31 Dec 2011

Educate yourself, because no-one else will

I am certain there is a serious crisis coming...

And apparently, the realisation is finally dawning on mainstream economists and TV pundits that the Indian banking sector, the corporate sector (a.k.a. India Inc.) and the central government (GoI) are sitting on a mountain of bad debt. (There is a reason for this... which I will come to at the end of this post.)

I am no economist, but with a little research, it was obvious that Kingfisher Airline's crash-landing is just the tip of iceberg when it comes to corporate India's profilgacy.

The following is today's Wall Street Journal online article titled, India's Slowing Growth Will Test Banks' Resilience,
After the peak of the financial crisis in 2009, India's banks opened the floodgates with loans to already over-leveraged companies. Credit Suisse looked at loans to 3,550 non-financial services companies in India with aggregate borrowing of $385 billion at the end of March and found that nearly 30% had net debt more than six times current earnings before interest, taxes, depreciation and amortization.

And the risk is currently spread across several sectors that are ALL expected to do badly in case of a economic slowdown in 2012 - which in itself seems to be a foregone conclusion!

India's private airlines, construction companies, utilities and real estate developers are all notorious for generating non-performing loans. All those sectors will suffer from an economic downturn.

But no matter how illogical it is, the big debtors can look forward to the big banks contorting numbers to restructure the unpayable loans - of course, to keep the sham 'assets' on their account books.

To compound the problem, many companies have borrowed in foreign currency from local banks, taking advantage of lower interest rates overseas. But an 18% fall in the rupee against the dollar since April means they now face significantly higher repayment costs. Struggling borrowers could try to convert foreign debt into rupee-denominated loans or restructuring high risk loans to ease repayment conditions. For lenders, that's better than outright defaults but it will hurt profits.

It's not just the big corporate houses that are essentially 'safe' from the risks of a default. Even the banks don't seem to care if their bad loans are beginning to look like a ticking 'time bomb'.

The Reserve Bank of India's stress test report published earlier this month forecasts 5.8% of non-performing assets in the worst-case scenario...

Since 'assets' are hypothetical numbers (remember, banks hold over 26% of equity in KFA bought at a 60% premium as part of loan 'restructuring' last year) that are leveraged 12-14 times their actual capital funds, 5.8% NPA ACTUALLY MEANS A LOSS OF UP TO 81% OF CAPITAL - in other words, insolvency!

India's top bankers are unafraid for the same reason that India's richest know they cannot lose their assets... because almost all the loses will be transfered to someone else!

This was in the Deccan Herald on 26 Dec...

(Finance Ministry) Officials said PSU banks including SBI may need Rs 40-100 billion capital infusion to maintain Tier-I capital of 8 per cent of their total risk-weighted assets. The government is mulling Rs 10,000 crore extra capital infusion depending on the profits of the banks until March 2012.

Planning Commission recently approved Rs 14,000 crore recapitalisation plan for public sector banks in the current fiscal year 2011-12.

Since Public Sector Banks make up about 70% of India's banking sector, the GoI will eventually 'nationalise' their bad debt as well.

There will be a prolonged play-for-time, but two things will inevitably follow:

1) A sovereign debt downgrade (India's sovereign debt is currently rated just one notch abvove 'junk'), followed by an IMF / World Bank loan.

2) The imposition of 'conditionalities' or 'structural adjustments' that include austerity, deregularisation and privatisation of national assets.

We have been there before... Dr. Manmohan Singh's twin mantras of 'liberalisation', 'economic growth' - and sometimes even his 'foreign policy' - stem from the conditions placed as a result of the 'economic crisis' in 1991.

I strongly believe India, like Greece and Italy, is essentially in bank receivership - and run by unelected technocrats beholden only to a handful of global financiers.


I'm afraid the mainstream media is just propaganda dressed-up as entertainment... You'll never (nor are you ever meant to) know the facts till there is ONLY ONE desperate straw to cling onto!

Switch the TV off, people - and switch your mind on before it's too late.

P.S: This goes for the Team Anna Hazare TV jamboree as well... Try seeing through the mainstream and social media hype; question the motives of everyone involved; and ask yourself if the Lokpal Bill - in any form - can really end or control corruption, or will it just add another elite layer of corruptible, power-hungry appointees outside the purview of the general public... Power begets corruption. Always.

I think India's anti-corruption agitation (and the 'Occupy movements') - if they are successful - will accomplish just the OPPOSITE of empowering people... But that's another post.

20 Dec 2011

Ayurveda. Black swans. And geopolitical puppeteers...

All the business pundits on TV seem to think that the central banks or the central governments must necessarily intervene with appropriate policies to stabilise financial markets or mitigate economic volatility.

Just look at what this mind-set is doing for the Eurozone countries.

By suppressing the SYMPTOM (the approach in Allopathy, the 'conventional' Western system of medicine) instead of the CAUSE (the approach in Ayurveda, the traditional India system for well-being) one is actually preventing the purging of toxic build-ups from the system - and increasing the potential for fatal reaction at a tipping point!

This tipping point is similar to a 'Black Swan' event.

According to wikipedia...
The black swan theory or theory of black swan events is a metaphor that encapsulates the concept that The event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.

The theory was developed by Nassim Nicholas Taleb to explain:
1. The disproportionate role of high-impact, hard-to-predict, and rare events that are beyond the realm of normal expectations in history, science, finance and technology

2. The non-computability of the probability of the consequential rare events using scientific methods (owing to the very nature of small probabilities)

3. The psychological biases that make people individually and collectively blind to uncertainty and unaware of the massive role of the rare event in historical affairs

This is what Nassim Nicholas Taleb says in 'Black Swan of Cairo', a document written for the Council on Foreign Relations (arguably, the most infuential group of geopolitical puppeteers on the planet).
The Black Swan of Cairo pdf
View more ebooks on ebookbrowse.com

If you must know, finance and economics is geopolitics.

12 Dec 2011

India straps on "financial suicide vest"

It was the 'Oracle of Omaha', Warren Buffett who famously described derivatives - like speculative Credit Default Swaps (CDSs) - as "financial weapons of mass destruction" in his 2002 annual report to Berkshire Hathaway's shareholders.

And they don't call him the 'Oracle' for nothing... Six years later, CDSs were a little talked-about, yet key reason for the global scale and massive destruction of the financial crisis that started in 2008.

In the current Eurozone crisis, a Bloomberg-Businessweek article aptly titled, "Credit Default Swap Risk Bomb Is Wired to Explode" lays out the reasons how CDSs have helped transform the problems that began with a few banks in Greece into an apocalyptic worldwide crisis.

In theory, CDSs function like insurance contracts on bonds. In the event of a default, the seller of the CDS promises to pay the the bond’s value to the buyer. CDSs are touted as 'risk-sharing' instruments meant to mitigate the impact of a potential default - but in the real world, CDSs seem to ecalate risk of institutional failure into risk of systemic failure!

In essence, CDSs are "financial suicide vests" that can 'take out' the CDS seller - and if that bank has bought a CDS - a chain-reaction (or contagion) is triggered, which can rip apart the financial system and bring down entire economies. This is the reason why the ECB, IMF and Fed cannot let Greece default!

On 7 Dec 2011, India got it's shiny new "financial suicide vest".

Reuters reported that "India's fledgling credit default swap market kicked-off [...] with two deals covering 100 million rupees worth of bonds." It involved ICICI Bank and IDBI Bank.

On 13 Dec, Firstpost quoted a Bloomberg report as saying that costs to protect bonds of Indian banks against default are rising at the fastest pace among Asian lenders: Five year CDS of ICICI Bank jumped the highest to 471 basis points, and swaps of SBI hit a two-year high of 397 basis points.

But India's bankers are bullish over CDSs! CRISIL says that it "believes that the RBI guidelines incorporate learnings from the CDS markets worldwide. Systemic safety and stability remain the regulator’s priority..."

True. The RBI make the rules, but banks and CCIL (Clearing Corp India) which processes the transactions have to uphold them. And CCIL is 83 percent-owned by banks and financial institutions - with the usual suspects: SBI, ICICI, IDBI, LIC, Bank of Baroda and HDFC Bank as its promoters!

Nothing to worry, then... Except...

The launch of India's CDS market was "sooner than expected". Could it be because India's banks are facing increasing "risk of credit default" considering the health of the overall Indian economy?

This week...
- India's Index of Industrial Production (IIP) for October (Year-on-Year) had nosedived to -5.1% from +3.5% in the April-October period. Not only has India's industrial output fallen like a rock, it's now sits at the lowest since the height of the previous crisis in Q1 200.)

- The Indian rupee has fallen over 15% to hit an all-time low against the US Dollar - and it is still falling in value! This means that all of India's payments denominated in USD - including its trade deficit and volume of external debt - has grown proportionately.

- Sector after sector (public and private) - including Aviation, Real Estate, Textile, Power Distribuition, and even State Governments - are facing mountains of debts that they cannot pay.

- During the 2008 crisis, India's foreign exchange reserves was 38% MORE than its external debt. Today, it is 0.4% LESS that the external debt.

I am no economist, but here is what I think: CDSs have given India's bankers a "self-destruct button." If they go down, the entire economy goes down with them!

At the very least, the Government of India (a.k.a the taxpayer) now has to bailout every bankrupt company to save its insolvent banker.

But it could get much worse... India's oligarchs, bankers, (IMF-appointed) politicans and (Wall St-appointed) media cronies could push India's economic system to the very edge of a cliff, India's sovereign credit rating will go down a notch - to 'JUNK' status.

"We urgently need foreign exchange," will be the mantra chanted repeatedly in the media. Dr Manmohan Singh's Cabinet will come up with a magical 'rescue package'. It will involve wholesale privatisation of public utilities, PSUs (public sector units), and natural resources. It will also involve across-the-board deregulation in all sectors.

I don't know if he'll have the gall to do it, but: MANMOHAN SINGH MAY 'BE FORCED TO' SELL INDIA'S GOLD RESERVES... AGAIN!

And after we lose our sovereignty, comes the REALLY painful part... Large scale unemployment. Civil unrest. Fractures along India's many cultural faultlines.

Well, have a Happy New Year everyone.

11 Dec 2011

Bankers vs. Lynch mob, coming soon to India?

There are some news articles that 'open your eyes' - and there are those that make your eyes pop!

Just yesterday, I had posted about how the ballooning billions in debt accumulat in India could be one unlucky snowflake away from an disastrous default avalanche.

Lo and behold! Along comes the reason why the oligarchs of India Inc. remain unfazed... The following news is from The Economic Times of 6 Dec 2011: Big borrowers of India Inc default on Rs 47,000 crore loans

The article opens thus...
Large borrowers, who took loans of Rs 10 crore or more, have defaulted on payments to the tune of Rs.47,000 crore, with banks not even pursuing cases to recover over half the amount.

Data available with the finance ministry shows that least 700 defaulters who had borrowed Rs.10 crore or more from public sector banks and cumulatively owe over Rs.26,000 crore have gone scot free despite not clearing their dues.

The article goes on thus...
In fact, in several cases, defaulters have gone ahead to get a second loan despite not clearing their past dues.

There is nearly Rs.14 lakh crore of credit outstanding against those who have borrowed Rs 10 crore and above! But, apparently, the banks are not in any hurry to get them to pay it back.

So India's genius bankers - when they are not helping out India Inc. with loans against worthless collateral or taking on hefty losses in the name of corporate debt 'restructuring' - are actually willing to let their 'friends' walk away from humungous loans with next-to-no consequences.

Oh, but there are consequences, to be sure... Not for the oligarchs, the banking elite or the traitorous political class. They get to hoard the profits, while their obscene debts are dumped on the nation (one step from a Moody's debt downgrade to 'Junk' status) and its citizens (one step from starvation and mass civil unrest) to pay up.

Look westward at imploding societies of Europe and the United States - NOW is the real opportunity to learn lessons on how (not) to run the economy.

A word of advise for those who live in ivory towers: The effette media-tamasha around Anna Hazare and his merry band of Rockefeller-Magsaysay awardees will be the least of your worries when the economy goes into debt-shock.

Just how many sten-gun magazines will your Z-triple plus category Special Protection Group have to empty to stop a 1.3 billion-strong juggernaut?


7 Dec 2011

India's himalayan debt crises-in-waiting...

If it continues blindly stumbling down the path of 'economic growth' through monetary inflation - a model that is globally coming apart at its seams - there will be hell to pay for India... Hell in the form of growing MOUNTAINS OF DEBT!


According to Bloomberg,

The (global) airline industry’s profit next year will fall 49 percent [...] as the sovereign-debt crisis in Europe hurts economic growth, the International Air Transport Association (IATA) said.

That's not good news for the five leading domestic airlines in India — Jet Airways​, Kingfisher Airlines​, Air India​ and SpiceJet Ltd — which have combined liabilities of Rs.84,058 crore.

The industry has already escalated the crisis right up to the Prime Minister's Office.


The sector had loans of about Rs.4.8 trillion from various creditors in March 2011! Canara Bank faces almost certain insolvency with 13.3% of its assets exposed to the sector. India’s top two lenders, State Bank of India and ICICI Bank, have more than Rs.300 billion of exposure each.

The government has stepped in waving the magic wand of "reforms". This may buy some time - but little else.


According to Bloomberg-Businessweek, India’s biggest real estate developers are having to fork out an unsustainable 20% interest for borrowing because of already high debts.

And while facing high interest rates, falling demand, dropping profits, high inventories, and bad forecasts, they also need to come up with the means to repay their towering debt of Rs.1.8 trillion over the next two to three years!


According to a report by CNBC-TV18,

The banks have a total exposure of about Rs.80,000 to Rs.1 lakh crore to the entire (textile) sector including unlisted companies. While so far none of these companies have reported major defaults, they fear that due to the fall in demand these companies may report defaults going forward.

Falling demand from their key western markets has prompted the industry to seek the Finance Ministry's support in restructuring their loans. Specifically, "[...] they have sought two things. One is repayment of principal amounts on long-term loans should be postponed for the next 24 months and also there should be easier norm for working capitals for the next five years."

In layman's terms, the textile industry don't seems to have the capital to keep factories operational - let alone service their debt. And they obviously do not see this as a "short-term" downturn either.

Given the huge numbers of direct employees, the farming communities upstream, and the massive exposure of the banking sector - all of who could literally "lose their shirts" - the GoI is almost certainly going to have to "do something".


West Bengal's Chief Minister, Mamata Banerjee, this month managed to wrestle permission from the GoI to raise an overall amount of Rs.21,614 crore from various sources. This, despite inheriting a state indebted to the tune of Rs.2 lakh crore. In fact, West Bengal's debt is currently around 40.8% of its (Gross State Domestic Product) GSDP, and the state spends about 33% of its entire revenue on just interest payment!

Other states on central fiscal life-support include, Punjab (debt, 34.1% of GSDP) which spends 21.1% of all revenue on interest payment alone; and Kerala (debt, 33.4% of GSDP) which pays 19.6% of its entire revenue on interest payment ...And these two are supposedly among the progressive role-models in the union!!!


I had posted previously on SBI's "request" for capital infusion from their largest shareholder: the Government of India.

The sectors that pose the most "troubled assets" for SBI, according to its Chairman...

The 'doomsday' scenario for SBI according Moody's...

Since SBI claims to be "leveraged" 12 to 14 times, 12 percent Non-Performing Assets (NPAs) translate into at least 144 percent of capital fund - that isn't "extreme stress" - that's insolvency! Besides, SBI is not the only bank that needs to be "recapitalised" to offset its NPA.

In fact, banks in India are so worried of NPAs, that they are refusing to lend - creating a 'credit crunch' in the market!


Recently, the Reserve Bank of India (RBI) has had to inject 'liquidity' into the system by buying GoI securities. The amount? Rs.22,000 crores in three weeks!

The following is a snapshot of where India stood in terms of debt issuance even before the RBI opened the liquidity tap...

According to a Ministry of Finance press release on 2 December 2011,
Credit growth to specific sector may pose concerns. According to the data published in the Report on Trend and Progress of Banking in India 2010-11, [...] credit to infrastructure, real estate, retail and Non-Banking Financial Companies witnessed a growth of 38.6 per cent, 21.4 per cent, 19.5 per cent and 54.8 per cent, respectively [...]

(The emphasis is mine.)

According to the Finance Ministry report, India’s external debt at end-March 2011 was US$ 305.9 billion, of which, corporate borrowing was 28.9% - and growing! BusinessLine has an article on the growing similarities between the 1991 'balance-of-payment' crisis and today's circumstances... And the falling value of the Indian Rupee certainly isn't helping.

The main difference is massive scale of the problem today.


1 Dec 2011

Airlines hijack India, Banks hold-up taxpayers

According to a Frontline article, "(Kingfisher Airlines) has not paid to the government Rs.410 crore collected by way of taxes deducted from the employees' salaries. It has defaulted on the payment of salaries and taxi, airport landing and parking, catering and aviation turbine fuel bills. On November 14, the company posted its 16th straight quarterly loss."

Last year in a deal with creditors, Kingfisher managed to magically 'restructured' Rs.1300 crore of debt into shares worth 62% over the prevailing market rate. The value per share has since fallen from nearly Rs.65 to around Rs.20!

The deal, something of a stroke of financial genius on part of the consortiunm of 13 creditors, was achieved under the stewardship of the venerable State Bank of India (SBI), the country's largest bank.

A year later, SBI proudly informs us that it now has Rs.1400 crore exposure to Kingfisher Airlines - which is Rs.100 crore MORE than the previous year's entire 'restructured' debt!

But the bank isn't the least bit disconcerted. No siree!

Because SBI isn't alone... "Non-performing assets, or bad loans, of banks in India are set to triple by March 2014, according to the latest report by CLSA." And according to the same article on FirstPost, "the corporate sector accounts for 70% of bank credit." Must be a coincidence, eh?

Pratip Chaudhuri, Chairman of SBI, cooly notes (in video below) that Moody's which recently downgraded his bank's rating (presumably because of dubious 'assets' like its equity in an airline that has NEVER made a profit!) also said that, "SBI is assured of the continuous support of the sovereign."

In English, it simply means "taxpayer-sponsored bailout." You see, they are just Too-Big-To-Fail.

(Apparently, SBI overall is rated Baa2 by Moody's, while India (SBI's 60% owner) is rated a notch BELOW them at Baa3! I guess, the magical world of finance is beyond the scope of concepts as mundane as logic.)

The Frontline article also quotes a report by Toronto-based Veritas Investment Research Corp. that Vijay Mallya's UB Group had "provided bank guarantees totalling Rs.16,000 crore, according to some reports, to Kingfisher Airlines' debt, far beyond its own marketable assets, thereby rendering both companies insolvent." It is amazing that no creditor considered this possibility?

But while Kingfisher Airlines has raked up debts of Rs.12,668 crore, and cancelled 175 out of 418 flights alloted to it for the current winter holiday season, the company's Chief Optimist and CEO, Sanjay Aggarwal, wrote "there is no risk to the long term future of the airline" in an email meant to stem the haemorrhaging of pilots and other employees.

But Kingfisher Airlines isn't overly perturbed either!

Because they are only the visible part of the iceberg... According to a LiveMint article, the entire Indian aviation industry is headed for a crash landing!!!

Collectively, the five leading domestic airlines — Jet Airways​ (India) Ltd and its unit JetLite (India) Ltd, Kingfisher Airlines​ Ltd, state-owned Air India​ Ltd and SpiceJet Ltd—are weighed down by Rs.84,058 crore of liabilities.

State-run Air India has a total debt of Rs.48,000 crore, Jet Airways Rs.19,602 crore, JetLite Rs.2,197 crore, Kingfisher Airlines Rs.12,668 crore, and SpiceJet Rs.1,591 crore.

(Try to pick a flight-path around this unholy skyline...)

So what do India's intrepid aviators do? Why, of course, the aggrieved jet-setters troop off to the Prime Minister's office... Jet Airways' Naresh Goyal (Chairman), Indigo's Rahul Bhatia (Promoter), IndiGo's Aditya Ghosh (CEO), SpiceJet's Neil Mills (CEO), Kingfisher's Sanjay Aggarwal (CEO), and Go Air's Jeh Wadia (owner), met Manmohan Singh over a cuppa Assam or Scotlands finest to seek government 'invervention'!

In plain English, it means "taxpayer-funded bailout." They too are Too-Big-To-Fail.

There are ultimately only two possibilities before India:
1) The Indian government intervenes, with a disasterous inflationary consequence, or
2) The Indian government does not intervene, allowing all the loss-making airlines and the over-leveraged banks to collapse, with disasterous deflationary consequences.

India's 'Lehman Moment' is looming large like a wide-body attaining terminal velocity... Whether it is direct incentives, tax-cuts, subsidies, or Foreign Direct Investments (FDIs), it is either lost income or new expense, both of which will be offset by taxing the aam aadmi!

India is primarily a domestic demand-driven economy, with consumer spending accounting for nearly 60% of the economy by expenditure. The current slowdown in India's GDP growth signals an ominous trend: Rapidly falling domestic spending!

And the less Indians spend, the lower the profits for India Inc. And in times when companies are stuffed to their gills in debt, it means losses that can threaten lenders who happily leveraged their capital up to 14 times and hold worthless IOUs as collateral!

But why is the aam aadmi tightening his purse strings? I suppose he is just tired...

Tired of the false promises. The 'economic superpower' lie. The uncertain global economic climate. The high cost-of-living. The falling value of their savings. Their cities falling apart at the seams and rotting at its heart. The erosion of traditional Indian family values. The consequent decadence in society. The frivolity in the mainstream media. The naked cronyism in the corporate world. The nepotism of epic proportions in government. And the complete failure of virtually ANY authority figure to set an example.

The aam aadmi knows he's Too-Small-To-Matter.

He know that nobody gives a rodent's rear-end if he swings from the end of a rope because he failed his family. What he might not know, however, is that there are roughly one billion and three hundred million others who feel just like he does... Right now!