Showing posts with label bond. Show all posts
Showing posts with label bond. Show all posts
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Tuesday, 10 August 2021
Sunday, 10 May 2020
Soaring government debt is now inevitable. It’s nothing to fear
Thatcher’s simplistic aversion to borrowing still haunts fiscal policy, but interest rates have been falling for many years writes Philip Inman in The Guardian
There are plenty of Tory MPs who believe there is a bigger threat to health, and possibly their electoral chances, from a damaged economy. They give equal billing to the threat from a flurry of corporate bankruptcies, a steep rise in unemployment and a ballooning debt pile that would dwarf the legacy left by the 2008 banking crash.
And it is this last concern – that of the mortgage to end all mortgages being left on the nation’s balance sheet – to which ministers have turned and begun to debate in the most heated terms. Without a doubt, a fear of debt is the main constraint on funding the current rescue operation and on making a boost to investment once the crisis is over.
If you are a traditional Conservative MP with a picture of Margaret Thatcher on the constituency office wall, you believe debts must be repaid, much like a domestic property mortgage.
This is the household analogy Thatcher used to great effect during her years as prime minister, despite it being economically illiterate, and only ever deployed as a way to keep public spending in check and state power limited.
Now, to tackle the coronavirus outbreak and nurse the economy until a vaccine is mass-produced, there is no choice but to watch the gap between spending and income soar.
The Institute for Fiscal Studies estimates the government will need to borrow an extra £200bn in this financial year alone and is heading for a debt-to-GDP ratio of 95% from the current level of around 83%.
A debt mountain that falls just short of the UK’s £2.2 trillion annual income is a level of borrowing that butts up against a significant psychological barrier – the three-figure debt-to-GDP ratio.
In the mind of a conservative thinker, only countries that are reckless, and possibly morally dubious, have spent so much that their debts exceed 100% of GDP.
In practical terms, a country with high debt levels can become the target of panicky investors, who can orchestrate a strike that means no one lends it money.
A government borrows by issuing bonds with a maturity date, and it needs fresh lenders to step in and buy the debt from existing lenders each time it matures. “Bond vigilantes” make money from orchestrating such bond-buying strikes and are ever watchful for countries that have left themselves vulnerable.
The euro crisis is still fresh in many people’s minds, when Italy and Greece found themselves bond-market pariahs. Italy’s debts equalled 130% of GDP. Greece found itself with a debt-to-GDP ratio of 180%.
George Osborne’s career as chancellor, and his adherence to a debilitating austerity programme, was built on warnings that Britain could suffer the same fate as Greece and Italy. Like his hero Thatcher, he persuaded an anxious nation that debt was to be feared.
Yet it was never true and is even less true today. Central to this argument is the path of interest rates. For the last 20 years in the UK and Europe, and the last 40 years in the US, interest rates on government debt have tumbled. Even though governments have borrowed more over time, the cost of financing each pound of debt has fallen.
There was always the concern that interest rates could increase at some time, but it was never likely and most economists agree it cannot happen now, at least not for a decade or more. There are too many savings in the world looking for a safe haven for the demand for government bonds ever to fall, especially relative to stock markets or lending to corporations. That means the bond vigilantes have no leverage, except in the developing world. For the richer countries, there is always someone to borrow from.
So, as the US and Japan have learned, it is not the size of your debts but how much they cost to service that matters. No wonder the US government debt-to-GDP ratio is at 110% and rising while Japan is a darling of the bond markets even though its government has a debt-to-GDP ratio above 250%.
Margaret Thatcher campaigning in the 1979 election. Photograph: Geoff Bruce/Getty Images
It is clear Boris Johnson has favoured his health advisers as he looks to ease the lockdown. Worries about a second coronavirus outbreak have clinched victory over concerns about keeping much of industry and commerce in a state of suspended animation.
After weeks of pleading by the Treasury to get the nation back to work, No 10 has opted to play it safe with people’s health, and particularly older people. And no wonder, after a hapless first few months in which the UK leapt to fourth place in probably the most ignominious league table in modern history – that of Covid-19 deaths per 100,000 population – behind Belgium, Spain and Italy.
It is clear Boris Johnson has favoured his health advisers as he looks to ease the lockdown. Worries about a second coronavirus outbreak have clinched victory over concerns about keeping much of industry and commerce in a state of suspended animation.
After weeks of pleading by the Treasury to get the nation back to work, No 10 has opted to play it safe with people’s health, and particularly older people. And no wonder, after a hapless first few months in which the UK leapt to fourth place in probably the most ignominious league table in modern history – that of Covid-19 deaths per 100,000 population – behind Belgium, Spain and Italy.
---Also read
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There are plenty of Tory MPs who believe there is a bigger threat to health, and possibly their electoral chances, from a damaged economy. They give equal billing to the threat from a flurry of corporate bankruptcies, a steep rise in unemployment and a ballooning debt pile that would dwarf the legacy left by the 2008 banking crash.
And it is this last concern – that of the mortgage to end all mortgages being left on the nation’s balance sheet – to which ministers have turned and begun to debate in the most heated terms. Without a doubt, a fear of debt is the main constraint on funding the current rescue operation and on making a boost to investment once the crisis is over.
If you are a traditional Conservative MP with a picture of Margaret Thatcher on the constituency office wall, you believe debts must be repaid, much like a domestic property mortgage.
This is the household analogy Thatcher used to great effect during her years as prime minister, despite it being economically illiterate, and only ever deployed as a way to keep public spending in check and state power limited.
Now, to tackle the coronavirus outbreak and nurse the economy until a vaccine is mass-produced, there is no choice but to watch the gap between spending and income soar.
The Institute for Fiscal Studies estimates the government will need to borrow an extra £200bn in this financial year alone and is heading for a debt-to-GDP ratio of 95% from the current level of around 83%.
A debt mountain that falls just short of the UK’s £2.2 trillion annual income is a level of borrowing that butts up against a significant psychological barrier – the three-figure debt-to-GDP ratio.
In the mind of a conservative thinker, only countries that are reckless, and possibly morally dubious, have spent so much that their debts exceed 100% of GDP.
In practical terms, a country with high debt levels can become the target of panicky investors, who can orchestrate a strike that means no one lends it money.
A government borrows by issuing bonds with a maturity date, and it needs fresh lenders to step in and buy the debt from existing lenders each time it matures. “Bond vigilantes” make money from orchestrating such bond-buying strikes and are ever watchful for countries that have left themselves vulnerable.
The euro crisis is still fresh in many people’s minds, when Italy and Greece found themselves bond-market pariahs. Italy’s debts equalled 130% of GDP. Greece found itself with a debt-to-GDP ratio of 180%.
George Osborne’s career as chancellor, and his adherence to a debilitating austerity programme, was built on warnings that Britain could suffer the same fate as Greece and Italy. Like his hero Thatcher, he persuaded an anxious nation that debt was to be feared.
Yet it was never true and is even less true today. Central to this argument is the path of interest rates. For the last 20 years in the UK and Europe, and the last 40 years in the US, interest rates on government debt have tumbled. Even though governments have borrowed more over time, the cost of financing each pound of debt has fallen.
There was always the concern that interest rates could increase at some time, but it was never likely and most economists agree it cannot happen now, at least not for a decade or more. There are too many savings in the world looking for a safe haven for the demand for government bonds ever to fall, especially relative to stock markets or lending to corporations. That means the bond vigilantes have no leverage, except in the developing world. For the richer countries, there is always someone to borrow from.
So, as the US and Japan have learned, it is not the size of your debts but how much they cost to service that matters. No wonder the US government debt-to-GDP ratio is at 110% and rising while Japan is a darling of the bond markets even though its government has a debt-to-GDP ratio above 250%.
Monday, 4 May 2020
Can governments afford the debts they are piling up to stabilise economies?
Two experts debate the long-term impact on inflation of the Covid-19 rescue packages
Stephanie Kelton and Edward Chancellor in The FT
YES - It poses no inherent danger to states that issue their own currency
The Covid-19 pandemic has forced governments around the world to spend large sums in an effort to stabilise their economies, writes Stephanie Kelton. Gone, for now, are concerns about how to “pay for” it all. Instead we are seeing wartime levels of spending, driving deficits — and public debt — to new highs.
France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100 per cent of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160 per cent. In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237 per cent. With GDP collapsing on a global scale, few countries will escape. In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120 per cent in 2021.
Stephanie Kelton and Edward Chancellor in The FT
YES - It poses no inherent danger to states that issue their own currency
The Covid-19 pandemic has forced governments around the world to spend large sums in an effort to stabilise their economies, writes Stephanie Kelton. Gone, for now, are concerns about how to “pay for” it all. Instead we are seeing wartime levels of spending, driving deficits — and public debt — to new highs.
France, Spain, the US, and the UK are all projected to end the year with public debt levels of more than 100 per cent of gross domestic product, while Goldman Sachs predicts that Italy’s debt-to-GDP ratio will soar above 160 per cent. In Japan, Prime Minister Shinzo Abe has committed to nearly $1tn in new deficit spending to protect a $5tn economy, a move that will push Japan’s debt ratio well above its record of 237 per cent. With GDP collapsing on a global scale, few countries will escape. In advanced economies, the IMF expects average debt-to-GDP ratios to be above 120 per cent in 2021.
---Also watch
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While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world. Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates. Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt. They should not.
While public debt can create problems in certain circumstances, it poses no inherent danger to currency-issuing governments, such as the US, Japan, or the UK. This is not, as some argue, because these countries can currently borrow at very low cost, or because a strong recovery will allow them to grow their way out of debt.
There are three real reasons. First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.
The first point should be obvious, but it is often obscured by the way governments manage their fiscal operations. Take Japan, a country with its own sovereign currency. To spend more, Tokyo simply authorises payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account. Being the issuer of a sovereign currency means never having to worry about how you are going to pay your bills. The Japanese government can afford to buy whatever is available for sale in its own currency. True, it can spend too much, fuelling inflationary pressure, but it never needs to borrow Yen.
If that is true, why do governments sell bonds whenever they run deficits? Why not just spend without adding to the national debt? It is an important question. Part of the reason is habit. Under a gold standard, governments sold bonds so deficits would not leave too much currency in people’s hands. Borrowing replaced currency (which was convertible into gold) with government bonds which were not. In other words, countries sold bonds to reduce pressure on their gold reserves. But that’s not why they borrow in the modern era.
Today, borrowing is voluntary, at least for countries with sovereign currencies. Sovereign bonds are just an interest-bearing form of government money. The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it borrows. As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.
So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods. By selling bonds, they maintain the illusion of being financially constrained.
In truth, currency-issuing governments can safely spend without borrowing. The debt overhang that many are worried about can be avoided. That is not to say that there is anything wrong with offering people an interest-bearing alternative to government currency. Bonds are a gift to investors, not a sign of dependency on them. The question we should be debating, then, is how much “interest income” should governments be paying out, and to whom?
The writer is a professor of economics and public policy at Stony Brook University and author of the forthcoming book “The Deficit Myth”
No — This dangerous monetary practice ensures inflation is around the corner
How to pay for the fathomless costs of fighting a pandemic? All the state’s expenses, whether a Green New Deal, jobs-for-all or the economic lockdowns, can be met simply by printing money. That is what modern monetary theory claims, writes Edward Chancellor.
Adherents of this unorthodox school of economics would have us believe, like Alice in Wonderland, six impossible things before breakfast. Governments can never go bust. They don’t need to raise taxes or issue bonds to finance themselves. Borrowing creates savings. Fiscal deficits are not the problem, they are the cure. We could even pay off the national debt tomorrow.
As theory, MMT has been rejected by mainstream economists. But as a matter of practical policy, it is already being deployed. Ever since Ben Bernanke, as governor of the US Federal Reserve, delivered his “helicopter money” speech in November 2002, the world has been moving in this direction. As president of the European Central Bank, Mario Draghi proved that even the most indebted countries need not default. Last year, the US federal deficit exceeded $1tn at a time when the Fed was acquiring Treasuries with newly printed dollars — that’s pure MMT.
This crisis has accelerated the process. Fiscal and monetary policy are now being openly co-ordinated, just as MMT recommends. The US budget deficit is set to reach nearly $4tn this year. But tax rises are not on the agenda. Instead, the Fed will write the cheques. Across the Atlantic, the Bank of England is directly financing the largest peacetime deficit in its history. MMT claims that money is a creature of the state. The Fed’s share of an expanding US money supply is close to 40 per cent and rising. Again, we are seeing MMT in practice.
The lockdown is a propitious moment to implement MMT. During crises, the public has an abnormally high demand to hold cash; debt monetisation appears less of a problem. But governments can print money to cover their costs for only as long as the public retains confidence in a currency. When the crisis passes, the excess money must be mopped up.
Proponents of MMT claim this shouldn’t be a problem. But then they admit that nobody has a good inflation model. We cannot accurately measure the economy’s spare capacity, either. This means that politicians are unlikely to raise taxes in time to nip inflation in the bud. Bonds can always be issued to withdraw money from circulation. But once inflation is under way, bondholders demand higher coupons. From a fiscal perspective, it makes more sense to issue government debt when rates are low — as they are today — than to print money now and pay higher rates later.
Great historic inflations have been caused not by monetary excesses but by supply shocks, say MMT exponents. It’s likely that coronavirus will turn out to be one of those shocks. Besides, history casts doubt on attempts to explain inflation by non-monetary factors. The closest example of MMT in implementation comes from France’s experiment with paper money. In 1720, the Scottish adventurer John Law served as French finance minister and head of the central bank. The bank printed lots of paper money, the national debt was repaid and France enjoyed brief prosperity. But inflation soon took off and crisis ensued.
The truth is that governments have an inherent bias towards inflation, especially under adverse conditions such as wars and revolutions. The Covid-19 lockdown is another such condition. Tomorrow’s inflation will alleviate some of today’s financial problems: debt levels will come down and inequalities of wealth will be mitigated. Once excessive debt has been inflated away, interest rates can return to normal. When that happens, homes should be more affordable and returns on savings will rise.
But the evils of inflation should not be overlooked. Economies do not function well when everyone is scrambling to keep pace with soaring prices. Inflations produce their own distributional pain. Workers whose incomes rise with inflation do better than retirees. Debtors will thrive at the expense of creditors. Profiteers arise, along with populists who feed on social discontents.
Modern monetary practices ensure another inflation is around the corner. MMT provides the intellectual gloss. It promises a free lunch. Even Alice shouldn’t believe that.
The writer, a financial historian, is author of a forthcoming history of interest
While most see big deficits as a price worth paying to combat the crisis, many worry about a debt overhang in a post-pandemic world. Some fear that investors will grow weary of lending to cash-strapped governments, forcing countries to borrow at higher interest rates. Others worry governments will need to impose painful austerity in the years ahead, requiring the private sector to tighten its belt to pay down public debt. They should not.
While public debt can create problems in certain circumstances, it poses no inherent danger to currency-issuing governments, such as the US, Japan, or the UK. This is not, as some argue, because these countries can currently borrow at very low cost, or because a strong recovery will allow them to grow their way out of debt.
There are three real reasons. First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.
The first point should be obvious, but it is often obscured by the way governments manage their fiscal operations. Take Japan, a country with its own sovereign currency. To spend more, Tokyo simply authorises payments and the Bank of Japan uses the computer to increase the quantity of Yen in the bank account. Being the issuer of a sovereign currency means never having to worry about how you are going to pay your bills. The Japanese government can afford to buy whatever is available for sale in its own currency. True, it can spend too much, fuelling inflationary pressure, but it never needs to borrow Yen.
If that is true, why do governments sell bonds whenever they run deficits? Why not just spend without adding to the national debt? It is an important question. Part of the reason is habit. Under a gold standard, governments sold bonds so deficits would not leave too much currency in people’s hands. Borrowing replaced currency (which was convertible into gold) with government bonds which were not. In other words, countries sold bonds to reduce pressure on their gold reserves. But that’s not why they borrow in the modern era.
Today, borrowing is voluntary, at least for countries with sovereign currencies. Sovereign bonds are just an interest-bearing form of government money. The UK, for example, is under no obligation to offer an interest-bearing alternative to its zero-interest currency, nor must it pay market rates when it borrows. As Japan has demonstrated with yield curve control, the interest rate on government bonds is a policy choice.
So today, governments sell bonds to protect something more valuable than gold: a well-guarded secret about the true nature of their fiscal capacities, which, if widely understood, might lead to calls for “overt monetary financing” to pay for public goods. By selling bonds, they maintain the illusion of being financially constrained.
In truth, currency-issuing governments can safely spend without borrowing. The debt overhang that many are worried about can be avoided. That is not to say that there is anything wrong with offering people an interest-bearing alternative to government currency. Bonds are a gift to investors, not a sign of dependency on them. The question we should be debating, then, is how much “interest income” should governments be paying out, and to whom?
The writer is a professor of economics and public policy at Stony Brook University and author of the forthcoming book “The Deficit Myth”
No — This dangerous monetary practice ensures inflation is around the corner
How to pay for the fathomless costs of fighting a pandemic? All the state’s expenses, whether a Green New Deal, jobs-for-all or the economic lockdowns, can be met simply by printing money. That is what modern monetary theory claims, writes Edward Chancellor.
Adherents of this unorthodox school of economics would have us believe, like Alice in Wonderland, six impossible things before breakfast. Governments can never go bust. They don’t need to raise taxes or issue bonds to finance themselves. Borrowing creates savings. Fiscal deficits are not the problem, they are the cure. We could even pay off the national debt tomorrow.
As theory, MMT has been rejected by mainstream economists. But as a matter of practical policy, it is already being deployed. Ever since Ben Bernanke, as governor of the US Federal Reserve, delivered his “helicopter money” speech in November 2002, the world has been moving in this direction. As president of the European Central Bank, Mario Draghi proved that even the most indebted countries need not default. Last year, the US federal deficit exceeded $1tn at a time when the Fed was acquiring Treasuries with newly printed dollars — that’s pure MMT.
This crisis has accelerated the process. Fiscal and monetary policy are now being openly co-ordinated, just as MMT recommends. The US budget deficit is set to reach nearly $4tn this year. But tax rises are not on the agenda. Instead, the Fed will write the cheques. Across the Atlantic, the Bank of England is directly financing the largest peacetime deficit in its history. MMT claims that money is a creature of the state. The Fed’s share of an expanding US money supply is close to 40 per cent and rising. Again, we are seeing MMT in practice.
The lockdown is a propitious moment to implement MMT. During crises, the public has an abnormally high demand to hold cash; debt monetisation appears less of a problem. But governments can print money to cover their costs for only as long as the public retains confidence in a currency. When the crisis passes, the excess money must be mopped up.
Proponents of MMT claim this shouldn’t be a problem. But then they admit that nobody has a good inflation model. We cannot accurately measure the economy’s spare capacity, either. This means that politicians are unlikely to raise taxes in time to nip inflation in the bud. Bonds can always be issued to withdraw money from circulation. But once inflation is under way, bondholders demand higher coupons. From a fiscal perspective, it makes more sense to issue government debt when rates are low — as they are today — than to print money now and pay higher rates later.
Great historic inflations have been caused not by monetary excesses but by supply shocks, say MMT exponents. It’s likely that coronavirus will turn out to be one of those shocks. Besides, history casts doubt on attempts to explain inflation by non-monetary factors. The closest example of MMT in implementation comes from France’s experiment with paper money. In 1720, the Scottish adventurer John Law served as French finance minister and head of the central bank. The bank printed lots of paper money, the national debt was repaid and France enjoyed brief prosperity. But inflation soon took off and crisis ensued.
The truth is that governments have an inherent bias towards inflation, especially under adverse conditions such as wars and revolutions. The Covid-19 lockdown is another such condition. Tomorrow’s inflation will alleviate some of today’s financial problems: debt levels will come down and inequalities of wealth will be mitigated. Once excessive debt has been inflated away, interest rates can return to normal. When that happens, homes should be more affordable and returns on savings will rise.
But the evils of inflation should not be overlooked. Economies do not function well when everyone is scrambling to keep pace with soaring prices. Inflations produce their own distributional pain. Workers whose incomes rise with inflation do better than retirees. Debtors will thrive at the expense of creditors. Profiteers arise, along with populists who feed on social discontents.
Modern monetary practices ensure another inflation is around the corner. MMT provides the intellectual gloss. It promises a free lunch. Even Alice shouldn’t believe that.
The writer, a financial historian, is author of a forthcoming history of interest
Thursday, 21 November 2019
Thursday, 1 November 2018
Big Business Strikes Again, this Time Through Modi Government's Assault on RBI
The unprecedented invocation of Section 7 is not in enlightened public interest – it is a brazen move to force the RBI to open bank funding to desperate corporates.
Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui
M K Venu in The Wire.In
Reserve Bank of India Governor Urjit Patel with former governor Raghuram Rajan in the background. Credit: Reuters/Danish Siddiqui
The business cronies of this government have done it again. And they manage such coups each time with unfailing precision. This time, the Centre has taken the unprecedented action of sending a direction to Reserve Bank of India (RBI) under Section 7 of the RBI Act, the first step in a process of virtually issuing a diktat that the central bank must do whatever is necessary to resolve the potential credit freeze in the non-banking finance sector and relax norms for lending to small business.
The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.
I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.
But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.
It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.
Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports
These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?
These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.
Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.
Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret
So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.
RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.
There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.
If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.
The RBI over the past year placed lending restrictions on weaker banks, where non-performing assets (NPAs) and other warning indicators were much higher than normal, consequently eroding much of their capital. You can be sure once these norms are relaxed by an RBI under duress, bank funds will start flowing again to the cronies directly or indirectly because moneys are essentially fungible.
I’m told that one celebrated big business promoter from Gujarat, who is known to travel with Prime Minister Narendra Modi on official trips abroad, is currently borrowing short-term money at over 18% to meet his past loan servicing needs.
But once RBI relaxes the current stringent lending norms for banks and adequate liquidity is provided to trapped NBFCs, select big business cronies – owing nearly Rs 4 lakh crore to banks – will continue to get access to funds. In any case, these powerful promoters have managed to avoid going into bankruptcy proceedings as mandated by the RBI’s circular of February 12, 2018. Some of the power projects of the Adani Group, Essar, the Tatas and so on, who have repayment overdues of over Rs 1 lakh crore, are currently being given a fresh lease of life.
So make no mistake, the unprecedented invocation of Section 7 of the RBI Act, never done since independence, not even during the financial crises of 1991 or 2008, is not guided by enlightened public interest as the finance ministry may claim.
It is a brazen move to force the RBI to open bank funding to desperate corporates who need to save themselves so that they are also in a position to give the necessary funds to political parties via anonymous electoral bonds.
Also read: Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports
These corporate groups and their promoters remain immortal and untouched through all regimes. They manage to get a share of juicy defence contracts even while they owe over Rs 1 lakh crore of overdue loans to banks. Modi will also have to answer why a select group of promoters are getting special treatment by avoiding the RBI circular of February 12, 2018. Is there pressure on the central bank to dilute its rule which mandates that all borrowers above a certain level have to enter bankruptcy proceedings? Is a special dispensation being created for cronies?
These questions will surely haunt the Modi regime in the run-up to the 2019 elections. The sheer power exercised by these business houses is now becoming more and more apparent and naked.
Earlier these powerful forces ran a campaign against Raghuram Rajan and ensured he didn’t get an extension because Rajan had sent a list to the prime minister’s office (PMO) of politically-connected promoters who may have fraudulently diverted bank loans for purposes others than the financing of their projects.
Rajan had asked for a multi-agency probe against these errant promoters because RBI felt it alone did not have the wherewithal to do it. An RTI application by The Wire confirms that the list was sent in 2015 and the PMO is refusing to part with it even to a parliamentary committee headed by BJP leader Murli Manohar Joshi after several reminders.
Also read: Exclusive: RTI Confirms Raghuram Rajan Sent Modi List of NPA Defaulters, Action Taken a Secret
So, it is clear the government is hiding something and is now feeling impelled to get rid of the RBI chief by initiating action under the never-before-used Section 7 provision.
RBI governor Urjit Patel cannot heed the Centre’s directive as it would lower the dignity of the institution and erode the integrity of some of the tough decisions that the central bank has taken to clean up the banks and bring errant promoters to their heels. If Patel quits, India will become a laughing stock among global investors and the money markets could see unprecedented volatility. Remember, in his speech last Friday, deputy governor Viral Acharya had invoked the 2010 Argentine example where the central bank governor there resigned in protest after the regime tried to force him to part with the institution’s reserves to fill the government’s fiscal gap. The markets went for a toss after that in Argentina.
There is a strong parallel here as the finance ministry is also coercing the RBI into parting with a part of its contingency reserves (over Rs. 2.5 lakh crore) to meet the Centre’s growing fiscal deficit in an election year. All this is happening under the shadows of high oil prices, a growing current account deficit and a weakening rupee.
If the RBI governor resigns in these circumstances there could be huge repercussions. The invocation of Section 7 of the RBI Act is, therefore, an act of desperation that is bound to boomerang on the Modi government.
Sunday, 11 February 2018
The end of an era of cheap money?
Nicole Bullock, Eric Platt and Alexandra Scaggs in The Financial Time
For more than a decade, Mike Schmanske made a living trading “volatility” — betting on the size and speed of moves in the US stock market. After 2014, the market was calm for so long that he spent much of his time sailing a Swan yacht. He got his adrenalin flowing in a different way: on his first trip from Bermuda to Newport, Rhode Island, he raced a hurricane back to port and made it with 12 hours to spare.
For more than a decade, Mike Schmanske made a living trading “volatility” — betting on the size and speed of moves in the US stock market. After 2014, the market was calm for so long that he spent much of his time sailing a Swan yacht. He got his adrenalin flowing in a different way: on his first trip from Bermuda to Newport, Rhode Island, he raced a hurricane back to port and made it with 12 hours to spare.
Now, a new bout of turbulence is pulling him back to Wall Street. A sharp outbreak of volatility has written more than $5tn off the value of global stocks in less than two weeks and Mr Schmanske is talking to his old trading buddies about getting back into the market.
“This is the most calls I’ve taken in years,” says Mr Schmanske*, a pioneer of some of the first volatility trading products while at Barclays and now a consultant. “Things were slow. I was literally on a boat a few weeks back.”
The catalyst for the volatility surge came at 8:30am last Friday when the US government employment report showed a surprisingly strong rise in wages, prompting bond yields to shoot upwards and the price of those bonds to fall. Within hours, the losses in the $14tn Treasury market had spread to stocks, setting the stage for Wall Street’s worst week in two years.** By Thursday, US equities had entered what is known as a correction — a fall of at least 10 per cent. Many investors who had piled into esoteric instruments that enable them to bet on continued calm in the market had been wiped out.
The ructions over the past week have attracted so much attention because they strike at the question that has haunted markets for the past two years — what happens when the economy returns to normal? Since the financial crisis, markets have been boosted by an unprecedented mixture of ultra-low interest rates and asset-buying by central banks in a bid to fend off the threat of deflation. But with global growth robust and inflation beginning to re-appear, central banks are pulling back.
The question investors are trying to answer is how much of the sharp drop in share prices is due to a technical reaction driven by a much-hyped niche in the market that bets on volatility, versus part of a broader adjustment to a different economic reality.
“The system has changed,” says Jean Ergas, head strategist at Tigress Partners, who said the market had made more of a “rethink” than a correction. “This is the unwinding of a massive carry trade, in which people borrowed at zero per cent and put money into stocks for a yield of 2 per cent.”
The year began on a euphoric note as a large cut in US corporate tax prompted investors to mark up their expectations for earnings growth. The economy was already humming around the world for the first time since the financial crisis.
At its peak on January 26, the market values of S&P 500 companies had surged by $5tn from a year earlier, while global stocks were up by nearly $14tn. The gains lured small investors into the market, with more than $350bn pumped into equity funds in the year, according to fund tracker EPFR Global.
But cracks had already appeared in the bond market. Investors were starting to make noise and demand higher yields. Bill Gross and Jeffrey Gundlach — two well-known money managers in fixed-income markets — both declared last month a new era after a 36-year “bull market” in bonds, which had seen yields driven steadily lower.
It was against that backdrop that markets reacted to last Friday’s news of a 2.9 per cent rise in US wages — not dramatic in a different era but still the largest year-on-year rise since the financial crisis. Inflation fears rose. Investors began marking up the odds that the Federal Reserve could tighten policy by a full percentage point this year, more aggressively than previously thought. Robust growth in Europe and Japan also raised the question of when the European Central Bank and Bank of Japan would begin to remove crisis-era stimulus.
“Inflation fears running back into the market and hitting basically all assets in a market that had run up significantly is a pretty plausible, simple story,” says Clifford Asness, co-founder of AQR Capital Management. “You do not have to go looking for Alger Hiss in this pumpkin.”
By the end of last Friday, yields on benchmark 10-year US Treasuries had hurdled above 2.8 per cent for the first time in nearly four years. For the year, yields had risen more than 40 basis points, increasing the appeal of bonds relative to stocks. The Dow Jones Industrial Average lost 666 points — an unsettling omen for religiously minded traders.
“Optimism over synchronised global growth and supportive macro conditions led to outsized gains in equity markets to start the year,” says Craig Burelle, macro strategies research analyst at Loomis Sayles. “But more recently, some investors worried the economic momentum was too much of a good thing, and optimism gave way to concerns about the future path of inflation and interest rates.”
Before long, the anxiety had gone global. On Sunday evening, many Americans were watching the Philadelphia Eagles upset the New England Patriots in the Super Bowl: at the same time, Asian markets were opening on Monday with a spike in bond yields.
“On any other Sunday night you might have been more anxious about what you were seeing,” says Matt Cheslock, a trader at Virtu and a 25-year veteran of the New York Stock Exchange. “The game provided a nice distraction.”
Monday morning in the US added a new source of uncertainty with the swearing in of Jay Powell as the chairman of the Federal Reserve, bringing a relatively little-known face to lead the central bank. For much of the day, Wall Street avoided serious losses. Then, a big drop seemed to come out of nowhere. About an hour before the closing bell, the Dow slumped more than 800 points in 10 minutes.
“The adrenalin kicks in,” says Mr Cheslock. “Everyone gets sharper. The complacency is long gone.”
Customers rushed to log into their accounts at Vanguard, TD Ameritrade, T Rowe Price and Charles Schwab, straining websites. Some were unable to place orders.
“As the volatility picks up and the indices plummet the rumours start to swell,” says Michael Arone, chief investment strategist at State Street Global Advisors. “Folks are wondering the classic Warren Buffett line about when the tide goes out, you see who is not wearing swimming trunks.”
Over the past week, the investors who have been left most exposed are those who had made bets on subdued volatility. As share prices slumped, Wall Street’s “fear gauge” — the widely watched Cboe Vix volatility index — spiked.
Trading strategies that profited from the calm in markets during 2017 quickly unravelled. Two exchange-traded products that enabled investors to bet on low volatility lost nearly all their value on Monday.
After the bell on Monday, the Vix continued to rise and shares in vehicles related to Vix also fell.
On Tuesday morning, Nomura, the Japanese bank, said in Tokyo that it would pull a product that was pegged to S&P 500 volatility. Within half an hour, the Nikkei 225 had fallen 2.5 per cent, which, in turn, prompted a bout of selling in bitcoin. The digital currency — worth more than $19,000 as recently as December — dropped below $6,000 just after 2:45am in New York, as traders in London and Frankfurt were getting to their desks. Stock markets in both countries would open 3.5 per cent lower.
As US investors slept, the turbulence continued. At 4am in New York, a number of exchange traded products related to volatility were halted. By 7:11am, more than two hours before the US open, the Vix volatility index shot above 50 — only the second time it has done so since 2010. The turbulence forced bankers to postpone a number of bond sales planned for the day. Then Credit Suisse said it would close an exchange traded note, known by the ticker XIV — which is designed to move in the exact opposite direction to the Vix each day, and had thus collapsed as volatility rose.
“People had forgotten that stocks don’t just go up,” says Adam Sender, head of Sender Company and Partners, a hedge fund. “Corrections are a normal process. This was inevitable. Interest rates rising was the trigger, but short-volatility was the fuel.”
The volatility subsided amid a Tuesday afternoon rally in New York, and world stock markets survived much of the next day without incident. But then at 1pm on Wednesday in New York, signs of nervousness re-emerged. Demand at the auction of US Treasury bonds was weak, a signal that investors were worried about inflation and a rising budget deficit, and would therefore only buy at higher yields. Stocks ended the day in the red, and when investors in Tokyo returned on Thursday, prices dropped quickly. Heavier selling ensued on Wall Street. By Friday morning, the main indices in the US, Germany and Japan were all down more than 10 per cent from their January highs. When trading finally closed for the week after another rollercoaster day, US losses were shaved to about 9 per cent.
For some, the shock created by the collapse of the volatility products has been salutary. “It’s always good to be reminded of these things with accidents that aren’t of systemic importance to the entire economy,” says Victor Haghani, founder of London’s Elm Partners and an alumnus of Long-Term Capital Management. “It’s a gentle reminder from the market.”
However, many investors believe the questions raised over the past week go well beyond the products connected to the Vix index. “We’ve gone from a market used to playing checkers — rising earnings, low rates equals higher prices — to being forced to compete in grandmaster three-dimensional chess: worries over growth versus rates, equity valuations, and the strength of the dollar, and now market structure concerns,” says Nicholas Colas, cofounder of DataTrek, a New York research group.
While some investors talked of a buying opportunity, believing that faster economic growth and a modest uptick in inflation represent a positive backdrop for equities, many headed for the exits. Investors pulled more than $30bn from stock funds in the week to Wednesday, the largest week of withdrawals since EPFR began tracking the data at the turn of the century.
The slump in share prices put the White House on the defensive, given that President Donald Trump has taken pride in the stock gains under his administration. “In the ‘old days,’ when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down,” he tweeted on Wednesday. “Big mistake, and we have so much good (great) news about the economy!”
Others were less confident. “This is not yet a major earthquake,” said Lawrence Summers, US Treasury secretary under President Bill Clinton. “Whether it’s an early tremor or a random fluctuation remains to be seen. I’m nervous and will stay nervous. [It is] far from clear that good growth and stable finance are compatible.”
Some strategists expect the recent declines to lead to further selling, as computer-driven funds that target volatility are forced to shed more equities. Analysts put the amount of automatic selling from the recent turmoil at about $200bn, and more could be on the way unless markets simmer down.
Jonathan Lavine, co-managing partner of Bain Capital, says a drop in share prices was not a surprise in itself. “It was the ferocity of the move, not triggered by any material news and propelled by a small corner of financial markets,” he says. “You have to ask yourself what would happen in the event of real bad news.”
Saturday, 22 April 2017
Thursday, 31 July 2014
Argentina defaults as debt talks break down
Finance minister Axel Kicillof said Argentina would not be held to ransom by bondholders demanding to be paid in full
Argentina's economy minister Axel Kicillof speaks to the media at a press conference in New York July 30, 2014. Photograph: CARLO ALLEGRI/REUTERS
Argentina has fallen into default for the second time since 2001 after last-minute talks with "vulture" bondholders in New York failed to produce a deal overnight.
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At a dramatic press conference in New York on Wednesday night, Argentinian finance minister Axel Kicillof declared that Argentina would not be held to ransom by the holdout bondholders, who are demanding to be paid in full on debt which the country defaulted on in 2001.
Kicillof said: "We're not going to sign an agreement that jeopardises the future of all Argentines. Argentines can remain calm because tomorrow will just be another day and the world will keep on spinning."
Shortly before the deadline, Daniel Pollack, the court-appointed mediator, confirmed that the talks had broken down. "Unfortunately, no agreement was reached and the Republic of Argentina will imminently be in default."
Earlier, the credit rating firm Standard & Poor's declared that Argentina was now in "selective default". The default comes two months after a US court ruled that Argentina must pay the holdout bondholders in full, saddling it with a bill of more than $1.5bn.
The vast majority (more than 90% of bondholders) agreed to restructure debts in 2005 and 2010, taking a big "haircut" – a reduction of more than 70% in the value of their investments in return for regular interest payments.
Argentina's last default, in late 2001, came after a major political and economic crisis; scores were killed in riots, and both the president and the economy minister resigned. But there was little sign of a panic in global financial markets this time, as the default was widely expected. However, it could add more pain for Argentinians, with the economy already in recession.
Pollack said: "The full consequences of default are not predictable, but they certainly are not positive."
The holdouts – branded "vulture funds" by Argentinian president Cristina Fernández de Kirchner – are US hedge funds spearheaded by the billionaire Paul Singer's NML Capital, an affiliate of Elliott Management, and Aurelius Capital Management.
Steve Ellis, portfolio manager at Fidelity emerging market debt fund, said: "We expect contagion to other markets to be fairly limited. This is a highly technical legal case and a selective default.
"Argentina was isolated from international capital markets for years so we don't expect the default to distort any global capital flows. However, there will be remaining risks around a longer term default which would have negative impacts on the Argentine economy. At this stage, the market will likely price in a delay of payments should the government continue to deposit coupon payments until they can reach a deal with the holdouts in 2015."
Thursday, 15 November 2012
Scientists find 'fidelity' hormone which keeps men from straying
The chemical oxytocin helped men in romantic relationships keep their distance from strangers they might find attractive.
They stayed about four to six inches further away when approaching or being approached by good-looking women than those given a dummy drug.
Dubbed the 'cuddle drug', oxytocin is naturally made in the body and is involved in sex, sexual attraction, trust and confidence.
It is released into the blood during labour - triggering the production of breast milk - and floods the brain during breastfeeding, helping mother and baby bond.
Researchers said their findings published in The Journal of Neuroscience suggest oxytocin could promote fidelity. In contrast oxytocin had no effect on single men.
Dr René Hurlemann, of Bonn University in Germany, said: "Previous animal research in prairie voles identified oxytocin as major key for monogamous fidelity in animals.
"Here we provide the first evidence that oxytocin may have a similar role for humans."
In the study his team administered oxytocin or a placebo via a nasal spray to fifty-seven healthy and heterosexual men, about half of whom were in monogamous relationships.
Forty-five minutes later the participants were introduced to a female experimenter they later described as "attractive".
As the woman moved towards or away from the volunteers the men were asked to indicate when she was at an "ideal distance" as well as when she moved to a place that felt "slightly uncomfortable."
Dr Hurlemann said: "Because oxytocin is known to increase trust in people we expected men under the influence of the hormone to allow the female experimenter to come even closer - but the direct opposite happened."
The effect of oxytocin on the monogamous men was the same regardless of whether the beauty maintained eye contact or averted her gaze - or if the men were the ones approaching or withdrawing from her.
Oxytocin also had no effect on the men's attitude towards the woman - both those who received the hormone and the placebo rated her as being equally attractive.
In a separate experiment the researchers found oxytocin had no effect on the distance men kept between themselves and a male experimenter.
They said future studies are needed to determine exactly how oxytocin might act on the brain to affect behaviour.
Psychiatrist Professor Larry Young, of Emory University in Atlanta who was not involved in the study, said the hormone could be nature's way of encouraging fathers not to stray.
He said: "In monogamous prairie voles we know oxytocin plays an important role in the formation of the pair bond.
"This study suggests the general role of oxytocin in promoting monogamous behaviour is conserved from rodents to man."
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