Global markets slide on fears of debt default spreading to Italy, Spain; warning signals were available some months ago
Global markets today suffered one of their worst beatings in recent months on mounting fears of a likely default by Greece and that the debt crisis is spreading to Italy and Spain. Shares across Europe dropped nearly 3% to two-year lows, Asian markets were also hit earlier in the day, and it appeared likely that the story would be repeated in the US markets too.
While to some the IMF has been surprisingly silent on bailouts for these debt-ridden European economies and Euro zone finance ministers are now talking about a rescue fund to help Greece but have fixed no timing, it seems that early warnings about this developing situation that could devastate financial markets all over again have been ignored.
Over a month ago, Porter Stansberry, financial advisor, warned that Italy was the next big global problem. In an article headlined "This is the biggest threat to your financial future" published on The Daily Crux web site, Mr Stansberry wrote, "Credit default swaps on Italian sovereign debt are at record levels and moving higher. Currently it costs €250,000 per year to insure €10 million worth of Italian bonds. I expect these prices to continue to increase, making it much harder for Italy to get the estimated €250 billion it needs to finance its annual deficit and roll over the €170 billion in principal that will come due in the second half of this year."
"And... none of these debt estimates includes the growing likelihood of a major bailout for UniCredit, Italy's largest bank. UniCredit is Europe's largest lender to Eastern Europe, where JPMorgan estimates credit losses will total €40 billion this year. When you see in the news that Hungary's currency is plummeting, you can bet UniCredit's losses are growing," Mr Stansberry elaborated.
Today, on the Italian bourses, UniCredit fell by over 7% before turning higher aided by a ban on short-selling by Italy's regulator and news that the government had sold its targeted €6.75 billion of 12-month bills in a bond auction.
UniCredit is the successor bank of Kredit-Anstalt, whose failure in 1931 overwhelmed European governments, forcing Austria, Germany, and England off the gold standard.
Mr Stansberry stated emphatically: "As I told my subscribers in March, I think history is about to repeat itself: Roughly 75 years after its collapse set off the banking crisis that ended the gold standard and destroyed the world's financial system, Kredit-Anstalt (now known as UniCredit) is once again the largest bank in Eastern Europe. I believe it will soon fail again, setting off another global banking crisis."
The investment advisor explained that one aspect about European sovereign debt that most investors around the world failed to understand is that Europe's banking regulators have allowed the banks to own European sovereign debt with zero reserves because the banks argued these were "risk-free" assets. The easiest way for European banks to "lever up" and increase their returns on equity was to borrow large amounts of slightly higher-yielding sovereign debt, from places like Greece, Spain, Portugal, and Italy. This allowed nations privileged access to credit, and it also allowed banks to take on much more leverage than they could have otherwise afforded. "Now, with credit default swap prices rising on these sovereign credits, the truth of these credit risks is coming out," he wrote.
In another note to investors on 20th June, Mr Stansberry wrote that he expected the Spanish and Italian economies to collapse in the next six months. "I expect this next 'down leg' in the world's markets to be more severe than the crisis of 2008, because the balance sheets of the Western democracies are now less prepared to manage the losses.
Describing the history of UniCredit again, and how the failure of its predecessor Oesterreichische Credit-Anstalt—the largest bank in Eastern Europe before World War II—was responsible for kicking off the Great Depression, Mr Stansberry said he was convinced that the failure of UniCredit now would presage the next global monetary collapse.
Today, as the UniCredit stock continues to weaken, there could be a run on the bank and the losses would be too large for Italy to manage without a huge international bailout. "UniCredit has borrowed $300 billion from other European banks. And Italy's government already owes creditors more than 120% of GDP. There aren't any easy solutions to this problem," the investment advisor wrote.
Nifty may stage a rally till 5,600, but this may be short-lived
Domestic markets were severely mauled today by the deepening Euro debt crisis and a couple of negative domestic factors such as poor Infosys results and a decline in the manufacturing index. After opening lower, the indices were knocked down through the day and lost more than 1.5% by the close of trading.
The European sovereign-debt crisis threatened to pass on to Italy and Spain, and prompted a surge in bond yields. Eurogroup finance ministers said late Monday they are ready to adopt further measures to ensure that Greece's sovereign-debt crisis does not spread to other parts of the European Union. However they didn't take any concrete steps.
The yield on 10-year Italian government bonds rose more than 0.2% percentage points to around 5.8% and the cost of insuring the debt against default also hit a record high.
The Sensex opened 187 points down at 18,534, while the Nifty opened at 5,557, lower by 59 points from its previous close.
The drop in the indices was worsened by the first quarter results of Infosys Technologies that were below expectations. The company announced a 15.72% increase in consolidated net profit to Rs1,722 crore for the first quarter ended 30 June 2011 over the Rs1,488 crore recorded in the corresponding period a year ago. However, net profit dipped 5.2% from the Rs1,818 crore in the previous quarter ended 31 March 2011, hurt by wage hikes and intense competition from rivals. The company maintained its full-year dollar revenue forecast of 18%-20%, which too was a disappointment for the market and the stock price slipped over 5% in early trade. The Infosys stock was the worst performer in the pack of Sensex stocks today, closing with a loss of 4.27%.
Slower-than-expected industrial output numbers for May that were announced around noon, dampened sentiments further. Industrial output, measured by the Index of Industrial Production (IIP) rose by just 5.6% from a year earlier. April's industrial output growth was also revised downwards to 5.8% from the earlier 6.3%, the government said. The growth in April-May was just 5.7% compared to 10.8% a year ago.
The weak market appeared to revive briefly on the news of the much-awaited Cabinet reshuffle, a little before noon. While the prime minister was expected to make changes that would address the problem of corruption and remove ministers who have not performed, there weren't any major changes apart from the induction of a few new faces. At about this time, the indices hit their intra day high, the Sensex at 18,589 and the Nifty at 5,580.
The market did not revive after that and as the European markets re-opened weak, the Sensex hit an intra-day low at 18,326 and the Nifty fell back to 5,497. At the close the Sensex had lost 310 points to 18,412 and the Nifty 90 points to 5,526.
Yesterday, we mentioned that the Nifty may find support at 5,525. Today, the Nifty broke this support but ended above it. We could see a pullback rally if the US market ends with minor losses.
Today, among the pack of 30 stocks in the Sensex, ONGC and Hindustan Unilever were the only stocks which were marginally positive. Other major losers besides Infosys were DLF (down by 3.84%), Mahindra & Mahindra (down by 3.02%), Jindal Steel (down by 2.99%) and Reliance Infrastructure (down by 2.89%). Only five stocks were positive in the Nifty.
The advance decline ratio on the National Stock Exchange (NSE) was a poor 427:1295.
Among the top gainers on the NSE were Weizmann Forex (up 20.03%), Savita Oil (up 12.92%), whereas the top losers were Jumbo Bag (down by 10.42%) and Vijay Shanthi Builders (down by 9.68%).
The European crisis had its effect on Asian markets across the board. The Hang Seng dropped the maximum (down by 3.06%), followed by the Seoul Composite (down by 2.20%) and the Taiwan Weighted (down 2.02%). The others dropped between 1.79% and 0.11%.
Narayan Varma addresses fourth Moneylife Foundation seminar on the Right to Information Act, saying people must build pressure so public authorities voluntarily disseminate imformation
Narayan Varma, chartered accountant and a consultant on several official committees for the effective implementation of the Right to Information Act, today said that "talks are going on at the Centre on expanding the scope of Section 4 of the RTI Act and its proper implementation."
Mr Varma was speaking at a seminar organised by Moneylife Foundation. He is a member of various government committees and civil society organisations dealing with the effective implementation of RTI.
He focused on Section 4 of the Act which primarily involves suo moto disclosure of information by public authorities. According to this section all records should be maintained and indexed properly in a way that facilitates easy access to information, gives citizens the right to inspect files physically without filing an application, and it states that public authorities should also voluntarily disseminate as much information as possible to the public through various domains and raise awareness through workshops and seminars.
"Unfortunately, the government has failed to provide guidelines to the public authorities on suo moto dissemination of information, neither do the bureaucrats have the political will to implement Section 4," Mr Varma said. "But we as citizens and activists must prevail upon them to change their attitude."
Replying to participants question about the rules and fees that are applicable to different public authorities for seeking information, Mr Varma said, "Though the RTI Act is the overarching legislation in this matter, there are individual laws formulated by states and public authorities like the courts. The norms and fees are also subject to such rules."
Mr Varma described several success stories of information seekers. He spoke about a man who was entitled to a substantial compensation from the government through estate duty, which was abolished more than 50 years ago. Mr Varma and his associates not only helped the man claim his inheritance, but they also helped the concerned government department to re-construct the lost documents on the basis of the documents that the man had with him.
"The other difficult thing to establish is who is a public authority," he said. "When the definition of public authority says that it has to be 'substantially funded' by the government, it opens the ground to debate. But we have got information in many cases by establishing that the institution concerned is a 'public authority'."
He talked about how activists had compelled some government-aided hospitals to put up information on their websites about the number of free beds reserved for the poor.
"Unfortunately, there are a lot of public authorities who do not favour voluntary dissemination of information," Mr Varma said. "They think it is a nuisance. But that mindset has to change. And we must create pressure to that effect."