03.11.2008

• Landmine explosion targets Ram Vilas Paswan & Buddhadeb Bhattacharjee
  
• Union ministers Ram Vilas Paswan and Jitin Prasada, West Bengal CM Buddhadeb Bhattacharjee and state industries minister Nirupam Sen had a narrow escape when an IED (Improvised Explosive Device), planted by Maoists, went off minutes after their cars had passed on Sunday afternoon. It snapped an electric wire that slammed on a convoy car, injuring six cops. The team had come to lay the foundation stone of the JSW steel plant at Salboni.
• This is the first ever Maoist attack on a CPI(M) Chief Minister in the country.
  
• Take a look at how Mutual Funds (MF) short-change the retail investors
• According to a report appearing in today's ET, some fund houses have given “guaranteed” returns to big-ticket investors who were willing to bail them out by parking money in MF schemes for a few weeks. Under the arrangement, even if the net asset value (NAV) of the scheme dipped, these investors would be allowed to exit at a higher, pre-agreed NAV — something that other investors in the scheme would be clueless about.
• How is this extra return passed on? By booking bogus marketing or some other expenses for which payment is made to one of the related firms / subsidiaries of the big ticket investor -- typically a coporate house.
• Why are MFs resorting to this? Because inflows are drying up and the prices of securities are getting plunged. Investors are seen pulling out money from fixed maturity and liquid funds. So they find it difficult to meet redemption pressures.
  
• Look at this graphic which gives concise details.
• Language lessons: short-change
• What is the meaning of 'short-chagne' in the above noting?
  
• Deprive of by deceit
• G-20 meet and whither global financial reform
• Reading this article gives a decent perspective of the need for international financial institutional reform, and we get a chance to reflect on the possible solutions that can help prevent the recurrence of the present financial crisis.
• What's your take on this? Will the US allow its currency lose pre-eminence? Though the author feels that it won't let it happen, I have a gut feeling that it will somehow come about. A strong dollar is actually hurting it by forcing to carry the burden of staying the world's biggest consumer. Just as the reform of the UN, an unthinkable proposition till five years ago, has surely come about and is no longer treated as an impossibility, this too I think will come about in a more subtle way. Whether it is IMF or the World Bank or both that will get the key role, is a matter of time. But before that assignment of key role, it is a must that their organization structure is reformed. The present juncture is an opportune moment for the rest of the world to really try and bring about a change in these institutions.
  
• Some solid explanation on how growth in emerging markets was fueled by global capital flows.
  
• Many of you may find this article highly technical. But those of you with stock market background and economics and finance as optionals can't afford to miss this. An excerpt:
• ... much of the growth leap was due to easy access to cheap money. It was no coincidence that the levitation act of emerging markets began in earnest from mid-2003, once the US economy started to recover strongly on the back of a booming housing sector. Following the tech bust in the preceding years, the US Federal Reserve cut interest rates aggressively to engineer a new growth cycle. This resulted in US households accumulating more debt, largely in the property sector. But the Fed was not just setting US interest rates — it was also determining the global price of money. Capital gushed into many developing countries that did not want to run an interest rate policy too different from the US given the currency linkages.
  
• The fundamental flaw with the emerging market growth model is that foreign capital typically funds nearly half the finances needed for expansion in any year. Whenever money is cheap and easily available in the global system, it spills over into emerging markets. But in a tighter liquidity environment — as is the case now — such funding dries up.
  Given the easy availability of credit over the past few years, corporates in the developing world raised huge amounts of debt and equity capital to fund their ambitious growth plans, largely from western financial institutions. Last year was a bumper year, with $435 billion in new overseas syndicated loans, $150 billion in external corporate bonds issuances and $210 billion of foreign IPO money heading to emerging markets. Not only have all these sources of financing ceased, but western banks in some regions are drawing down cash balances at their emerging market subsidiaries driven by the need to shrink the size of their balance sheets. The global liquidity tap has in effect been suddenly turned off, leaving many emerging market companies high and dry.
  
• So, what does it portend in the coming few years?
• Some kind of hard landing, if not an outright recession for some of the countries. Emerging economies' stratospheric growth rates will start climbing down. May be some will experience some kind of defaults even. Look at this explanation for defaults:
  
• The market is assigning a 40% probability for Russia defaulting on its sovereign debt over the next five years and more than a 20% chance for Brazil going down the same tube. Even though Russia virtually has very little government debt, the default probability arises from the expectation that the state will be forced to bail out a heavily indebted corporate sector. From $600 billion in July, Russia’s effective foreign exchange reserves have declined by a massive $250 billion with the Kremlin announcing various packages to rescue the corporate sector, where many companies face the pressure of rolling over large sums of short-term foreign debt.
  
• For much of the past two months, investors have been seeing death spirals in almost every region. The West Asian countries were thought to have a massive cushion as their accounts were budgeted on oil at $80 a barrel — a level that till even a month ago seemed to be a floor price. With the bottom having fallen off commodity prices, yesterday’s stars have suddenly become susceptible to panic as well.
  
• What seems inevitable though is that net capital flows into emerging markets will remain very weak for the foreseeable future and well below the frenetic pace of the past few years. Foreign flows to developing countries in the past three years have ranged anywhere between 9% of GDP in Eastern Europe to 2.5% of GDP in Asia and Latin America. Total net capital flows into emerging markets should next year drop back to the pre-2003 pace of 4% of GDP.