In your interest.
Online Personal Finance Magazine
No beating about the bush.
The lack of information about bad debts does not stop in developed countries. China, Brazil, Russia, and even India are dominated by state-owned banks whose lending is heavily influenced by politicians and they have less of an incentive to reveal the extent of the problem
The crash of 2008 was caused by two things. The first was a mountain of bad debt. This was accumulated during a period of economic growth when credit was given too easily to too many people. Of course this is a normal part of a business cycle. What looks like a good credit bet when times are good can look like a huge mistake when the economy turns bad. What turns a contraction into a crash is the other factor: bad information.
The information question is now causing problems for several financial institutions in developed countries. Bank of America's stock has fallen by 50% since May. Bank of America has $460 billion worth of real estate-related lending on its books and no one really knows how much it is worth. The real estate market in the US has continued to deflate, but information as to exactly how much is the subject of heated debate.
Like Bank of America, the shares of French banks including Société Générale, BNP Paribas and Crédit Agricole have been hit by large short-term losses. These were sparked by rumours, many of which turned out to be untrue. Still the risks associated with the French banks' exposure to potential losses from the sovereign debts of Italy and Spain are unknown. But the lack of information about bad debts certainly does not stop in developed countries. The issue is becoming quite severe in emerging markets as well.
China recently announced plans to bailout its local governments by assuming 2-3 trillion yuan ($308billion-$463 billion). The total amount of bad debts could go much higher, because many of these estimates do not include off-balance sheet loans. The information about debts in China is opaque even to the Chinese, much less to global markets. This could cause some severe problems. The ratings agency Fitch gave China the worst grade in its three-level scale of potential for systemic stress. Sixty per cent of countries that received the score had banking crises within a few years.
China is hardly alone. Most of the emerging market economies have been growing at a blazing pace. Over the past two years, emerging market economies have grown in excess of 7%, both stock markets and real estate prices have reached all-time highs. It would hardly be a surprise if there were credit problems, but information about the extent of the issues is hard to find.
India is a case in point. A recent report suggests that at least 17% of Indian banks' outstanding loan assets could be on the verge of default, and debt ratings for companies are deteriorating at the fastest pace since 2009. Public sector banks make up the vast majority of the banks in India and could be the worst hit, no doubt the result of loans to politically connected borrowers. The bad loans of the State Bank of India, the nation's largest lender, are a case in point. They rose 77% in the first three months of 2011, while the bank's net income fell 99%.
Brazil's banks are having similar problems. Brazil's biggest lender, Itau Unibanco raised its default-rate forecast for 2011 in July. Its shares have fallen 21% this year. In fact the entire Brazilian financial sector has lost more than its counterparts in Europe, as consumer defaults hit a 12-month high. But the exact numbers are not available, because Brazil has yet to implement recent legislation to allow Brazilian lenders to collect and share information on all borrowers.
Unlike Brazil, Turkey took the unusual step of lowering interest rates to protect itself from the wall of liquidity sloshing around the world. It didn't help. Despite attempts to curb bank lending, Turkey has experienced credit growth of more than 30%. Its reliance on foreign capital and a record current account deficit sets the stage for a capital flight crisis.
Not to be outdone, Russia's fifth-largest bank, Bank of Moscow, racked up at least 150 billion roubles ($5.4 billion) of unsecured bad loans. It recently required a $14 billion rescue. It may not be the only one required. Russia's banking sector, like the other BRICs, is dominated by state-owned banks whose lending is heavily influenced by politicians and not necessarily by accurate judgments of solvency. Worse, state banks have less of an incentive to reveal the extent of the problem, since their bad loans might reflect badly on those in power. So the information is likely to remain hidden until there are no alternatives.
But emerging market debt issues are not limited to emerging markets. The third-largest US bank, Citigroup, gets more than half of its profit from emerging markets. The stagnation of developed market economies has encouraged their banks to look to emerging markets for growth. Given the present issues in emerging markets, they might have been better off at home.
(The writer is president of Emerging Market Strategies and can be contacted at [email protected] or [email protected].)
Nifty may see the lows of 4,680 again after 19 months
Worries about domestic economic growth following a cut in the growth forecast for the current fiscal by the Reserve Bank of India (RBI) and global concerns resulted in the market closing in the negative for a third day. Today, the Nifty broke the support of 4,750 which we have been suggesting for the past few days. With this drop, the Nifty dipped to the level last seen on 6 February 2010, which means that we are trading at nearly a 19-month low. The downtrend is expected to continue and we may see the index fall to 4,680.
The market opened flat this morning on domestic concerns, as the RBI noted in its annual report for 2010-11 that was released yesterday that economic growth could moderate to 8% during the current fiscal, from 8.5% recorded a year ago, due to unfavourable developments. Near double-digit food inflation for the week ended 13th August also weighed on the sentiment. The Nifty opened one point lower at 4,839 and the Sensex resumed trading at 16,156, up 10 point from its previous close.
The market gained in the first hour, registering an intra-day high of 4,872 on the Nifty and 16,526 on the Sensex. But, continuous selling by institutional investors dragged the indices lower by noon. The market extended its losses through the post-noon session, dipping to the day’s low in the last 30 minutes of trade. Both the benchmark indices dropped to below their psychological levels, the Nifty to 4,720 and the Sensex to 15,756.
However, the market closed off these lows, on a marginal pull-back. The Nifty declined settled at 4,748, down 92 points, while the Sensex ended the day at 15,849, a loss of 298 points.
The advance-decline ratio on the National Stock Exchange (NSE) was a dismal 263:1447.
The broader indices underperformed the Sensex today as the BSE Mid-cap index tanked 2.25% and the BSE Small-cap index tumbled 2.65%.
All sectoral indices settled in the negative with the BSE Realty (down 4.09%) emerging as the biggest loser. It was followed by BSE Metal (down 3.69%), BSE Oil & Gas (down 3.19%), BSE PSU (down 2.58%) and BSE Bankex (down 2.50%).
The gainers on the Sensex were Hero MotoCorp (up 2.70%), Mahindra & Mahindra (up 1.20%) and Infosys (up 0.68%). The losers were led by Jaiprakash Associates (down 7.58%), DLF (down 5.76%), Tata Steel (down 4.77%), Reliance Industries (down 4.61%), and Coal India (down 3.90%).
The major gainers on the Nifty were Hero MotoCorp (up 3.14%), M&M (up 1.23%), Infosys (up 1.13%), Jindal Steel (up 0.13%) and TCS (up 0.03%). The main losers on the index were Reliance Capital (down 12.33%), Reliance Communications (down 11.11%), JP Associates (down 7.42%), Reliance Infrastructure (down 6.53%) and DLF (down 6.25%).
Markets in Asia settled mostly lower as investors awaited announcements by US Federal Reserve chairman Ben Bernanke, who is expected to chalk out the road ahead for the world’s largest economy in a speech later tonight. Japan’s benchmark Nikkei 225 rose 0.3% in volatile trade as prime minister Naoto Kan announced that he was resigning 14 months into the job.
The Shanghai Composite lost 0.12%, the Hang Seng fell 0.86%, the Jakarta Composite shed 0.07%, the KLSE Composite declined by 1.36% and the Straits Times slipped 0.63%. On the other hand, the Seoul Composite surged 0.81% and the Taiwan Weighted rose 0.46%.
Back home, foreign institutional investors were net sellers of stocks worth Rs1,440.55 crore on Thursday. On the other hand, domestic institutional investors were net buyers of equities worth Rs385.01 crore.
Indian drugmaker Indoco Remedies has entered into agreement to make generic products sold by South Africa’s Aspen Pharmacare in Australia. With this new development, the company’s existing relationship with Aspen will be strengthened. Indoco ended 5.08% lower at Rs386 on the NSE.
Private sector carrier Kingfisher Airlines has received its board’s nod to raise up to Rs2,000 crore through a rights issue. The board has also amended the terms for the issue of optionally convertible debentures that were issued on 3rd January. The stock plunged 6.40% to end at Rs23.40 on the NSE.
Diversified industrial company Ingersoll Rand today announced its entry into the cold chain consultancy segment in India. The company plans to provide a host of services and solutions to address issues of storage, transportation and delivery of perishable products. The stock closed at Rs438.10, down 3.17% on the NSE.
Ministry of Corporate Affairs allows spending of unclaimed investors’ funds to be decided by bureaucrats, industry bodies
In one of the most brazen moves in recent times, the ministry of corporate affairs (MCA) has allowed the spending of a fat pool of unclaimed investors’ funds that will be decided by a set of bureaucrats and industry associations. Here is how it has happened. When the...