(SA) Recovery in Economy: How Indian Economy Would Fare With The Large Fiscal Deficit by the End of Year 2009?

Is the 35% to 70% rally in a global stock market showing the recovery in the global economy or it is just a bear market rally? But its clear, this rally cannot be justified why? Lets start read the whole review. Even before the World Bank prediction, VMW have already made a bleak outlook for the global economy.
 
Click here to get India's State-wise GDP Data.

Recovery in EconomySince Mar, 2009 – equity markets has rallied by more than 30% from their Mar ’09 lows. What we could expect from this? Is it showing the recovery in the global economy or it is just a bear market rally or it is just giving some hope of recovery in the global economy? Whatever the recent trends in the global financial markets are developing, but the situation is still unclear. Economies are still struggling, investors are still losing their wealth, banks and financial companies are still losing their profits, credit market are still nervy, people are still very anxious about their job prospect, consumers are still shunning from the spending, companies are still losing their markets, and there are lot of other problems, which are revolving around us. Everyone is questioning about the economic prospect. For how long, this recession will last? When we should see the time of better prospect which we had witnessed before this crisis? 

Do you believe, the economy is now going to settling down or at least set to recover from here? Hmm…Yes, but not at a full pace. Since the crisis has embarked, banks and financial institutions have lost more than $700 billion in total losses, and it is not very easy for them to recover from this huge massive trouble in a very short period of time. Banks and FIs are striving to sustain their business in these tough times. Financial condition of the banks however is still not in a good shape and their bad assets in a balance sheet are still a major setback for them to recuperate from this. However, the government authorities and central bank around the world are taking adequate measures to heal the bank’s pain to put these banks back on the growth track. 

What are the Problems/Challenges, Indian Economy is facing? 

  • Disparity between Wholesale Price Index (WPI) and Consumer Price Index (CPI)
  • Higher Fiscal Deficit
  • Balance of Payments
  • Falling Exports
  • Rising Government Borrowings
  • Global Economic Challenges
  • Economic Reforms
  • Final Budget

We’ll discuss these points in detail latter… 

Liquidity Situation: Then & Now 

Exhibit 1: India's Call Money Rate between Jun '08 and Mar '09

Exhibit 1: India's Call Money Rate between Jun '08 and Mar '09

 

Now, let’s talk about the Indian economy and its financial system. Indian Government is persistently putting pressure on the Indian Banks to reduce interest rates to the important sectors like Real Estate and Infrastructure. The liquidity situation in the country was very fickle and lot of apprehension in the call money market when the global recession was at a peak during Sep, 2008 followed by the collapse of Wall Street investment bank Lehman Brothers Holdings Incorporated.  At that time, banks even unable to lend to each other, resulted call rates jumped up to 20% (See Exhibit 1 for the reference). However, the liquidity is now at a comfortable levels and call rates lingering around 3% and 4% and even falls below 3% in May ’09. If the Indian economy has an adequate amount of liquidity in the system, so why banks and financial institutions are still dis-inclining to lend? 

Firstly, this crisis proved to be the disastrous one especially for the international banks. Indian banks are still far better than the foreign banks. In India, banks have only saw decline in their revenue growth and profits and in some cases mark to market losses (largely known by MTM losses), however the foreign banks have lost almost trillions of dollars in the last 6 quarters and still struggling to do their business as usual. So, here the reason could be the lack of confidence. Secondly, the higher cost of credit. In India, the banks are largely depend on the time deposits (also known as Fixed Deposits or Term Deposits) for the primary source of funds to lend in which they have to offer more than 7% interest rate to the depositors. The cheaper source of credit to the banks is Current Account and Savings Account deposits (also known as Checking Account). Generally banks offer 3.5% to 4% interest rates on Savings Account and nil on Current Account. That is the reason – banks are now focusing on to reduce the cost burden. 

Stimulus Package Announcement? To refuel the growth in the export oriented industries, newly elected government should consider announcing Stimulus Package for the export industry such as Textiles, Gems & Jewelers, Steel and other industries which are vastly depend on the exports and to focus on the lower cost of credit to revive the infrastructure, Real Estate sector and Auto Sector. 

Indian economy as a whole 

India's CPI and WPI Comparison for Year 2008.

India's CPI and WPI Comparison for Year 2008.

 

Earlier, we’ve mentioned some important points which are specifically have certain influence on the Indian Economy. Out of those, one the most prominent is the variance between the WPI and CPI which actually making difficult for the RBI to take stance. Since the change in base year in Wholesale Price Index (WPI), inflation has steeply fallen from over 10% to almost zero within 6 months and interestingly, CPI has not been affected that much and still at over 8%. This is going to be a troublesome for the Reserve Bank of India while considering any change in its monetary policy. RBI should consider CPI numbers while taking any appropriate decision on the interest rates. Overall the inflation rate has created confusion for the RBI, that is the reason, the Indian Ministry of Statistics and Planning Implementation (MosPI) is going to launch CPI next year. 

US Dollar Trivializing and Euro Gaining Fiat Currency Status? Now, the another important developments since last year is rising Fiscal Deficit. This is not a single problem in the Indian Economy alone, actually many economies around world are facing the same kind of threat. US and UK probably would face the de-rating of their Bond/debt from the credit rating organizations. What would probably going to happen? Of course US Dollar may witness significant reduction in its value against the major currencies as the biggest creditors – China, Japan will sell US Treasury en-masse. The world’s fastest developing nations like India, China, Russia, Brazil are the biggest holder of US Dollars and may consider to revise their dependence on the US Dollar and in that case, US Dollar would lost its status as a Fiat currency (or universal currency) and will see the huge depreciation. 

Countering Tax Evasion is the Solution to the Soaring Deficits? With the Governments facing rising budget deficits while combating the economic crisis, tax authorities around the world have agreed on a plan to encourage tax compliance and counter tax evasion specially focusing on the banks, financial institutions, wealthy individuals and offshore investments. US, which have announced trillions of dollars of bailout packages to protect its economy is going to face significant rise in Debt to GDP ratio, perhaps would excess the 100% mark. The bailout packages, which cost nearly $5 Trillion to the American Taxpayers, will have to endure this strain possibly for the next decade. But the Indian economy in particular, which largely depends on the foreign inflows (FDI or FII) should check the rising fiscal deficit in order to maintain its sovereign rating. 

Higher Inflation prospect? Lets check the Indian Government’s borrowing in the last four quarters of the financial year 2008-09.


The given below table shows the borrowings of the Indian Government in the last four quarters of FY2008-09. The amount shown is in Crores (Ten Million) of Indian Rupees.

 

Year 2008        
Public Debt Q4 Q3 Q2 Q1
         
Internal Debt        
Market Loans 1,200,576.00 1,170,756.00 1,137,203.00 1,104,553.00
91 Day Treasury Bills 69,892.00 51,501.00 52,250.00 30,371.00
14 Day Treasury Bills 56,043.00 41,080.00 48,770.00 68,630.00
Other Debts 569,211.00 598,777.00 603,577.00 576,946.00
         
  1,895,722 1,862,114 1,841,800 1,780,500
         
External Debt 258,194.00 237,352.00 220,902.00 210,083.00
Other Liabilities 520,148.00 471,147.00 479,719.00 483,490.00
         
Total Public Debt of India 2,674,064 2,570,613 2,542,421 2,474,073
% age of Annual GDP 53.75% 51.67% 51.11% 49.73%
         
 The above table may not be accessible clearly. Please follow the link to access the full length We really apologize for the inconvenience caused to you. 

As you can see from the above table which shows the Indian Government Debt, which is continuously rising. The upward trend in the Debt to GDP Ratio is actually showing the signs of concern. This would ruin the country’s credit rating and makes credit expensive to all of us. Moreover, the rise in issue of Bonds to the central bank would force them to print more money and infuse that money into the economy which could lead to rise in stock of money. Currently India’s stock of money (M1) stood at $261.49 Billion in compare to $253.06 Billion in Mar 2009. Rise in money supply means higher headline inflation. 

After the elections, there is a rise in optimism among the investors and businesses. There are lot of tasks which are pending to the new government. Prime Minister Manmohan Singh, which is also known as a Architect of the Indian Economy by opening up the Indian Economy since 1990s and the business leaders are expecting the same from the PM and his cabinet as they have a liberty to announce the favorable reforms for the Indian economy and to open up the Foreign Direct Investments (FDI) route in the sectors like Banks, Insurance, Retail, Infrastructure, Power and other sectors. After this, government should also need to focus on larger gap in Balance of Payment. Higher Current Account (CA) deficit is largely caused by the falling exports. As the Indian Economy is facing lot of challenges from the global economic downturn, so far the federal government had announced the two stimulus packages for the sector to enhance the potential of the export industry to survive in the challenging time and to boost the domestic demand and the industry is expecting the another stimulus package as the condition of the global economy is still looking uncertain. 

Economy in Rest of Year 2009 

Not easy to answer! When the year 2009 was approaching after bloody ending of 2008, economist around the world were expected that the economy should continue to contract and even sharper than expected. Central banks around the world have slashed their interest rates further in order to fuel the economic growth engine and even the crucial G-20 summit in London also proved as a sturdy solution for this global mess. Global equity markets have regained their strength and recovered by more than 30% from their Mar ’09 lows. That is the strong thumbs up from the investors in response to the global authority. But economies like US, UK, Germany, France, Japan and other developed economies are still contracting and seeing the worst economic data in more than a decade. US economy in particular, will take at least five years to recover from the massive amount of losses that has damaged the country’s financial system badly. Now the trillions of dollars of bailout package has been announced in response to this crisis and this will probably swell to multi trillion dollars in amount in the next few years and indeed will convert into a huge deficit for the country, which will be inherited to the newer generation of the country. Indian economy is also facing the same challenge, and this threat must be contain for a fresh start of the global economy by following the determination of the G-20 Summit which was held in London, UK. 

So overall, the situation is sill in a very bad shape and the recovery in the global market is not showing the real picture. The rise in consumer confidence, business sentiment, and the perception about the particular economy would take some time to revive. 

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(SA) RBI Revised Its Monetary Policy; Reduces Repo Rate & Reverse Repo Rate.

Reserve Bank of India modifies its monetary policy. RBI Governor Duvvuri Subbarao has slashed CRR and policy rates several time since he took the charge.
 
Banks are under significant liquidity pressure and it is evident that the banks are now withdrawing money under the central bank’s Liquidity Adjustment Facility (LAF) or Repurchase Agreement (Repo). Is the RBI cogitating the another rate hike to contain inflation under the compressed liquidity situation? Find out more.
The Reserve Bank of India.

The Reserve Bank of India Headquarters in Mumbai.

On Tuesday Apr 21, 2009, India’s Central bank – Reserve Bank of India has announced its Annual Policy on Macroeconomic and Monetary Developments. RBI has slashed its policy rates by 25 bps. BPS is Basis Points which should be defined by One Hundredth of a one percentage point 1/100th of 1%.

After the reduction in policy rates, RBI’s Repo rate stands at 4.75% and Reverse Repo rate stands at 3.25%. Repo means repurchase agreement in which banks sell government securities to the RBI in exchange for cash and agrees to repurchase those securities from the RBI at a later date which is the Reverse Repo Rate. While addressing to media, RBI Governor stresses that the bank should pass-on the reduction benefits to the consumers. India has witnessed the steep fall in demand for a credit.

RBI Reference Rate As on Apr 2009

Bank Rate 6%
Repo Rate 4.75%
Reverse Repo Rate 3.25%
Cash Reserve Ratio (CRR) 5%
Statutory Liquidity Ratio (SLR) 24%
Prime Lending Rate (PLR) 13%

 

The Indian Economy has also got affected by the economic crisis in developed countries. Since mid of Sep 2008, when the major financial institutions were collapsed, the India’s central bank has reduced its policy rates and CRR by number of times and SLR by 100 bps since than to prop the Indian economy up. India’s money supply dropped to 18.4% in compare to 21.7% last year which signifies the deceleration in credit market and the capital inflows. In the last few months, Indian Rupee has depreciated by more than 18%  and likely to depreciate further due to higher risk aversion in Rupee denominated assets, acute deleveraging due to falling exports which resulted fall in corporate earnings and strong demand for US Dollar due to huge amount of selling in equity markets. However, since Mar 09, financial markets have performed better in compare to its peers and other developed markets due to attracting and cheap valuation of the India Incorporated. By taking these factors in mind, RBI is taking precise decision on a periodic basis to respond to the global financial crisis and to make a favorable economic environment. India’s external debt and national debt has reached the level of 49% to the annual gross domestic product, however the strong foreign reserves would ensure the external stability. 

This research has been Superannuated by the VMW Research Team. This research might not be applicable in today’s economic context.

Economy in Crisis: Global Markets Loses Extended to $50 Trillion, South Asia Can Weather Economic Crisis.

Asian Development Bank study says, there is further room for interest rate cut is available in India and need to diversify their economies to reduce the impact of global financial crisis and larger Gov’t deficits.

Asian Development Bank's Headquarters in Manila, the Phillippines.

Asian Development Bank's Headquarters in Manila, the Phillippines.

According to the new study by the ADB, the Global financial markets losses have reached $50 trillion (Rs.2.5 Quadrillion or Rs.2.5 followed by 14 zeroes) mark. Losses on financial assets in Developing Asia in 2008 totaled $9.8 trillion. The total measure of losses includes reduction in value in Equity and bond markets including those backed by mortgages  and other assets and depriciation of many currencies against the US Dollar, however it does not includes the derivative products like Credit Default Swaps (CDS). According to data available with the VMW, the total outstanding of principle amount of CDS equals to $50 trillion alone, and  it will further instensify the total losses. Study shows the recovery can only now be contemplate for the late 2009 or early 2010. Data provide close connection between the economy and markets, therefore, the emerging economies are in mid of the crisis and the next 12 to 18 months are very crucial.

The good news is that, the South Asia (including Indian Subcontinent – India, Sri Lanka, Afghanistan, Pakistan, Bangladesh, Nepal, Bhutan and Maldives) Economies can weather the current Economic downturn by taking both short term and long term measures to stimulate the domestic demand and their economies.

The number of short term measures have been taken to cushion the impact of this crisis. In India, the Government has already announced the three Economic Stimulus Packages to stimulate the economy. Particularly in India and Sri Lanka, there is enough room available for more rate cuts. It means, the expectations from the central bank to brace the economy is still alive. Government could also consider incentives to encourage overseas workers to remit money home, they should also discuss currency swap arrangements and other measures to keep their financial systems stable.

However, in the long term, South Asian nations need to reduce their fiscal deficits, diversify their economies, step up infrastructure investment and boost intra-regional trade to take up the slack of lower demand from G7 nations.

Source: Asian Development Bank and VMW.

(SA) Interim Budget 2009 Review: Fiscal Deficit Swells to 8% to the GDP.

Please Read the latest report on India Budget 2009.
India’s Fiscal Deficit swells to 8 per cent of the annual gross domestic product, govt spending likely to rise and tax rate cut are less likely. However, Govt has reduced Excise Duty and Service Tax to shore-up the economy.
 
 
Pranab Mukherjee

India's External Affairs Minister (Foreign Minister)

 

Then Minister of External Affairs – Mr Pranab Mukherjee, who was in charge for Finance Ministry also for a while, has announced the Pre-Election Interim Budget 2009 for the Fiscal 2009-10. Markets and the corporate world has anticipated lot of changes and reframing of policies to weather the current global economic downturn however, the Interim Budget has banished all the factors to support the Indian economy. Interestingly, he has pointed out that the major policy announcement would take place post election in the Regular announcement of the General Budget which was held in May, 2009. 

In his budget speech, he merely stressed upon the Rural Development by expanding the Rural Infrastructure Development Fund (RIDF) from Rs. 5,500 Crores ($1.13 Billion) for the year 2003-04 to Rs. 14,000 Crores ($2.87 Billion) for the year 2008-09. Apart from that, he has discussed, exactly what the UPA Govt have did in the last 5 years of their tenure. On the most important Financial and Tax reforms front, he has left this portion for the Regular Budget announcement. He said the, tax rates must fall in these stressful economic times, while the majority of industry has expected positive changes on the tax front and the ailing Real Estate and Infrastructure sectors had anticipated for support from the Government. Now, the RBI is the final ray of hope until the General Elections in a way of reduction in policy rates by at least 100 bps. 

India’s Finances 

Since the last Year’s Budget announcement, the Indian Govt’s finances have totally shaken up. Three major developments like provision for pay revision (Sixth Pay Commission), loan waiver and finally National Rural Employment Guarantee Act (NREGA) and various other subsidies has led to significant intensification of the India’s Fiscal Deficit. Initially, Govt had pegged it at 2.1% of the India’s GDP. This Fiscal Deficit has to be rise for sure as the Govt has announced two different Stimulus Packages in the last couple of months to stimulate the economy and the domestic demand, extra spending under NREGA, Subsidy on Oil and Fertilisers and most importantly the lower revenue/receipt from Taxes. Government is also expecting lower tax revenue in this fiscal year due to global economic downturn. The abstract of “Demand for Grant” is given below:  

  • Pay & Pension Revision: Rs. 28,505 Crores ($5.85 Billion)
  • Oil Subsidy (Oil Bonds): Rs. 65,942 Crores ($13.54 Billion)
  • Fertilizer Subsidy (incl Bonds): Rs. 64,866 Crores ($13.32 Billion)
  • Food Subsidy: Rs. 11471 Crores ($2.36 Billion)
  • NREGA: Rs. 25,000 Crores ($5.13 Billion)
  • Farmer’s Debt Relief: Rs. 15,000 Crores($3.08 Billion)
  • Transfer to States: Rs. 12,741 Crores ($2.61 Billion)

The total cost of those subsidies (including bonds) and other packages is Rs. 223,525 Crores ($45.9 Billion) which means, the it works out to 4.4% of the India’s GDP. If the Govt adds the reduction in tax collections, it could cost 1 per cent of GDP. According to the Economic Advisory Council (EAC), the Fiscal Deficit in the Union Budget had been placed at 2.5% to which, the addition of 4.4% and 1% to this number would definitely raise the total to nearly 8% of the GDP. Credit Rating agencies like Standard & Poor’s (S&P), Moody’s and Fitch are closely watching the India’s fiscal shortfall and this would definitely force them to downgrade the India’s Sovereign Debt rating. On Tue, Feb 24, 2009 S&P has reaffirmed the India’s rating to BBB-, means downgrading India from “Stable” to “Negative” outlook. 

What would happen, if the Fiscal Deficit rises? It means, that the Government will borrow extra to finance their expenditures (planned or non-planned). We won’t evade the higher monetary inflation. If the Government borrows extra for its spending, then the level of money supply will rise because it will force the Reserve Bank of India (RBI) to print more money – which would lead to the higher inflation at least in the medium term. Currently, the India’s national debt is 59% of the annual gross domestic product (Central and State Government combined). At VMW, we have earlier discussed about the deflation in the Developed Economy, however we’ve ruled out the Headline Deflation in India. Maybe the short term, Government borrowing will prevent the further fall in inflation. There is also a possibility of higher interest rates in the long run. 

As a result, there is a limited room for the Government to ramp up the spending without causing the structural harm to the economy. That’s why the Government is reluctant to cut tax rates and in the near future, Government may also consider reducing subsidy burden on Oil and Fertiliser by 1.6% of the GDP and this Interim Budget proves merely a performance review of the Government. 

Please Note: All figures in US Dollar (USD) terms are converted at Indian Rupee (INR) 48.70 aganist the USD. 

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(SA) Global Financial Crisis: It’s Impact On India And The World?

US Economy is in worst recession since the Great Depression and the Federal Govt of the United States has already announced the massive amount of bailout package to help the ailing Financial System. After Obama’s inauguration, the question arises – will the Obama Administration fulfill their promises they have made during the campaign? You can also download the full version of this research report from here.
 
 
 

Barack Obama Sworn in as US PresidentIn our “Economy in Crisis” series, we had earlier discussed about the economic future of India especially in the year 2009, which tells that the global economy will continue to contract till H1CY2009 – afterwards we might see growth in the global economy or at least the downfall should be stagnated. 

Since, the US President Barack Obama has won the Presidential Elections in Nov, 2008 there are lot of anticipation about how the global economy would respond under his leadership. As he understands the current economic mess, he also believes that the damage to the economy has already been done. Now the economy is in dire situation and needs an urgent action to impede the Depression type of risk to the global economy. But, how the US deal with this dreadful circumstances which affecting the global economic growth? 

Americans has borrowed and spent beyond their ordinary means and put the economy in deep trouble. Banks lent astounding amount of money to homeowners without having concern of credit, certain that real estate prices could go up. US President Barack Obama has said in his inaugural address, “that the challenges are real and they’re many”. The Economic crisis is his top priority and effective policies are needed. Unemployment rate soared to over 7%, though some economists believe the real jobless rate, including discouraged workers and part time workers, is closer to 14%. On the other side, Housing prices ceaselessly falling and have lost over $3 trillion in its value since the mid 2007, banks becomes paralyzed after huge amount of losses and afraid to fresh lending, US deficit inflated to record $1.19 trillion for the year 2008. Last year alone, the Federal Government of the United States has announced bailout of over $1.369 Trillion and the Federal Reserve has announced $2 Trillion emergency Fed Loans by expanding its balance sheet from $900 billion to over $2 trillion. But the big question is where does all this money come from? 

Projected US Deficit And Surplus
Chart Shwoing the projected US Deficits For the Year up to 2015.

Chart Showing the Projected US Deficits for the Year up to 2015. Source: CBO

 

US is the largest debtor nation with over $10 trillion of national debt and to fund its trillion dollars bailout package, US will print more money or sell more treasuries. Initially, US have already started issuing fresh debt to finance its initial $700 billion Wall Street bailout package. Now the obvious question has arisen – who will finance this massive bailout amount. Of course, the Asian Tigers, which hold $4.35 trillion in foreign reserves. US need coordinated action from the East. The global leaders has already argued that the G8 (Group of 8 Developed Nations) won’t work on this massive financial turmoil, however the Nov-08 meeting in Washington D.C. when the former US President George W. Bush has called the G20 nations to joint hands cooperatively to undertake the global economic crisis. G20 nations which includes the fastest growing economy such as India, China, Brazil, Mexico and Russia has enormous amount of foreign reserves. In which China has accumulated large chunk of foreign reserves. 

Chart showing China's Trade with the United States.

Chart showing China's Trade with the United States.

 

US is the largest export market for China, thereby China certainly has an interest in ensuring the viability of the US economy. As of now, China holds nearly $1.9 trillion of foreign reserve assets in which between 60% and 70% has already been invested in dollar denominated assets such as US Treasury and other corporate bonds like Fannie Mae and Freddie Mac. According to the latest data available with the VMW, China holds $540 billion of US Treasury Securities. China’s savings were key reason of lower long term interest rates in the US. China needs to support the dwindling US economy by investing more in the US Treasury; however there are certain limits to the investments in to the US by China, because Chinese economy also suffers the huge crackdown in its economy despite getting Number 3 slot. GDP per capita of China is $5,325 which is still very low in compared to Germany’s $34,000. Unemployment rate also soared to 4.5% from 4% since the global economic downturn and large number of manufacturing units has halted their operations as no demand exist for their products in the international markets. Chinese economy is entirely relying upon exports and the recent export data showed the major downturn. China might consider focussing on its own economic problems.  

Chart Showing China's Foreign Reserves.

Chart Showing China's Foreign Reserves.

 

But the another interesting point here is Japan, which has reduced the investments in US Treasury from peak of $600 billion last year due to its own economic problem and needed large amount of cash to meet its own requirement, China still expanding its investment portfolio by buying more in US securities. A European analyst has commented that China needs to spend its trillions; the world could avert the recession, thereby, some economists called it as “Chimerica” the relationship between China and America. China needs to finance the US debt in order to make the economy progressive. 

What should be the negative consequences of this Economic Catastrophe? 

According to the US Treasury data, the value of outstanding American Treasury bills top $10 trillion, double since the year 2000 and this number sure to increase as the bailout package announced to support the distressed Auto industry, preventing collapse of government backed mortgage giants Fannie Mae and Freddie Mac. This could be real problem for the United States as the foreign investors could doubt the American money to pay back such an extraordinary sum inducing them to stop or slow their deposits in to the US. That could send to Dollar plummeting and making imports dearer to the American consumers and businesses. Then the US Treasury needs to pay higher interest rates to attract investments. The ongoing crisis has a potential to inflict serious damage to the international status and power of the United States. 

But, does it really going to happen? I guess no! During the time of Great Depression in 1930s, US has intervened in the economy by way of taking over the toxic assets of the banks and created the new company known as Fannie Mae, which convert the bank’s assets in to marketable securities. It said to be a new wave of government intervention because the 2008 Presidential Election was equivalent to the 1932 election, when President Franklin D Roosevelt adopted the “New Deal” policy in which mortgage backed security issuer Fannie Mae founded. Thereby, the US will find it much easier to run into large deficits as the foreign investors continue to hold dollars and will continue to invest in the US Treasury and the new US Administration could bring some changes in its policies and they will bailout the whole economy without worrying about their finances. 

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Economy in Crisis: Two Pillar Action Plan Is The Solution Of This Crisis.

Investors react to the market slump.

Investors react to the market slump.

 

Organization for Economic Co-operation and Development is preparing a two-pillar action plan for governments, as part of a global response to the world financial crisis, calling for tighter regulation and oversight of financial markets and improved national policies to promote economic growth.

The action plan would cover a wide range of areas, from financial regulation, corporate governance and fiscal policy to competition, employment policy, insurance and pensions. The causes and consequences of this crisis are rooted in a wide set of inter-related policy areas and can only be addressed through integrated responses. The two pillar action plan organized as – First, align regulations and incentives in the financial sector so that market operators act in a tighter oversight and  risk management environment. Second, review and upgrade national policies and improve policy coordination at the international level to restore the conditions for economic growth.

One of the key lessons of the financial crisis has been the critical importance of efficiently functioning financial markets for the stability of the real economy. That efficiency relies not just on competition but also on effective regulation and supervision. Looking beyond financial markets, governments must also play their part in sustaining economic activity. Automatic fiscal stabilisers are already helping to cushion the downturn, especially in Europe. But more needs to be done. 

“Governments must hold fast to their efforts to address poverty, inequality and climate change. It is crucial, in the middle of the storm, that we don’t lose our sense of direction, we keep our commitments to scale-up development aid, to keep global trade and investments open, to develop cleaner energy to protect our environment.” Said: OECD Secretary-General.

Source: OECD

Reason Of Economic Disaster: An Explosion of World Financial Assets!

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The current credit crunch has added new urgency to discussions about redesigning the rules of the game for global capital markets. Clearly, risk management has lagged behind innovation in the financial system, and existing regulatory frameworks and institutions need to be updated to keep pace. National governments are clearly still important to the world financial system, but their ability to unilaterally manage and regulate financial activity is diminishing. Instead, as global capital markets grow, they are dispersing financial power. The United States remains the world’s biggest economy and home to the largest financial markets, but the influence of Europe, China, and the Middle East (among others) now extends globally. Investment of trade surpluses by Asian countries and of petrodollars by oil exporters has pumped liquidity into global capital markets, lowered interest rates in developed countries, fueled a new wave of leveraged financial activity, and propped up struggling Wall Street investment banks.

All this has happened as the world’s capital markets have undergone an extraordinary transformation. The value of the world’s financial assets—including equities, private and public debt, and bank deposits—has soared from $12 trillion in 1980 to $195 trillion in 2007. In fact, those assets have grown faster than the world economy. This phenomenon is called as Financial Deepening. In 1980, the total value of global financial assets was roughly equal to world GDP; by the end of 2007, world financial depth, or the ratio of assets to GDP, was 356%. Today, one-third of owners of government bonds, one-fourth of equities owners, and one-fifth of people who own private debt securities are not from the country where the assets were issued. Even the individual investor who buys only U.S. stocks on U.S. exchanges is paying prices determined in global markets.

Pension and insurance funds continue to be the major private investors, but other private and public players are increasing in importance. Hedge funds, private equity funds, central banks, sovereign wealth funds, government investment corporations, and government controlled companies all with different investment goals and strategies are now prominent on the global landscape. The recent crisis has highlighted the weaknesses of systems that regulate some actors but not others and that have no international reach. At a minimum, this patchwork approach encourages investors to operate in the realms with the fewest restrictions a race to the regulatory bottom.

Policy makers need to grasp how much financial activity is taking place outside traditional publicly traded and regulated markets and to ensure adequate oversight. Several Western banks and other companies have recapitalized in 2008 not by selling shares or debt on public exchanges but by seeking large cash infusions from private investors. As debt markets froze up, banks unloaded lots of loans by selling them to private equity firms. And while the credit crisis cooled the leveraged buyout boom of early 2007, many private equity firms have adapted in 2008 by acquiring stakes in public companies.

Deeper financial markets, though unruly and unpredictable, have many benefits. They can provide broader access to capital for borrowers, increase opportunities for sharing risk, and spur economic growth. Of course, market turmoil can also cause great disruptions, such as the currency crises that led to devastating recessions in Asia during the late 1990s and shortly thereafter in Argentina not to mention the U.S. subprime mortgage debacle, which continues to unfold. As policy makers look ahead, their goal should be to enable the world to enjoy the benefits of evolving global capital markets while managing the risks more effectively. But success depends on updating our thinking, not just our rules.

 Source: McKinsey & Company and HBR.