recovery to be sustainable, there must also be a change in the pattern of global growth.  For too long, many countries oriented their economies toward producing for export rather than consuming at home, counting on the United States to import many more of their goods and services than they bought of ours.
From here on he started talking indirectly about China and other developing countries 
The United States will do its part to achieve this adjustment.  Private savings have increased significantly, and, as the recovery strengthens, we will bring down our fiscal deficits to a sustainable level.

But as America saves more, countries overly reliant on exports to us for their own growth will need to change their policies, or else global growth will slow and all of us will be worse off.  Countries that chronically run large surpluses need to undertake policies that will boost their domestic demand.
I guess he is specifically talking about Chinese policy of keeping Yuan undervaluation and there by giving added advantage of Chinese exporters. How can too much export oriented markers like china ,japan increase domestic demand? I only knew of one thing which is lower taxes and there by keeping more money in public pocket and asking them to spend . Other than that anything else? no idea for now
That brings me to the second policy challenge: we believe it is very important to see more progress by the major emerging economies to more flexible, more market-oriented exchange rate systems.  This is particularly important for those countries whose currencies are significantly undervalued.
Like China which is pegging its yuan to dollar at a fixed rate from 2004 and here is the previous post related to it  basket-band-and-crawl-(BBC)
This is a problem because when large economies with undervalued exchange rates act to keep the currency from appreciating, that encourages other countries to do the same.
Yes looks like when China can do this why cant i do (JAPAN). Japan recently made jump into the bandwagon of group which is depreciating there currencies there by giving advantage to there export oriented companies. This is one kind of protectionist measures which are illegal according to WTO conventios

This sets off a damaging dynamic, described first by my former colleague Ted Truman, as "competitive non appreciation." Over time, more and more countries face stronger pressure to lean against the market forces pushing up the value of their currencies. The collective impact of this behavior risks either causing inflation and asset bubbles in emerging economies, or else depressing consumption growth and intensifying short-term distortions in favor of exports.

This is a multilateral problem.  It is unfair to countries that were already running more flexible regimes and let their currencies appreciate.  And it requires a cooperative approach to solve, because emerging economies individually will be less likely to move, unless they are confident other countries would move with them.
Japan acted on its own without a coordinated effort  into the currency market  for the first time in six years, buying dollars to weaken the surging yen  

This problem exposes once again the need for an effective multilateral mechanism to encourage economies running current account surpluses to abandon export-oriented policies, let their currencies appreciate, and strengthen domestic demand.  This is a necessary complement to the adjustments being undertaken by countries running current account deficits.  A cooperative re balancing of policy in this direction would be better for overall growth.

This issue was well-known to the group of economists who gathered in Bretton Woods, New Hampshire, to refashion the war-ravaged global financial system in 1944.  The Articles of Agreement of the IMF, drafted at that conference, contain a now-obscure paragraph calling on the Fund to issue reports on countries with "scarce currencies"--what today we would call countries running persistent surpluses--"setting forth the causes of the scarcity and containing recommendations designed to bring it to an end."  That clause now reads like a relic of a bygone monetary era.  But the problem it was drafted to address--the threat to global financial stability posed by persistent, large surpluses--is as salient today as it was then.

This brings me to a third issue on the international agenda, the reform of the architecture of economic cooperation.

The Framework, called the "Framework for Strong, Sustainable and Balanced Growth," was designed to create stronger incentives for rebalancing growth, as the world recovered from the crisis, with higher savings in countries like the United States, complemented by reforms to strengthen domestic demand in surplus countries like China, other emerging economies, Germany, and Japan.

We agreed to pursue these two paths in parallel.  Each involved a change in the rights and responsibilities of the major economies, both emerging and advanced.
We have moved aggressively to do our part to help bring the world out of crisis.  We are working very hard to repair our financial system, to fix what was broken, and to reduce the future risk of financial crises here at home.  We have seen a very significant increase in private savings by households.  Our external deficit has fallen sharply, and we are financing at home a much larger share of the fiscal deficits we inherited.

We still have a lot of challenges ahead of us to strengthen growth and to restore fiscal sustainability.  And we expect to work closely with Congress in the months ahead on how best to move forward.   
 Mr. Geithner said that “China will be less likely to move, to allow its currency to appreciate more rapidly, if it’s not confident that other countries will move with it.”
His warnings were echoed, in crucial respects, by the I.M.F., which released its latest World Economic Outlook on Wednesday.


Tuesday, September 21, 2010

Recap of a Bailout

A Bailout is act of providing capital to a entity that is in danger of failing or its act of saving it from failing and there by causing less damage to others with its contagion effect.

Now Question are:
Why will anyone be ready to bailout a entity if its failing ,How can it get back its capital back?.What if the entity needs more capital than the amount supplied to it?.What is the plan of entity to repay back the capital provided?.How much can be Trusted on this entity ?

Bailing out is easy but why should some one bailout after all the entity is mismanaged its money and came into this situation and many will argue that it should suffer for its misdeeds.Generally government bailouts happen with public money and most of the cases public will be angry with govt decision.

Bailouts generally encourage corporate irresponsibility and may be give a chance for them to act irrationally as they think that government is there in back of us and nothing is going to happen.
We can see that most of Big Banks in US got Bailed out for now..but if they repeat the same mistakes by there aggressive risk taking then govt will not be in a position to bailout.

Themes for Bailout: Wiki Link
# Central banks provide loans to help the system cope with liquidity concerns, where banks are unable or unwilling to provide loans to businesses or individuals.
# Let insolvent institutions (i.e., those with insufficient funds to pay their short-term obligations or those with more debt than assets) fail in an orderly way.
# Understand the true financial position of key financial institutions, through audits or other means.
# Banks that are deemed healthy enough (or important enough) to survive require recapitalization, which involves the government providing funds to the bank in exchange for preferred stock.                                                                                                                       
# Government should take an ownership (equity or stock) interest to the extent taxpayer assistance is provided, so that taxpayers can benefit later.
# Prohibit dividend payments, to ensure taxpayer money are used for loans and strengthening the bank, rather than payments to investors.
# Interest rate cuts, to lower lending rates and stimulate the economy
And why am talking about Bailout all of sudden when season flavor is Forex market and  Ongoing Bull Market
Coz...Coz.Today i was Bailed Out by my friend Bullzzzz :) Hope i will not make the mistake of mismanaging capital and avoid aggressive risk taking. Need more clarity or if u want to share your experience then contact me at 09884839655 or

Recession is over for now

At last The Business Cycle Dating Committee of the National Bureau of Economic Research determined the end of recession which created some amount of insecurity into my life. It excatly started when got into corporate from students life and  had to experience first hand effects of it like my company conducting a eliminating exam for graduates who joined in 2007, somehow i managed it but that's a different story.
Some observations from Committee report :

The committee determined that a trough in business activity occurred in the U.S. economy in June 2009. The trough marks the end of the recession that began in December 2007 and the beginning of an expansion. The recession lasted 18 months, which makes it the longest of any recession since World War II. Previously the longest postwar recessions were those of 1973-75 and 1981-82, both of which lasted 16 months.
 At that time my project was with American client so faced the music and now its European client and still they haven't come out of the woods and am still facing the music
In determining that a trough occurred in June 2009, the committee did not conclude that economic conditions since that month have been favorable or that the economy has returned to operating at normal capacity. Rather, the committee determined only that the recession ended and a recovery began in that month.
Am not sure of any indicators turning pre-crisis levels
The trough marks the end of the declining phase and the start of the rising phase of the business cycle. Economic activity is typically below normal in the early stages of an expansion, and it sometimes remains so well into the expansion.
Meaning last recession is over and we are into expansion phase with a slow growth

The committee decided that any future downturn of the economy would be a new recession and not a continuation of the recession that began in December 2007. The basis for this decision was the length and strength of the recovery to date.
That means if any GDP drop occurs going forward implies that we might face another recession thats what people are calling it as double dip recession . For now we are safe cause of policies adopted by government is increasing consumption. But how far can government stretch to avoid double . Only time will tell it

Link of Committee report

Wednesday, September 15, 2010

19000 crossed...Whats next for Markets

All of Sudden Markets across the global went from Bear market to Bull market with a short span of 1 week started with ISM Index on September 1 in US , Economic Data coming from China and very good  IIP Data of  industrial growth at 13.8 per cent in July in India led to markets moving by over 5% to 7% within a short span.

Though they are some concernes with Data coming especially Dr.Doom commenting that ISM Data is flawed
and our own Provisional Data of IIP might not be very reliable   as commented by analysts.

So what exactly moved our markets in very short reason is good IIP Data and domestic Demand coupled with Strong FII inflows Made our markets reaching 33 months High and now the same analysts are saying 20000 and 21000 for sensex is no BigDeal

And also there is talk of some Hedge funds pouring money into market when our own Domestic institutional investors are pulling out the money . To get a better understanding check the below chart
 Can see that DII were selling huges amount in last 3 days

Check this to get a look of FII flows ,whole of August and September except on last expiry day FII seems to be buying into equities

FII Net position (Total Buy -Total Sell) is very huge meaning FII are Buying more than Selling and thats what precisely is adding Fuel to the markets for now..

Looks like they might keep on doing that for some more time..untial the valuations of index becomes High and I guess we have RBI midterm policy review and Analysts are expecting a a hike of 25 to 50 bps in Repo Ratio. and do something to control inflation without effecting the growth.

I guess the current market run is due to FII and Liquidity driven rise and expect RBI to suck some amount of Liquid from market before inflation becomes too hot to handle. Lets see Tomorrow ..cya for now

Tuesday, September 14, 2010

Understanding Basel iii Accord

     Basel 3 Accord which was agreed by governors across the globe over this weekend to implement new set of rules to prevent another financial crisis,am not sure how its going to prevent another crisis..cause Basel 2 which was published on 2004 didnt prevent the crisis. Now its pointed by critics that basel 3 implementations got diluted for the sake of few selected countries. Will try to uncover whats this all about.
A. Tier 1 Capital

Tier 1 capital ratio = 4%
Core Tier 1 capital ratio = 2%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital
Tier 1 Capital Ratio = 6%
Core Tier 1 Capital Ratio (Common Equity after deductions) = 4.5%
Core Tier 1 Capital Ratio (Common Equity after deductions) before 2013 = 2%, 1st January 2013 = 3.5%, 1st January 2014 = 4%, 1st January 2015 = 4.5%
The difference between the total capital requirement of 8.0% and the Tier 1 requirement can be met with Tier 2 capital.
Capital Requiement :
Tier 1 capital consists largely of shareholders' equity. This is the amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those shares are currently trading for on the stock exchange), retained profits subtracting accumulated losses,

Tier 2 Capital 
A term used to describe the capital adequacy of a bank. Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more

B. Capital Conservation Buffer

There is no capital conservation buffer.

Banks will be required to hold a capital conservation buffer of 2.5% to withstand future periods of stress bringing the total common equity requirements to 7%.
Capital Conservation Buffer of 2.5 percent, on top of Tier 1 capital, will be met with common equity, after the application of deductions.
Capital Conservation Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%

The purpose of the conservation buffer is to ensure that banks maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. While banks are allowed to draw on the buffer during such periods of stress, the closer their regulatory capital ratios approach the minimum requirement, the greater the constraints on earnings distributions.If Banks are in buffer zone then they are restricted of paying out bonuses ,share buy back,dividends etc..

C. Countercyclical Capital Buffer
There is no Countercyclical Capital Buffer

A countercyclical buffer within a range of 0% – 2.5% of common equity or other fully loss absorbing capital will be implemented according to national circumstances.
Banks that have a capital ratio that is less than 2.5%, will face restrictions on payouts of dividends, share buybacks and bonuses.
The buffer will be phased in from January 2016 and will be fully effective in January 2019.
Countercyclical Capital Buffer before 2016 = 0%, 1st January 2016 = 0.625%, 1st January 2017 = 1.25%, 1st January 2018 = 1.875%, 1st January 2019 = 2.5%
 The purpose of the counter cyclical buffer is to achieve the broader macro prudential goal of protecting the banking sector from periods of excess aggregate credit growth With them, banks increase their capital in good times, not bad. And then, in bad times, they disappear: regulators can (and indeed are encouraged to) abolish the buffers immediately, if there’s some kind of credit crisis. When write-downs eat into bank capital, they eat only into the buffer, which is no longer required, rather than the underlying minimum capital requirement.

D. Capital for Systemically Important Banks only

There is no Capital for Systemically Important Banks
Systemically important banks should have loss absorbing capacity beyond the standards announced today and work continues on this issue in the Financial Stability Board and relevant Basel Committee work streams.

The Basel Committee and the FSB are developing a well integrated approach to systemically important financial institutions which could include combinations of capital surcharges, contingent capital and bail-in debt. 
Total Regulatory Capital Ratio = [Tier 1 Capital Ratio] + [Capital Conservation Buffer] + [Countercyclical Capital Buffer] + [Capital for Systemically Important Banks]
Will try to see how these rules going to effect indian banks..I have a feeling that indian banks need to maintain a higher ratio cause here in india as we have high inflation and  it will eat into banks capital...cya in next post

links which can be referenced :
Bank of international settlements paper