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Volume 4, Issue 2 | June 2010

The Monthly Finance Magazine from IIFT

AG Bank Yuan Appreciation OIL Deregulation


The Biggest IPO!! Moving towards Flexibility... The Side Effects!!

Clouds of Turnmoil
In Europe

IN
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K. EE TIM
EA FIN ST
SP IN IR
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EX IST FO
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June 2010 From the Editor’s Desk INFINEETI | Vol 4, Issue 2

Hello Friends,

T he European crisis is the biggest challenge the world is facing, Mehak talks
about the problem, the steps being taken and the likely impact on India. Ashish
discusses about the biggest IPO by China’s Agricultural Bank till date and how
it would shape the economy of China.
Team INFINEETI
With this issue, Infineeti has invited articles from the Industry experts. To take this
Editor-in-Chief initiative off, Mr. Rahul Sonthalia has thrown up a startling fact which we are going
Soumya Kanti Bag to see in times to come - the U.S crisis may soon revisit the world! He talks about
a option ARMS, and how they are going to have a staggering effect on the already
Editorial Board unsteady U.S. economy.
Ashutosh Sharma
Ritika Yadav Sukrit is back with his analysis on the latest trends in The Indian Stock Markets.
Sayani Ghosh Sourav mulls over the implications of appreciation of Yuan and how it would en-
Sukrit Munjal hance the process of global rebalancing.

Coordinating Committee Madhuri talks about the oil deregulation and how government is pulling all stops to
Arun Singhal
make this attempt a successful one.
Neha Daga

Design
Ashutosh thinks that Europe debt crisis can turn into a contagious disease. He shares
Soumya Kanti Bag his views on policy to be adopted and interdependence of growth and fiscal consoli-
dation. Finally, Arun tries to bring some element of fun in Finance with Finnword.
Feedback/ Queries
infineeti@iift.ac.in Happy reading!!
infineeti@gmail.com

Soumya Kanti Bag


(Editor-in-Chief)

Indian Institute of Foreign Trade 32


INFINEETI | Vol 4, Issue 2 Contents June 2010

4 | Cover Story
Clouds of Turmoil over Europe
Europe is in trouble. Massive budget deficits,devaluation of currency, surge in inflation
rates, the signs are alarming.Is it a repeat of what happened in US, or is it something more
destructive. This article talks about the problem,steps being taken and the likely impact on
India.

14
Deregulation of Oil Price and its affects
Madhuri talks about the nuanced phase out process of regulation of oil prices launched
by the government of India. The articles throws light on how drastic deregualtion would
have affected the Industry and how the private players are changing the game this time.
But the question remains is complete oil deregulation a veiled disaster?? Read on to
know...

12
Yuan Appreciation-The Outcomes
The economy of China has finally decided to appreciate its currency under various geopolitical
pressures, one being its relations with the US.One thing that remains to be seen is that this might
culminate into rising inflation. The government still maintains an optimism regarding this step
as this shall aid China’s imports. Sourav tries to explain the various dimensions on this issue.

7
Agriculture Bank of China - The Dragonish IPO
9
Experts Speaks
10
Taking Stocks
17
2010 European sovereign debt crisis: Is it turning into a contagious disease
20
FinWord

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June 2010 Cover Story INFINEETI | Vol 4, Issue 2

Mehak Gandhi

Clouds of Financial Turmoil Over Europe

Europe seems to be enshrouded in dark clouds – not the fate of the fragile global economic recovery.
merely the ash spewed out by the Icelandic volcano
that has disrupted air travel – but the clouds over Unlike The US Crisis
Europe stemming from concerns over its financial
stability. The economic crisis has laid bare the in- As the struggle to maintain the euro – the common
herent weaknesses of the European economy. The European currency, to rebalance the European econ-
huge budget deficits in Greece, Ireland, Italy, Por- omy and to sustain political cohesion of Europe con-
tugal and Spain threaten to break the euro’s back. tinues, many well-developed countries are becom-
So far, the common currency has managed to pre- ing aware of the hazards of running unprecedented
vent any massive devaluation and an accompany- levels of public debt as they emerge from global
ing surge in inflation. But the present scenario with recession. The US budget deficit hit $1.4 trillion in
global equity markets on a downswing, euro’s fu- 2009, roughly 10% of the economy’s GDP. The White
ture under the scanner and downbeat sentiment House projects that the deficits this year will reach
over Europe seems to have vast implications for $1.6 trillion. The large deficits have evoked com-

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INFINEETI | Vol 4, Issue 2 Cover Story June 2010
parisons to Greece. However, US differs from Greece or censor inflation, and ultimately, whether some
and other smaller European countries whose mar- countries should be barred from the monetary
kets have come under speculative attack because it union. The German economy still looks strong, but
benefits from a well-established currency, dollar, and ultimately, even it cannot hold up Europe alone.
its credit markets are considered safe havens in the
times of financial turmoil. In US, it was the banks that
were failing and yet being bailed out by the strong
Federal Reserve, while in Europe, entire economies
are collapsing under the weight of debt. But while
the authorities make strategic plans for Europe,
they do so with the hindsight of the economic chal-
lenges US had gone through. The public sentiment
continues to be cautious, with the recent turmoil still
afresh in their minds, and it may take some time
before faith all over the world is finally restored.

Decisive Times for Europe The Greek crisis has spread to become a eurozone
crisis. Europe’s woes are manifestations of wilt-
International markets have been on a see-saw ride ing welfare states that can no longer deliver all
as it is still not fully believed that the $1 trillion Eu- the entitlements that the politicians keep legislat-
ropean Union aid package to save troubled nations ing. Greece is an extreme example, but others are
such as Greece and Spain will be enough to prevent not far behind. In the US, just three entitlement
another credit crisis. Europe has to bail out divergent programmes – social security (for retirees), Medi-
economies lashed to a single currency, and these care (for the aged) and Medicaid (for the poor)
economies had little control over national taxes and may swallow up 20% of GDP in 2020 as against
spending over the years. The consequences are 800 7% today. Unfunded liabilities like guaranteed
billion euro ($1 trillion) splurged for a debt crisis led pensions are growing everywhere. These are
by Greece, sagging confidence in the European Cen- promises to spend money that is financed by debt,
tral Bank’s independence and speculative fears that a which will have to be repaid by a future genera-
currency designed to last forever might break apart. tion. This strategy was sustainable when the ratio
Germany is leading the way to fix the loopholes of beneficiaries to workers was low. However, in
overlooked when euro was first founded and decide the coming years, western politicians will have to
whether the currency will be used to promote growth come to grips

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June 2010 Cover Story INFINEETI | Vol 4, Issue 2

with the problem and ensure that change comes be- However, at the same time, this situation is being
fore it’s too late. seen as a ‘buying opportunity’ because even as Eu-
rope is doing what it can to keep interest rates lower,
it is bullish for the equities. While the European crisis
is likely to affect flows to India in the near term as risk-
taking is cut back, it is inevitable that in the long-run,
markets will stabilize and growth will return. When
the clouds clear, we’ll realize that it was an imperative
correction for the world economies and a golden op-
portunity to foresee the potential growth. Ultimately,
life is all about exercising prudence in testing times.

The Impact On India The author is a second year student of The Indian
Institute of Foreign Trade, Kolkata.
India, with its huge share of exports and foreign
investments in GDP, is more sensitive than ever to ...
the global economy. The markets at home remain
volatile while reacting to global news. A weakening
currency in Europe is a worry for India’s export-fo-
cused IT sector, which has only just recovered from
the fallout of the US slowdown. Europe is the second
largest market for the Indian IT industry, accounting
for nearly $15 billion worth of exports. The euro has
slid to its lowest since the Lehman Brothers collapse
and while the dollar has strengthened against the
euro, it has not strengthened against the rupee to
the same extent. Cross currency hedges against the
euro and the pound are less common than rupee-dol-
lar hedges. Companies usually ensure that a higher
percentage of dollar exposure is hedged, as com-
pared to only a part of euro exposure. In the wake
of the current scenario, the revenue realization will
be lower and the weak euro would affect profitability.

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INFINEETI | Vol 4, Issue 2 June 2010

Ashish Sharma

Agriculture Bank of China - The Dragonish IPO

A fter a hiatus of a few months, IPO deluge


seems to be back again. The enormity of this
deluge can be judged by the fact that just two com-
the primary market in the emerging markets have
outperformed their developed counterparts with
emerging markets raising as much as three times the
panies, Agriculture Bank of China (AgBank) and amount than developed countries in the last quarter.
Petroleo Brasileiro, state-controlled petroleum
major from Brazil are all set to raise $50 Billion The government owned AgBank is all set to break
from the capital market. This is a welcome change all records as far as the size of IPO is concerned. It
after what happened in the last quarter when as initially planned to raise a whopping $30 billion that
many as 47 IPOs across the world were shelved will overshadow the previous record of $21.9 billion
on apprehensions of sinking capital markets. IPO by Industrial and Commercial Bank of China in
October 2006. AgBank is the last of the “big four”
Bourses have been volatile for a while now on state banks to list. With around 350 million custom-
fears of the Sovereign Debt crises sending the ers, and has assets mainly in agro-based loans. Ag-
world economy into doldrums yet again. These ap- Bank is issuing 53 Billion equity shares and is dilut-
prehensions have sent stock indices from Tokyo to ing 15% of its stake in a dual listing that will see
New York to their lowest levels of 2010. Apparently, its shares traded in both Hong Kong and Shanghai.

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June 2010 INFINEETI | Vol 4, Issue 2
While the Honk Kong arm would sell with a price loan burden. Further, since the return on capital from
range of HK$2.88-HK$3.48, the Shanghai arm will sell the rural loans is typically 20-30 percent lesser than
with a price range of 2.52 Yuan to 2.68 Yuan. It in- those in urban areas owing to small loan sizes and
tends to raise around $13.1 Billion from Hong Kong large monitoring costs the risk increases considerably.
and $ 10.1 Billion from the Shanghai arm of the of-
fering. These figures value AgBank to be at 1.55 to As I write this, the IPO has already been over-
1.79 times the estimated 2010 book value. Even the subscribed several times and all set to shatter
upper end of the range of IPO will make the IPO all records in the primary markets. Will the IPO
worth around $23 Billion against $30 Billion planned. meet the investors’ expectation or set the senti-
This drop can be attributed to weak market senti- ments for the upcoming IPOs remains to be seen.
ments and the fact that the Chinese stock markets
have lost around 20 percent in the recent months. The author is a second year student of Institute
of Management Technology, Ghaziabad

...

A strong backing by the state and cornerstone in-


vestors should ensure that the offering goes ahead
despite weak market sentiments. Amongst the
eleven strong cornerstone investors are Qatar’s sov-
ereign investment fund, British bank Standard Char-
tered and Hong Kong’s richest tycoon Li Ka-Shing.

Despite the strong support from the government and


the cornerstone investors, there is suspicion about the
IPO as the bank is considered to be the weakest of the
four banks in terms of the quality of loans and bad

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INFINEETI | Vol 4, Issue 2 Expert Speaks June 2010

Rahul Sonthalia

Option ARMs Threaten Housing Rebound

A n Option ARM is an adjustable rate mortgage, a loan,


popular during the housing boom for its low mini-
mum payments before resetting at higher costs later.
a level of 130-150% of the initial mortgage balance.

About 1 million option ARMs are estimated to resett in the


This helped a huge number of home buyers in US take next four years. About three quarters of those loans will
loans with very low monthly payments initially and adjust next year and in 2011, with the peak coming in Au-
which allowed them to pay less than even the monthly gust 2011 when about 54,000 loans recast, the data show.
accrued interest thus resulting in a “negative amortiza-
tion”, which means that the unpaid portion of the accru- This reset will lead to further foreclosures in US and
ing interest is added to the outstanding principal balance. will be a threat to the housing recovery. The more
than 30-35% fall in the value of property will not
For example, if the borrower makes a minimum payment help the borrowers to refinance their mortgage and
of $1,000 and the ARM has accrued monthly interest in which will lead to a further slowdown in housing
arrears of $1,500, $500 will be added to the borrower’s prices. This will also result in more write offs on the
loan balance and the next month’s interest-only payment balance sheets of the large banks/ lending institu-
will be calculated using the new, higher principal balance. tions as the payments are difficult to come across.
Thus the recovery in the US markets is still a long way to go
“Shirley Breitmaier’s mortgage payment started out at
$98 when she bought a three-bedroom home in Galt, Cali- The author is the head of the Equity Research team
fornia, in 2007. The 73-year-old widow may see it jump to at Kredent Academy and the visiting faculty at IIFT
$3,500 a month in two years”- says Bloomberg. The reset
occurs when the outstanding mortgage balance reaches ...

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June 2010 Stock Watch INFINEETI | Vol 4, Issue 2

Sukrit Munjal

TAKING STOCK

T he month of June began with volatility due to


global economic conditions. As the month pro-
gressed, worries over the Euro crisis subsided and
exports in coffee, coupled with good monsoon led
to an increase in FMCG sector by 8.38%. Auto sec-
tor saw a growth of 8.10%, majorly due to healthy
the decision of the Chinese Central bank to appre- auto sales number in the month of May 2010.
ciate Yuan provided momentum to Indian markets. Capital Index grew by 7.71% due to pickup in or-
The markets also reacted positively to the govern- der inflows, while Oil & Gas sector gained, thanks
ment’s decision on deregulation of fuel prices. On to the government’s decision on deregulation of
back of optimistic macro economic outlook, positive fuel prices. Only the metal index closed in red for
sentiments among market participants led both the the month of June. Weak demand from the larg-
benchmark index, Sensex and Nifty, up by 4.45% est consumer, China, coupled with increase in ore
and 4.46% over previous month’s close. At 6.13% prices; has put pressure on Margins in this sector.
growth, small-cap index outperformed, while the
mid-cap index closed in line with the benchmark.
Futures & Options
FMCG, Auto, Capital goods and Oil& Gas sectors The June series opened at 43,262 cr. as against
were among the top performers. A surge of 48% 49,374 cr. last month, wherein the Nifty future was

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INFINEETI | Vol 4, Issue 2 Stock Watch June 2010

14,402 cr. and Stock futures were 28,860 cr. The During the month, foreign institutions were
rollovers to the June series were very low as the net buyers of Rs. 7,713 cr. and the domes-
global scenario was not quite healthy but still tic players were sellers of Rs. 4,777 cr.
Indian markets were holding strong above the
4,900 level which was considered to the stron- The author is a second year student of Indian
Institute of Foreign Trade, Kolkata
gest support from a long term perspective.

...
.

Sectorally speaking, Metal, banking and sugar


space continued to be the laggards on Dalal Street
due to negative sentiment seen in the global mar-
kets. Even with all the negative sentiments across
the globe, Indian markets outperformed as huge
leadership was seen in Reliance Industries and the
Oil marketing companies after the government re-
moved control over price of petrol, allowing it to
increase and decrease as per international crude
oil prices. Credit rating agency Crisil said the de-
control of petrol price will positively impact the
financial risk profiles of oil marketing companies.

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June 2010 INFINEETI | Vol 4, Issue 2

Sourav Roy

Yuan Appreciation-The Outcomes


C hina is facing a similar kind of pressure to re-
valuate its Yuan as was faced by Japan during
the 80’s to revaluate its Yen. The undervaluation of
that it would follow more flexible exchange rate policy.
Considering the growth rate of Chinese economy and
huge surplus they have, more flexibility in exchange
Chinese Yuan has been a bone of contention in the rate will strengthen Yuan against world currencies.
relationship between China and other countries es-
pecially US. So, China has recently been under strong Markets across the world have been rallying on
international pressure to revaluate its currency. the announcement of the latest flexible exchange
rate regime followed by China. Floating of Chinese
After the commencement of economic reforms in 1974 in Yuan will help ease the tension between China and
China, Yuan the Chinese currency was devalued on sev- USA as USA blames the undervalued Chinese cur-
eral occasions until 1994. After that China maintained rency for its huge trade deficit with China. A strong
a constant rate for several years. It again revalued its Yuan may be good for US exports to China but since
currency in July 2005 under constant demand from the China still forms a major pie of US imports, a dear-
US and the EU. From July 2005 to July 2008 China allow er Yuan will increase inflation in the short term.
its Yuan to appreciate. But 2008 onwards, China has not
allowed its Yuan to appreciate. This led to a consider- Any appreciation in the Chinese Yuan will increase
able pressure from other countries on the Chinese gov- the purchasing power of Chinese people. So any ap-
ernment to appreciate its currency. Under this pressure, preciation will boosts internal consumption in China,
Peoples Bank of China announced on June 20, 2010

Indian Institute of Foreign Trade 12


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INFINEETI | Vol 4, Issue 2 June 2010

thereby reducing the dependence on ex-


port for economic growth thus help-
ing in the process of global rebalancing.

Impact of floating Yuan on commodity market will


depend on the speed and extent to which Yuan will
appreciate compared to US Dollar. It will affect the
commodity market by impacting export and import
i.e. supply and demand from China. Any apprecia-
tion of Yuan will make goods cheaper leading to an
increase in the imports. In turn, this will increase the
prices of commodities like metals, oil, etc. higher as of the edge away from the Chinese export since
Chinese goods will become comparatively costlier.
Chinese currency’s appreciation will bring some
comfort to other countries that are competing with
China as they will be able to allow their currency
to appreciate. This will make them less concerned
about inflow of fund and help them curb the inflation.
Although this is likely to be a slow process, it does
signal a move in the right direction. Almost all ana-
lysts urge caution, pointing out that any moves
in the Yuan are likely to be slow and controlled.
the Chinese will be able to import more raw materi-
als until equilibrium will be found. Chinese airlines
will be benefited by cheaper imported fuel. Global The author is a student at Institute of Manage-
manufacturing and resource companies who supply ment Technology, Ghaziabad
equipment and commodities will benefit from Yuan
movement as this will make their products cheaper. ...
If Yuan strengthens against the world curren-
cies, competitors of China including India, Thai-
land etc will gain, as appreciation will take some

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June 2010 INFINEETI | Vol 4, Issue 2

Madhuri Gosh

Deregulation of Oil Prices and its Effect

O n June 25, 2010, the Empowered Group of


Ministers (EGoM) took a major policy deci-
sion on the country’s retail fuel pricing. After long
However, cooking fuels will continue to be subsidized.
It seems although, that the increase in kerosene and
domestic LPG prices is less than that proposed by the
deliberation for more than a year, the EGoM has Kirit Parekh Committee. The deregulation of diesel
freed the price of petrol from the government’s prices in a phased manner is contrary to the com-
control. This EGoM decision is in sync with partial plete deregulation recommended by the committee.
implementation of Kirit Parekh Committee’s report.
The policy change is viewed as an instance of the
Immediately after the announcement, petrol price government parleying with the ‘Industry’ and
was increased by about Rs3.7/litre. Diesel prices have also another frontier for making profits. Accord-
also been increased by Rs2/litre and are going to be ing to the Government the reduction in overall
deregulated in a phased manner. In the cooking fuel subsidies has been made to manageable limits
segment, domestic LPG prices have been increased and the Improved profitability situation of up-
by Rs35/cylinder, and kerosene prices by Rs3/litre. stream companies post the APM (Administered

Indian Institute of Foreign Trade 14


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INFINEETI | Vol 4, Issue 2 June 2010
Pricing Mechanism) gas price hike, enables them of increased competition due to the deregulation.
to bear a relatively higher subsidy burden. It has
also made efforts towards divestment in IOC. There are however pertinent questions sur-
According to FICCI, the government has taken rounding the timeline of the diesel price de-
a “very nuanced approach” in freeing up petrol regulation, the frequency of change in pet-
prices. The government has marginally increased rol price and the pricing band for petrol price
prices, maybe considering the possible political fall- . The absence of announcement of subsidy
out in case the prices were increased significantly. sharing formulae makes it difficult to judge
Experts say that if the recommendation of the Kirit the beneficiaries of the deregulation move.
Parikh committee would have been accepted in total-
ity under recoveries would have come down drasti-
cally. Significantly lower under recoveries along with
cash subsidy of Rs200, 000 million to be provided by
the government would have resulted in a reduction
subsidy-sharing burden for ONGC, OIL and GAIL to
the levels of around Rs16, 000 million -20,000mil-
lion. Thus, we were not anticipating any increase
in the retail prices of kerosene and domestic LPG.
Subsidy for under recoveries on the sale of
The deregulation of auto fuels is likely to result in the cooking fuel to the private marketers is also
re-entry of private players like Reliance Industries still under consideration. Deregulation hing-
(RIL) and Essar Oil (EOL) that had closed down their es on stability in crude prices, stable and
retail operations due to lack of a level-playing field, lower product cracks of subsidized products,
EOL has already started to ramp up its entire retail ac- stable and reform-oriented government, un-
count of the proposed de-regulation outlet network, der recoveries and subsidy sharing structure.
with most of it having started and rest about to start.
RIL has also started opening its retail outlets, and the All said, the announcement of petrol deregula-
company would get more aggressive if the govern- tion seems to be a step in the right direction and
ment policy regarding the complete deregulation of will benefit PSU oil companies, viz. ONGC, OIL In-
diesel prices gets clearer. Even BPCL, could ramp up dia, GAIL, IOC, HPCL and BPCL. The downstream
its retail operations at a much faster pace as it has oil companies are likely to be key beneficiaries
overlapping presence with RIL in the highway seg- while there is a neutral outlook for the upstream
ment, and is likely to be the most affected on account oil companies as many analysts are still debat

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June 2010 INFINEETI | Vol 4, Issue 2

ing whether the move will lead to improvement of administered pricing mechanism (APM) in 2002
in the earnings of the Oil Marketing Companies (which had to be later folded up in 2004 with the
(OMCs) or upstream segment or government fi- government’s interference when the OMCs wanted to
nances. Many say, the extent of the oil bonds issued pass on the increasing crude prices to the consumers).
may determine the fate of the OMCs going ahead. We certainly hope that this time around the Govern-
ment’s decision is a sound economic one and its inten-
tion to reform the oil sector is met with better fate.
The author is a second year student of
The Indian Institute of Foreign Trade, Delhi

...

There are inflationary concerns as Government

takes a subdued outlook on crude oil prices. For


now this seems to be Government’s step towards
stabilizing country’s oil economy by tackling the
structural problem of oil subsidies in the coun-
try and being fiscally responsible as well as send
correct price signals to consumers so that there
is no wastage of scarce resources. There is how-
ever need to evolve a mechanism to provide a
cushion against the volatility in global oil prices.

Having said that, we cannot forget the previous un-


successful experience of the Centre on dismantling

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INFINEETI | Vol 4, Issue 2 June 2010

Ashutosh Sharma

2010 European sovereign debt crisis: Is it turning


into a contagious disease
E uropeans are seemingly coping with the trauma
of 2010 European sovereign debt crisis. Three
of the semifinalist teams in FIFA 2010 are from
Greece and Spain are considered to be the epicen-
ters of the European debt crisis but in fact Span-
ish and Greek banks were no worse than banks in
Europe and people are enjoying the moment with the strong eurozone countries, especially Germany
hope that Europe will emerge as the winner of FIFA which has taken a condescending attitude to the
world cup once again. However the uneven mac- problems of Greece and Spain. It acted like a poi-
roeconomic performance of member countries of son pill and speeded the concern about possible
Europe may overshadow the possible win. Batter- default to the other parts of the European economy
ing the eurozone is scary to the financial markets and thereby fearing the possibility of contagion in
with their cups of sorrows continues to fill. In the the entire eurozone. The countries that are currently
midst of a fragile and easily reversible recovery under financial pressure and those that are seen as
after a very severe recession, governments across potentially under pressure very soon are recognized
Europe – in both deficit and Fiscal countries – are as PIIGS (Portugal, Ireland, Italy, Greece and Spain).
announcing fiscal austerity packages that are going Out of them Ireland and Greece are facing the real
to prolong the recession for sure and damaging the possibility of sovereign default. These countries are
prospects of recovery especially in employment. already facing a hard time from financial markets

Indian Institute of Foreign Trade 17


June 2010 INFINEETI | Vol 4, Issue 2

that have forced up bond yields and created a


drought of credit to borrowers in these countries.
And those holding such debt are unavoidably at
some risk of a fall in the value of their assets.

European banks had as much as $2.95 trillion


in loans outstanding to these five countries at
the end of December 2009. Chart 1 shows that
banks based in France, Germany, the U.K. and
the Netherlands have invested a significant
part of their lending in these five countries.

Chart 2 : Banks exposure to Spain and Greece


Source : Bank for International Settle-
ments Quarterly report , Basel June 2010.
Credit lending by governments accounts for less
Considering the worst effected countries of Euro- than one-fifth of the total exposure of banks to
pean crisis – Greece and Spain. Chart 2 shows that these countries. Hence the lending of banks to these
French and German Banks together account for more countries is denominated by private debt. The Gov-
than half of Greek debt. In Spain, the proportion is ernment bond market is the focus of the current
less but the amounts involved are significantly more. crisis which is causing a possibility of sovereign
default of these countries. The more the financial
markets strike the government bond markets, the

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INFINEETI | Vol 4, Issue 2 June 2010

more the governments of Greece and Spain are forced region. European Union helped world in diversi-
to announce and implement severe austerity packag- fication of market powers and a serious alter-
es that entail large cuts in public expenditure with ad- native to USA. Today when Union is under the
verse effects on employment and output. This effect threat of disintegration, serious austerity mea-
is seemingly propagating to other parts of Europe sures may lead to little option but to cut the
because of interdependency between the economies. budgetary deficits of countries rapidly implying
a steep recession and a drop in imports. Achiev-
ing both growth and fiscal consolidation seems
highly unlikely – growth will have to give way.

The author is a second year student of The
Indian Institute of Foreign Trade, Delhi.

...
The European Union is 53 years old now dating from
the treaty of Rome in 1957.Probably it is suffering
from mid life crisis. The expressions of this mid life
crisis have started coming up and will become more
and more evident in near future. It is possible that
what is being considered as a crisis of currency and
bond markets of Europe can affect the recovery of
the world from the 2008 recession. The earlier aims
of the European project, such as peace and unity are
looking timid under the pressure of financial mar-
kets. Union does not appear to be able to deliver the
promised security and prosperity to all its citizens.

Union should try to remodel the interdependence


leading to a greater drive for fiscal integration as
well as a focus on wage-lead growth in the entire

Indian Institute of Foreign Trade 19


June 2010 Fun-with-Fin INFINEETI | Vol 4, Issue 2

FIN-WORD
Feeling bombarded with the finance jargons??? Not really!
So you think you have it in you? Infineeti introduces Finword, a
monthly crossword, which will test your mettle as well as build on
your knowledge.

** Answer to be published in the next issue.


Please send in your entry to infineeti@iift.ac.in
The first correct entry will have his/her name
published in the magazine.

Last Finnword’s Winner: Deepak Agarwal

DOWN
1 Relationship between price and earning of a share
ACROSS 4 The price level at which analysts think people will sell
2 Level of company’s debt in relation to its equity capital 5 Entering into an agreement to reduce or eliminate risk
3 Type of annuity where payment starts at a later date 6 Transaction consisting of converting receivable into marketable
6 Type of bonds whose coupons are sold seperately security
11 Institution planning world’s biggest ipo 7 The most simplified and basic type of financial instrument
12 Name of a flower having some significance in finance 8 Science related to specialising in finance and insurance
13 The general tendency of a economic crisis to spread 9 A type of debt which can be redemeed earlier than its maturity
10 Amount paid by an insurer to the insured to compensate for
the loss

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INFINEETI | Vol 4, Issue 2 June 2010

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