22.12.2006

• Today’s papers reported that Vodafone Group credit-default swaps rose after media reports surfaced that the world’s biggest mobile phone operator may offer to buy Indian wireless provider Hutchison Essar for $13.5 bn. What are these credit-default swaps (CDSs)? In layman’s terms it is used to speculate on a company’s ability to repay debt. An increase indicates deteriorating credit quality. In detail -- a CDS is a swap designed to transfer the credit exposure of fixed income products between parties. It is the most widely used credit derivative. It is an agreement between a protection buyer and a protection seller whereby the buyer pays a periodic fee in return for a contingent payment by the seller upon a credit event (such as a certain default) happening in the reference entity. A CDS is often used like an insurance policy, or hedge for the holder of a corporate bond. The typical term of a CDS contract is five years, although being an over-the-counter derivative almost any maturity is possible.
• Another interesting term that we get across in the same context is an LBO. An LBO refers to acquisition of a company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired are used as collateral for the loans in addition to the assets of the acquiring company.
• Financial intermediaries may get to access the ECB (External Commercial Borrowing) window
• This is to enable them to finance the domestic infrastructure. The beneficiary institutions include
• Power Finance Corporation
• Rural Electrification Corporation
• Indian Infrastructure Finance Corporation
• The RBI has some reservations
• When the debt has to be repaid on maturity, it would strain the forex kitty
• Lending by a financial intermediary per se will not lead to forex-generating activity
• It is too risky to expose financial intermediaries to currency risks
• The government has recently enhanced the tenure of the ECBs from the 3-5 years to 10 years.
• PE funds top IPO mop-ups
• So far in 2006, IPOs have mobilized an amount of Rs. 24,100 cr.
• In contrast the investments made by PE (Private Equity) funds totaled to Rs. 33,750 cr.
• Left’s opposition to the pension reform bill
• It would change the nature of pension as a social security benefit if the funds are made available for investment in the equity markets.
• Specific provisions should be made for prohibiting investments in stock markets.
• Government should guarantee assured returns to employees, irrespective of the returns from the invested funds.
• Durand line
• Separates Afghanistan and Pakistan
• Meshrano Jirga = Upper house of Parliament of Afghanistan
• Wolesi Jirga = Lower house of Parliament of Afghanistan
• Maruti Udyog divestment
• Government decides to sell off the residual holding of 10.27% in Maruti Udyog.
• As Maruti Udyog is not a government entity now, the sell off of this equity cannot be called divestment. Hence the proceeds need not go into the National Investment Fund.
• WTO given names to agricultural subsidies
• The AoA (Agreement on Agriculture) structures domestic support (subsidies) into three categories or "boxes": a Green Box, an Amber Box and a Blue Box.
• The Green Box contains fixed payments to producers for environmental programs, so long as the payments are "decoupled" from current production levels.
• The Amber Box contains domestic subsidies that governments have agreed to reduce but not eliminate.
• The Blue Box contains subsidies which can be increased without limit, so long as payments are linked to production-limiting programs.
• Shane Warne and McGrath announce retirement
• The spinner and the paceman will be retiring from international cricket on January 6^th 2007, the last day of the 5^th Test at Sydney of the ongoing Ashes series.
• Pipeline policy
• The government has finally announced the pipeline policy, which is to be implemented from January 2007 once the regulator for Petroleum and Natural Gas is in place.
• Several criticisms leveled against the policy include:
• Its very purpose is unclear as it fails to clarify the provisions contained in the Petroleum and Natural Gas Regulatory Board Act.
• It takes away the independence of the proposed regulator.
• It completely overlooks storage, which is integral to any transportation and distribution network.
• It is silent on important aspects such as transnational pipelines built under inter-government agreements.
• It fails to clarify the difference between “contract carrier” and “common carrier”.
• Tobin tax and how it came about?
• Till 1971, the US dollar was pegged to the gold standard, which in effect meant that the amount of dollars the Federal Reserve could print was restricted to its underlying gold holdings. In 1971, the US government decided to take the dollar off the gold standard, which theoretically gave it the right to print any amount of dollars it chose to. As a result, liquidity in the system shot up, encouraging currency speculators across the globe to bet on or against the dollar. To deter excessive currency speculation, Nobel Laureate economist James Tobin proposed a small tax on international currency transactions in 1972. The proposed tax was to be between 0.1% and 0.25% of the value of the transaction.
• It is the news recently because Thailand imposed some capital control measures.
• Read more about in the interesting “ET in the classroom” of today’s ET.