23 Oct 2012

India's at a fiscal cliff - enjoy the view

There's an article on the zerohedge economics blog referring to the sheer absurdity of S&P's having the same BBB sovereign debt rating for nations that are burdened by debt ranging from 10 percent to 120 percent of their GDP!

The precarious BBB-rating is just ONE STEP above 'non-investment grade' or junk bond status.

These are the BBB-rated nations ranked by Debt-to-GDP ratio


Spain has already has it's entire banking sector downgraded - and is in the front of the queue for a major bailout by the European Central Bank (ECB). This event will probably be accompanied by the tightening the "austerity" tourniquet, and feudal overlordship of an EU 'Budget Commissioner' from the sinister European Stability Mechanism (ESM).

(This video on the ESM - shocking as it may be - is over an year old. The ESM has since morphed into an even more frightening, sovereignty-gobbling, legally-untouchable, financial frankenstein!)

However, my personal concern is not about Spain or the EU - it is about the BBB-rated nation that is standing alongside Spain on the edge of fiscal cliff: INDIA.

I had posted on India's predicament last December... (Please read it.)

Here's the gist of it - and a few updates...
1.] Back when Kingfisher Airlines (which had its license suspended this month) was in the news for debt 'problems'. I pointed out that the entire Indian Aviation Sector is drowning in debt. And their top bosses even approached the PMO for assistance!

One must understand that the ones in real trouble are the banks - including many government-owned banks - that lent money to these airlines! Bad loans mean vanished assets. And when assets are (mostly stock and equity) leveraged up to 14 times, seemingly minor single-digit losses or a steep drop in the stock market can wipe out a bank's capital base!

2.] Avaition is not the only 'sick' sector in India... Many other industries, including India's Power Distribution Sector, Real Estate Sector and Textile Sector are deep in debt.

3.] Several Indian States are struggling to pay just the INTEREST on the debts they owe. West Bengal loses 33 percent of the state's entire revenue; Punjab, 21.1 percent of the state revenue; and Kerala, 19.6 percent of the state revenue on JUST interest payment!

4.] India's Banking Sector is facing unprecedented levels of Non-Performing Assets (NPA) or bad loans - mostly to corporate clients like Kingfisher Airlines. In just 3 weeks towards the end of 2011, the Government of India, via the Reserve Bank of India (RBI), had pumped Rs 22,000 crores of liquidity into the banking system. Even AFTER such intervention, the banks were downgraded by the credit rating agencies this year! (On top of all this, next year, the BIS's Basel III agreement for INCREASED capital reserves kicks-in!)

5.] India's external debt is growing, it's currency weakening and it's economy is slowing. Despite the government puppets harping on about the lack of foreign investment, India had the SECOND HIGHEST foreign investment in-flow in the world in 2011! EVEN THEN, the nation's foreign currency reserve-to-debt ratio is fast approaching the levels last seen in 1991. (If you remember the shameful episode, that was when India gave away its national gold reserves in exchange for new DEBT with the IMF!!!)

India's present debt-to-GDP ratio can be simplistically explained like this: Around 65 percent of the value of everything India's produces is OWED to lenders.

Perhaps soon India will get it's own version of a 'Budget Commissioner'... We could call him, "Viceroy"!

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