Global Debt Crisis & Impact on India. October 2011

Transcription

1 Global Debt Crisis & Impact on India October

2 Disclaimer The information contained herein is proprietary and the property of Venator Search Partners and Piper Serica Advisors Pvt. Ltd.. This Presentation is being prepared for Venator s internal training purposes. The information contained herein is based on primary and secondary sources and we do not vouch for its correctness. The recipient should use its own judgment before using this information. 2

3 Contents Anatomy of A Debt Crisis United States of America Europe Are there any ways out? Impact on India 3

4 Anatomy of A Debt Crisis 4

5 Anatomy of A Debt Crisis Crisis due to debt defaults - US 2008 Banks that lent to subprime borrowers - Europe 2011 Countries that are over leveraged Low Growth - Increase in unemployment - Inequality of income and wealth Large losses unable to make ends meet - Fiscal deficit for Nations - Losses for corporations Inter linkages in global financial system compounds the problem Low regulatory supervision banks lending to undeserving borrowers Political weakness desire to do what is populist 5

6 Anatomy of A Debt Crisis DEBT is a four letter word Perfect debt storm is created when nations and companies act as delinquent individuals and those responsible for monitoring them are sleeping on the job 6

7 Anatomy of A Debt Crisis Money as Debt Total debt, can only be repaid in full by issuing more debt to cover the interest payments. Exponential debt growth and bankruptcies are therefore built in to the monetary infrastructure. < LESS THAN 7

8 Anatomy of A Debt Crisis 8

9 Anatomy of A Debt Crisis 9

10 Anatomy of A Debt Crisis 10

11 Anatomy of Debt Crisis While earnings are not keeping pace 11

12 Anatomy of A Debt Crisis QoQ Annualised GDP Growth, F 12

13 Anatomy of A Debt Crisis 13

14 Anatomy of A Debt Crisis 14

15 United States of America

16 United States of America Securitized Banking (selling loans) Think of securities as IOUs that are in turn traded and passed along, as in a game of hot potato. Securities end up functioning as money (i.e. means of exchange, or currency) 16

17 Ratio United States of America Loan sales increased 0.30 Ratio of Loan Sales to Loans Held United States ( ) Year *Ratio of Secondary Market Loan Sales to Commercial and Industrial Loans Outstanding 17

18 United States of America Bank Runs Revisited IOUs circulated around as money. Banks who had these IOUs borrowed against them in short-term contracts, i.e. they used these IOU s as collateral (or securities ) to borrow. Like a mortgage, I usually have to put up something I own as collateral worth some percentage of the money I am borrowing. Let s say that s 90%. If I default on my loan, the bank gets this property, worth 90% of the value of the loan. This is called securitized lending, because putting up collateral makes it less risky, or hence, more secure. 18

19 United States of America Bank Runs Revisited When the value of these securities dropped, because people stopped making their mortgage payments, this (loan to value ratio) was not met. Lenders demanded that they be paid back, or else be given more collateral, i.e. more securities. This is basically a mass withdrawal on the debtors who had to find more securities or sell them to raise more money. The sale in turn caused the prices of these securities to decline even further! The financial panic of was essentially a bank run in this secondary repo markets 19

20 United States of America De-regulation is to blame Examples of De-regulation: Basel I and Basel II lowering of capital requirements Repeal of Glass-Steagal Act: separates investment from commercial banks Hyman Minsky: Says that market success over time leads to complacency; people forget the risks of the financial markets, and take excessive risks. Most important problem was overall lack of regulation. Neoliberalism destroyed US economy in the 1980s increase in financial speculation 20

21 United_States United States of America 65.0 Public debt (% of GDP) Year 21

22 Financial Debt/GDP United States of America 1.2 Ratio of Financial Debt to Total GDP United States ( ) Year 22

23 Ratio United States of America 2.4 Total Debt to GDP Ratio United States ( ) Year 23

24 Percentage United States of America 12 US Unemployment Rate Year 24

25 Percentage United States of America A structural crisis? The Economy as it exists only employs about 80% of the labor force, or less! US Unemployment Rate Year 25

26 United States of America 26

27 Percentage United States of America Inequality 50.0 Percentage of Total Income Earned by the Top 10 Percent United States ( ) Year 27

28 United States of America Inequality and the Crisis During past 30 years, there has been a PROFIT BOOM; but this has NOT been distributed as compensation and wages to workers. Rising wages cuts directly into profits. This presents a problem to business: how do you keep consumption levels high without sacrificing profits by rising wages? Answer: GIVE WORKERS CREDIT CARDS RATHER THAN RAISES. - Debt is a substitute for rising wages. - But this was unsustainable in the longterm In short: inequality is economically unsustainable. 28

29 Europe

30 In 1958, an organization called European Coal and Steel Community was formed. This evolved into the European Union (EU) which was established by the Maastricht Treaty in The European Union introduced the euro on January 1, On this day, 11 member countries of the EU started using euro as their currency. It benefited countries such as Portugal, Italy, Ireland, Greece and Spain (together now known as the PIIGS) 30

31 Before these countries started to use the euro as a currency, they had to borrow money at interest rates much higher than the rates at which a country like Germany borrowed. When these countries started to use the euro they could borrow money at interest rates close to that of Germany, which was economically the best managed country in the EU 31 The rest of Europe, in effect, used Germany's credit rating to indulge its material desires. They borrowed as cheaply as Germans could to buy stuff they couldn't afford

32 Also other than the low interest rates, the inflation in the PIIGS countries was higher than the rate of interest. It means that, if the borrowing rate is 3 per cent while inflation is 4 per cent you're effectively borrowing for 1 per cent less than inflation. You're being paid to borrow And borrow they did. And the European peripheral countries (PIIGS) racked up enormous amount of debt in euros.' The debt of Greece, currently amounts to around 160 per cent of it s GDP. So, other than the citizens, the governments also started to borrow. This helped politicians keep their constituency of voters happy 32

33 France Europe Public debt (% of GDP) Year 33

34 Germany Europe Public debt (% of GDP) Year 34

35 Greece Europe Public debt (% of GDP) Year 35

36 Iceland Europe Public debt (% of GDP) Year 36

37 Ireland Europe Public debt (% of GDP) Year 37

38 Portugal Europe Public debt (% of GDP) Year 38

39 Europe 39

40 Take the case of Greece. A job which now pays 55,000 euros in Germany, pays 70,000 euros in Greece, even with the fact that Germany is a more productive nation. To get around pay restraints in the calendar year the Greek government simply paid employees a 13th and even 14th monthly salary -- months that didn't exist. There is more to come. The Greek government categorises certain jobs as arduous. These jobs have a retirement age of 55 for men and 50 for women. 'As this is also the moment when the state begins to shovel out generous pensions, more than 600 Greek professions somehow managed to get themselves classified as arduous: hairdressers, radio announcers, musicians It means more and more borrowing by the government, when they already have so much debt 40

41 41 Take the case of Spain. Spain had the biggest housing bubble in the world. "To put things in perspective, Spain now has as many unsold homes as the United States, even though the US is six times bigger. Most of these new homes were financed with capital from abroad. Spain's real estate debt comes to around 50 per cent of its GDP Every time there are default threats, the European Central Bank (ECB), helps out with a bailout. Since the start of the financial crisis it (the ECB) has bought, outright, something like $80 billion of Greek and Irish and Portuguese government bonds, and lent another $450 billion or so to various European governments and European banks, accepting virtually any collateral, including Greek government bonds

42 The situation is pretty messy because it is interlinked. Take the case of Germany, which keeps contributing the ECB rescue fund. In case of Greece, a lot of German and French banks which have lent money will be in trouble if Greece defaults 'The German government gives money to the rescue fund so that it can give money to the Irish government so that the Irish government can give money to Irish banks so the Irish banks can repay their loans to the German banks, 42 But wouldn't it be easier for the German government to just pay the German banks separately, instead of taking this long and convoluted route?

43 In 2004, interest rates in Hungary were at 12.5 per cent. This meant borrowing money was extremely expensive, In neighbouring Austria, the banks had started to offer loans and mortgages to their customers in Swiss francs. Rates in Austria, at 2 per cent, may have been lower than in Hungary, but in Switzerland, they were even lower at around 0.5 per cent. Why would Austrians borrow at 2 per cent when they could just as easily borrow at 0.5% per cent?. The same question applied to Hungarians, except that the difference was much bigger. So the Austrian banks, many of which also had branches in Hungary began to engage in the same business there, lending to Hungarian borrowers. 43

44 Austrian banks have lent 140% of their GDP to countries like Hungary. Even though Hungary has put in austerity measures and is trying to repay, if there was a blow up, the Austrian government wouldn't be able to save the banks and ECB might have to step in Swedish banks have also lent a lot of money to Estonia, Lithuania and Latvia, countries which aspire to have Euro as their currency some day When countries go back to their own currencies 44 to print it and repay debt, citizens will be affected.

45 Mauldin and Tepper elaborate on this using the example of Italy. 'Households and firms, anticipating that domestic deposits would be redenominated into the lira (Italy's currency before it started using the euro), which would then lose value against the euro, would shift their deposits to other euro-area banks. A system-wide bank run would follow. Investors anticipating that their claims on the Italian government would be redenominated into lira would shift into claims on other euro-area governments, leading to a bond market crisis... this would be the mother of all financial crises,' write the authors," 45

46 Are there any ways out? 46

47 Are there any ways out?... 47

48 Are there any ways out?... 48

49 Are there any ways out?... 49

50 Are there any ways out?... Public Debts, Deficits, and Illustrative Adjustment Paths (% GDP) 50

51 Are there any ways out?... Consumer Spending QoQ and YoY, F 51

52 Are there any ways out?... Real Short-Term Interest Rates (Versus CPI Inflation), F 52

53 Are there any ways out?... 53

54 Are there any ways out?... 54

55 Are there any ways out? 55

56 Impact on India 56

57 Impact on India 57

58 Impact on India Selected Countries Industrial Production Data and Forecasts (%), F 58

59 Impact on India India Macro Snapshot (%) 59

60 Median age in years Impact on India The Indian Population: An Overview 50 Indians are Younger than the World India 30 USA China Russia UK

61 Impact on India India: Increasing Working Population Growth in Global Working Age Population (15-64) Stock Position 2005 World 4,168 India 691 Africa 500 China 934 South East Asia 362 Latin America 359 Southern Asia 132 USA 200 Europe 497 Japan Addition to working age population by In Million Countries worldwide are anticipating a shortage of working population in the future. India is expected to emerge as a clear winner and by 2050 it will have the largest working age population. 61

62 Impact on India Government Debt in Selected Countries 62

63 Impact on India Gross & Net NPAs (%) 63

64 Impact on India Export Linkages are relatively low Composition of Exports Direction of exports 64

65 Thank You 65