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Global - Economy and Market 

 
Global - Economy and Market

Gasoline pushes inflation up in January

WASHINGTON - Gasoline prices jumped in January, leading overall consumer prices higher and offering a reminder of the risks energy costs pose to the economic recovery.

Bernanke says recovery slow but small banks climbing back

WASHINGTON - The weak economic recovery has made it harder for banks to make money from loans but the financial conditions of smaller institutions appear to be solidifying, Federal Reserve Chairman Ben Bernanke said on Thursday.

Manufacturing, housing data flag underlying strength

WASHINGTON - U.S. manufacturing output rose in January and a gauge of factory activity in New York state hit a 1-1/2-year high in February, showing a solid underpinning for the economic recovery. Housing starts rose more than expected in January as groundbreaking on rental property surged, boosting hopes the still-weak housing sector could help economic growth this year.

Fed is open to boosting economy if recovery falters

The Federal Reserve appears willing to stimulate the U.S. economy more if necessary, according to minutes of the central bank's January meeting. Officials are worried that recent signs of a strengthening economy are short-lived, the minutes show.

Europe posts economic shrinkage for Q4

The EU and eurozone economies each contracted 0.3% in the fourth quarter, sending Belgium, Italy, the Netherlands and Portugal into recession. The gross domestic product of Germany, Europe's biggest economy, declined 0.2%. France, the second-largest, saw GDP grow 0.2%.

Greek cabinet tackles austerity, rescue hopes rise

ATHENS - Greece's cabinet tackled on Saturday how to implement austerity demanded by the EU and IMF as a 130-billion-eurorescue seemed within reach, while the euro zone considered modifying a deal with private creditors to help Athens reduce its huge debts.

China says it will invest in Europe's bailout funds

People's Bank of China Governor Zhou Xiaochuan said China will invest in the EU's rescue funds and maintain its euro investments. "China will always adhere to the principle of holding assets of EU sovereign debt," he said. "We would participate in resolving the euro debt crisis." Premier Wen Jiabao made a similar statement.

China cuts banks' reserve ratios for second time

SHANGHAI - China's central bank cut the amount of cash that commercial lenders must hold as reserves on Saturday for the second time in nearly three months, the latest step to shore up the slowing economy. The government is reluctant to give the green light to another bout of big bank lending, with inflation risks lingering and, more importantly, policymakers are determined to cool down the property sector to ward off a speculative bubble. Few analysts believe the central bank will cut interest rate cuts this year, with annual inflation staying stubbornly higher than the one-year deposit rate of 3.5 percent.

China: January New Loans

• Banks lent out Rmb738.1bn in new loans in January, less than the market's expectation of a Rmb1tn rise, although we believe this was influenced by the fewer working days in January this year due to the Chinese new year festival.

• This coincides with the government's measured easing approach, but we need to take into account the amount of new loans in February to view the whole picture. M2 growth also decelerated further to 12.4% yoy in January.

• We suspect lending must have been very slow after the robust activities during the first week after the calendar new year. Banks granted a large sum of credit to local governments and local investment vehicles in the first week of January, but that momentum might have quickly cooled off.

• We think the current credit easing is selective, with property developers being excluded. Demand from businesses for real investments is also weak. The liquidity situation has improved, however, especially among the SMEs. We think growth prospects remains biased on the weak side.

Japan slowly wakes up to doomsday debt risk

TOKYO - Capital flight, soaring borrowing costs, tanking currency and stocks and a central bank forced to pump vast amounts of cash into local banks -- that is what Japan may have to contend with if it fails to tackle its snowballing debt.

India - Economy and Market

Industrial production provided a modest downside surprise relative both to consensus and our own forecast – coming in at 1.8% yoy. This was down from 5.9% in the previous month, while we estimate that output fell 1.6% on a seasonally adjusted month-on-month basis.

What's the underlying trend? In truth, production has been even more volatile than normal in the last few months, falling very heavily in October, before bouncing back even more strongly in November and then partially correcting in December. The best guide to the underlying trend is probably given by the three month-on-three month seasonally adjusted annualized rate. This has moved up from a low of -13% in October to 3.3% in December. As such, it is beginning to look as though production has bottomed in underlying terms – a view supported by the strong improvement we have seen in India's manufacturing PMI.

India's January wholesale price inflation came in at 6.6% yoy, slightly below the market's and our expectations, and the lowest inflation rate since 2009. We estimate that WPI rose only 0.1% on a seasonally adjusted basis from the previous month.

Another piece of good news is that the RBI's measure of core inflation, the manufacturing WPI ex-food, also moderated to 6.7% yoy from 7.7% in December, and the lowest level since January 2011.
These developments further support our rate cut call. We recently changed our interest rate view, and are now expecting the first repo rate cut to come in March (rather than April), with reductions totaling 175bps by January 2013.

 
Yeah, we had the same response as our readers when we saw that freak move in the EURUSD. Apparently, despite the fact that absolutely nothing has been resolved,Reuters just ran a headline that "Euro zone reaches deal on second Greek bailout package." And that is all it took for the EURUSD headline scanning algos to surge by 60 pips. That there nothing substantial in it, or that this is merely a rephrasing of the actual Bailout 2 announcement from before, is irrelevant. Here is what the actual Reuters report said.

Euro zone finance ministers struck a deal early on Tuesday for a second bailout programme for Greece that will involve financing of 130 billion euros and aims to cut Greece's debts to 121 percent of GDP by 2020, EU officials said.

"The financial volume (of the Greek package) is 130 billion euros and debt-to-GDP (will be) 121 percent. Now it's down to work on the statement," one official involved in the negotiations told Reuters.

Another official confirmed that the financing would total 130 billion euros with the aim of reducing Greece's debts from around 160 percent of GDP now to 121 percent by 2020.

So just the little matter of the statement, which is what has be en the actually stopping block for the past 6 months. And incidentally, the broad strokes of this announcement is a carbon copy of the second bailout deal reached back in the summer of 2011. Inother words, there is nothing substantial to this, and is merely boilerplate. But it was good enough to fool the algos. Now the only question is how long until this latest and greatest deal concoction falls apart again, and the whole farce is repeated all over.

 

 
To fund a deficit of 600,000 crores, the RBI might need to print 200,000 crores


Advance Taxes Are Not Enough

December, was when corporates (and individuals) pay another chunk of advance tax. This should have bolstered government revenues, but it seemingly has not. Total tax revenue in December, net of what was paid to the states, was Rs 99,944 crores, just 5.3% above the previous year. For the April to December time period, tax collections are just 7.5% higher.

Consider that India's Gross Domestic Product has grown 16% in "nominal" terms — that is, before inflation is removed. Government tax revenue should grow at the nominal rate (at least), but increasing inflation has eaten substantially into profits and thus, to taxes.

Meanwhile, government expenditure is growing at nearly 14%. No wonder the deficit is now at Rs 3.8 lakh crore, which is already more than 90% of the budgeted deficit for the entire year.
Lower Corporate Profits

Analyzing the December quarter results which are being announced now tells us that corporate profits, from the 400 top companies, have fallen 1.5% from the same quarter a year back. The September quarter was also a declining number. While revenues have grown 26%, expenses have grown even more at 32%. A lower corporate profit number doesn't just cut directly from government revenues, it makes valuations of their stocks lower (and the government owns a large chunk of PSUs).
The Lack of Enough Non-Tax Revenue

Last year, a bulk of non-tax revenue came from selling the 3G and BWA spectrum. This year the government expected to sell equity stakes in public sector companies like ONGC and BHEL, which has not yet happened largely because the government believes the market prices are too low.

The government has tried innovative means of revenue. It has asked government owned companies to buy back their shares with their surplus cash. Nearly 30,000 cr. worth shares of large companies like L&T and Axis bank lie with SUUTI, a special purpose vehicle that was created when US-64, a mutual fund, was bailed out by the government. These could be sold, but prices will drop if the news is public, so the idea is to sell the shares into another SPV and use accounting magic to make the non-tax number. The most innovative, perhaps, was to attempt to charge Vodafone with an income tax order of more than 8,000 cr. after they bought the telecom company, Hutch; the Supreme Court has since ruled against the government.
Bailouts and Oil Subsidies

While expenses are up 14%, they don't include certain large ticket items. The oil deficit — the under-recovery because we price diesel, LPG and kerosene below market prices — is now 97,000 crores, and is likely to grow to about 125,000 crores. A good portion of that will have to be financed by the central government. There is an increase in the acquisition prices of food from farmers, there's more fertilizer subsidy, increase in payments to NREGA, and so on. For the last quarter, there are also bailouts of Air India, additional capital to the public sector banks and the whole election process to keep expenses higher.

 
Greece ended months of uncertainty by finally securing a new bailout and debt-restructuring agreement with euro-zone finance ministers, but doubts remain over whether Greece will be able to meet the ambitious terms of the accord.

The finance ministers agreed on the long-awaited €130 billion ($171.9 billion) deal after haggling into the early hours of Tuesday morning to settle the final details.

Officials said the meeting, which lasted nearly 13 hours, produced a plan that would reduce Greece's debt to 120.5% of gross domestic product by 2020. International Monetary Fund Managing Director Christine Lagarde said that target was lowered from 129% at the start of the meeting.

Private-sector creditors agreed to take a write-down on their bonds of 53.5%—more than the 50% write-down that had been conceded before the meeting. The private-debt exchange is expected to cut Greece's debt by €107 billion, according to the Institute of International Finance, which negotiated on behalf of bondholders.

According to a statement from the finance ministers, Greece would also benefit from an arrangement in which the European Central Bank would distribute profits on its estimated €45 billion to €50 billion in holdings of bonds it bought in the secondary market in 2010-11 to euro-zone governments, which may then use them to help Greece.

Profits on an estimated €12 billion of bonds held by national central banks in the euro zone will be passed on to Greece, reducing its debt by €1.8 billion before 2020. The meeting decided against the central banks participating in the private-sector debt exchange.

The ministers also agreed to a further reduction in interest rates on the €53 billion in loans from the euro-zone made as part of the first bailout agreed upon in May 2010, saving some €1.4 billion.

"The deal is a good result for Greece, for the euro zone and for the markets, we hope," said Italian Prime Minister Mario Monti after the meeting.

Even with the agreement, economists expect the deal will leave longer-term questions about Greece's ability to pay off even its reduced debt burden. "There are downside risks. This is clear," said the IMF's Ms. Lagarde. "It's not an easy program. It's a very ambitious program."

The problem: The Greek economy must become more competitive through across-the-board wage cuts, allowing the country to export its way back to economic health. But that hoped-for export boom could take years to materialize.

After months of political brinkmanship and unrest on the streets of Athens, a deal on Greek debt may at last be in sight. Heard on the Street's Simon Nixon has the latest details. Photo: Associated Press

Meanwhile, falling wages will only deepen Greece's recession, making the government's debt burden—still large even after the restructuring—harder to bear.

The ministers agreed that the European Commission, the European Union's executive arm, would have "an enhanced and permanent presence on the ground" in Greece to better monitor Greece's economic performance.

Greece also agreed to put money corresponding to the following quarter's debt servicing bill into a special segregated account, and would agree to introduce a change in the Greek constitution to ensure priority is granted to debt repayments.

The second bailout would offer Greece €130 billion in loans on top of the €110 billion it received from the euro zone and the IMF in May 2010. The IMF, concerned about its large exposure to the euro zone, is expected to offer just a minimal contribution this time around, leaving euro-zone governments to shoulder the vast majority of the second loan package.

The IMF agreed to provide €30 billion of the first bailout, but officials last week expected its contribution to be just €13 billion this time around.

The agreement will set in motion an exchange of an estimated €200 billion of Greek government bonds in private hands for new bonds with roughly half of their face value, which must be completed by the middle of next month. That exchange could set off legal disputes with disgruntled bondholders.


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Analysts said the accord would have to be approved by some national parliaments in the euro zone, potentially causing uncertainty. A further test of the program will come in the months ahead, when the tough austerity measures Greece passed to secure the aid package are supposed to come into force.

These include yet another round of spending and pension cuts for an economy in its fifth year of recession, coupled with a 22% cut in the minimum wage.

With elections tentatively scheduled in April to replace the coalition government of Prime Minister Lucas Papademos, Greek politicians may become increasingly wary of standing behind the measures that just passed Parliament over popular outcry, analysts said

Their worries were heightened by comments from Antonis Samaras, the leader of the New Democracy party who is likely to be prime minister after the elections, who told Parliament last week: "I want to avoid the jump over the cliff today, to buy time, to restore normality and to go to elections tomorrow…. This is why I ask you to vote in favor of the new loan agreement today and to have the ability tomorrow to negotiate and to change the current policy which has been forced on us."

Marie Diron, an economist at Oxford Economics, said, "They have to satisfy the euro-zone governments while at the same time making very tough measures acceptable to their population. That is something a technocratic government can perhaps manage, but after the election it might become much more difficult for an elected government to satisfy these two goals."

Some euro-zone governments have taken a harder line with Greece. German, Dutch and Finnish officials have become increasingly skeptical that Greece will implement the painful economic policies its Parliament backed.

Dutch Finance Minister Jan Kees de Jager, speaking before the finance ministers' meeting, called for "permanent" oversight of the Greek government by officials of the so-called troika—the European Commission, the ECB and the IMF.

"When you look at the derailments in Greece, which have occurred several times now, it's probably necessary that there's some kind of permanent presence of the troika in Athens," Mr. de Jager told reporters upon arriving at the finance ministers' meeting. "Not every three months, but more permanent."

If Greece dutifully adheres to policies prescribed by the troika, the economic impact could be harsh, Ms. Diron said.

"Cuts in the minimum wage will bite very hard," she said.

Lowering the minimum wage is supposed to address some of the failures of the previous austerity packages, which focused on reducing the government's borrowing needs

 
SP TULSIAN.

Q: What about his potential news on Sterlite and Sesa Goa, how do you read it?

A: The background in which this news has germinated is that Vedanta group is looking to transfer stakes held by them in Cairn India to Serlite Industries. Sterlite Industries is going to become the holding company. If I move on this premise, it is a very positive move. But, ultimately everything boils down to the swap ratio because couple of years back Sterlite had moved similar proposal, which was against interest of minority shareholders. It was a bit complicated and they were forced to drop that proposal.

Cairn India holds 39% stake. I am excluding 24% stake held by Sesa Goa. So, if they transfer 39% stake into Sterlite Industries, eventually taking the current price as the base, they will be able to raise their stake in Sterlite Industries to about 75%. I am seeing this as a precursor by the group to initiate a move to purchase the residual stake of the government to the extent of 29% in Hindustan Zinc and 49% in BALCO.

Collectively, the group will require about Rs 23,000-24,000 crore for buying both these stakes. They need Rs 17,000-18,000 crore for Hindustan Zinc and Rs 4,000-5,000 crore for BALCO.

Ultimately, they will be looking to raise this kind of money based on cash flow of Cairn India. If Sesa Goa gets merged with Sterlite, this stake of Vedanta transfer to Sterlite, Sterlite will be holding 58-59% in Cairn India. Cairn India will be making a cash profit of about Rs 10,000 crore every year. So, they will be looking upon to capitalize this cash generation for buying out residual stake.

Otherwise in the present form, the balance sheet of Sterlite Industries will get stretched. There is no other point in buying residual stake in any other company because both these stakes are presently held by Sterlite Industries. So, it is a composite move and if that happens then Sterlite Industries will be the holding company for ferrous metal business, non-ferrous metal business and crude.

Apart from that, all the stakes in these three businesses will be more that 50%. So, everything will get consolidated on the top-line and bottom-line. In this background, there will not be in fear of company discounting for Sterlite valuations. If that happens, it will be very positive for Sterlite Industries overall and its shareholders, but one has to look for the swap ratio. I am presuming that swap will happen based on present market capitalization of all the companies.