US UK Banks: Nationalization on the Cards

Things might seem to be fine on the surface but troubled times for banks in US and UK are not yet over. The losses by US banks alone amounted to $1.8 trillion which is more than their $1.4 trillion Net Worth. The sad part is that most of these banks including the "Paper Juggernaut Citi" are not showing signs of recovery and are just working on damage control.

So this brings a question into picture that many economists worldwide are contemplating on. Should these banks be nationalized temporarily? The Government already has a 60 to 80% stake in several of these banks post the bail out. I am an advocate of free markets but at this juncture the more important thing is to turn the banks around and that will not happen unless the hollow ineffectual managements of these banks are removed. This will only be possible if these banks are temporarily taken over by the government which elects representatives of the management and shapes the banks' future for the next few year and then privatizes them again.

This might seem like a wild idea but countries have done this successfully in the past. Sweden nationalized its banks during a crisis in the early 1990s and for the most part privatized them again once they were stabilized. Ireland nationalized Anglo Irish Bank in January and has spent some $9 billion to recapitalize Bank of Ireland and Allied Irish Banks. In Berlin this week, the government said it would prefer to take a majority stake in Germany's struggling Hypo Real Estate Holding rather than nationalize the property lender.

Nationalized banks usually do not perform as well because their primary objective is employment and subsidies to a particular sector. Moreover, they have a much looser corporate governance as compared to a private bank. Its a tightrope walk but the existing management of these banks have caused enough havoc for a lifetime and I think that a temporary nationalization might not be such a bad idea after all.

Why Is the Stimulus Not Working?

IBM, Microsoft, Lenovo Ericsson and HSBC combined cut close to 17000 jobs and this was despite the $819 billion stimulus package approved by the House in US. Things are no better in India. India Inc is expected to cut close to 27000 jobs by March this year after all the sweeteners the central bank has thrown at them.

So why are such large scale layoffs happening even after liquidity infusion in the economy? The problem still remains that mere indirect and direct liquidity infusion will not put business back as usual. Firstly, the lack in global demand is pushing the margins at which large companies could afford to operate initially due to the huge volumes. With these volumes hit, sustenance itself is becoming a difficult thing. Second is the problem with short term liquidity and inventory hold up cost. Banks are reluctant to lend working capital readily as they suspect a rise in bad loans and the inventory hold up cost is too much for the companies to counter without the sales happening. Lastly, quick cost saving initiatives in order to cut down on expenditure usually are the easiest to achieve by laying off duplication in work and cutting jobs. This as a part of Rapid and Sustained Cost Management is seen as a short term approach which affects the long term growth of the organisation. But for many companies, employee remuneration amounting to as much as 20% of the total cost, it is a forced choice.

Moreover, economists are of the opinion that the liquidity being infused in the country will show its effect post the first half of 2009 but this alone will not be able to get business rolling in the country.

The Cost of Bailout

The Global Financial Bailout comes at the cost of $4.62 trillion. To help make sense of this number and put things in perspective, let us look at the following:

South Korean Bailout 1997 Cost: $78 billion
Indonesian Bailout 1999 Cost: $122 billion
Brazil Bailout 2001 Cost: $110 billion
Argentina Bailout 2001 Cost: $52 billion

TOTAL = $ 3.62 trillion

The Current Bailout is at least $4.62 trillion

Food For Thought???

When The World Tells A Story

It is difficult to put things in perspective and find out when exactly a crisis started and when it was at peak. But then too, a closer look shows us that the world tells a story when things are going wrong and shaping up a crisis.
Between September 2008 to January 2009, the Global Financial World told many tales and when the pieces are now put together, they form a clear picture of what we now know as the Gobal Fianancial Crisis of the 21st century.
USA - Weak economic data, withdrawn guidance by companies and talk of job cuts meant that US retail sales dropped by 1.2% in September 2008, which was the worst drop in 3 years and the third decline in a row. The Consumer Confidence Index fell by record percentages.

China - The Chinese Composite Index fell by 68.52% in 2008 as global demand for Chinese exports fell.

Britain - Economic output declined by 0.5% in September 2008. Argentine President's plan to take control of $29 billion of pension assets raised fears of a possible debt default by the government. British economy shrank by more than expected for the first time in 16 years. The Bank of England announced a cut in interest rates by 50 bps with a possibility of further rate cuts in future.

Japan - Sony slashed its forecast for annual operating profit by 57% on grounds of a stronger Yen and a worsening market for television and cameras.

Sweden - The Central Bank cut rates by 50 bps and hinted further future reductions.

South Korea - The Government announced a rescued package of $50 billion to rescue its bereaved markets. The country witnessed its slowest economic growth in 4 years.

New Zealand - The Central Bank cut rates by 100 bps and hinted further future reductions

Switzerland - UBS was forced by the Government into a $59.2 billion bailout

Russia - The Central Bank placed a rescue package of $26.6 billion in unsecured loans

India - Government injected Rs 320000 Crores in multiple phases. Inflation rose above 12% and IIP fell to record lows

IMF - Expressed intention to help Hungary, Iceland, Belarus, Ukraine, Serbia and Pakistan for economic programs backed by financing

The World Told A Story....

Where Asia stands...

The question everyone wants to know is When will things get better? I am talking about Asia in particular and Asia has a very serious concern that investors in US, Europe and Japan might choose to part ways for the time being.

But an Asian Economic Report by HSBC seems to think that the prospects for Asia are positive. The report states, "Fundamentally, we remain of the view that Asia does not suffer from the same financial dislocations seen in the West. As we mentioned previously this should set up the region for an ultimately faster rebound once global financial market uncertainties begin to abate. Therefore, with perhaps the exception of Korea and India, most of the latest financial rescue measures are defensive in nature, rather than indicative of elementary financial vulnerabilities. The primary concern of policy-makers in Asia is to shore up growth. Other measures, such as blanket deposit guarantees and emergency local liquidity injections, therefore appear unlikely across the region, although a number of central banks may continue to provide dollar liquidity directly into local markets to ease external funding strains".

I personally believe that the Asian markets will see a run up only post a short term consolidation. This might take between 3 to 18 months to happen, depending on other economic indicators. The Corporate Results for the coming quarter will be the crucial indicator. If everything goes as planned, then Asia might see itself as the leader of global economic revival by the end of August 2009.

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Financial Crisis Takes Another Victim: Rubens Barrichello

If I had told someone a few days back that the Global Financial Crisis will cost Rubens Barrichello his job, then they would have probably laughed at me. But Honda's decision to permanently withdraw from Formula One may result in current driver Rubens Barrichello being out of job. Honda decided this week to permanently cease all activities in Formula One due to the global financial crisis and the slowdown in the Auto industry back home. 

Barrichello, who is the most experienced driver in F1 history, with more than 271 Grand Prix in his name and 9 wins has raced with likes of Ayrton Senna and Alain Prost. With Japan's 2nd largest automaker decided to close shop, it might finally come to light that Barichello is too old to be likely hired by any other team. Most of the teams by now would have already decided on drivers for 2009 or renewed contracts. It breaks my heart to see two of the biggest names in F1 (Honda and Barrichello) fall victim to the Financial Grim Reaper.

A Take on: CRISIL India Economic View - November 2008

The table below shows the 8 parameters for which CRISIL has forecasted India's figures for 2008-2009.

Quite frankly, I find a few of these numbers too optimistic and a few reasons cited in the report by CRISIL too vague. Its highly unlikely that India's overall GDP growth will hit more than 6.5%. In fact it might be as low as 6%. I would be too optimistic if I say that the year end Rs/$ exchange rate would stand at Rs 45. Chances are that this figure might hover around Rs 48 after hitting a high of Rs 52. Moreover the country's fiscal deficit would see a slight relief due to lower oil prices globally and for India, its oil imports eat into most of what its Balance of Payment shows in the form of inflows. 

My major concern apart from all these this year are the FII outflows which I think will accelerate post the Mumbai Terror Attack. If Nifty does test lows of 1800 then it will test a lot of patience for many Domestic Institutional Buyers who have been trying to buffer the damage done by the FIIs. My take on IT/ITES, Realty and Auto this year is bearish and the year 2009 according to me will see markets being range bound. I personally see no mouth watering returns from the Indian stock markets during the year 2009 though I pray and hope that by 2012 Sensex hits 25000 (We all want that....Don't We??)

US: Cause and Effect for Mexico

China seems to have cracked a good deal by leasing majority of Mexico for 50 years, in order to overcome the farmland issue and also enabling Chinese companies to build factories in Mexico to supply the North American market more easily. But will that solve problems for Mexico?

Currently it seems like Mexico is on the cliff edge. 80% of Mexico's exports are consumed by US consumers and the slowdown in US means an unlimited supply of problems for Mexico. Because Mexican manufacturers rely heavily on US companies, most of them are laying off workers on a large scale. In places such as Nuevo Lared, employers have laid off as much as 40% of their work force and lost at least 40% of their business in a week. Mexico too like most nations is turning to a stimulus package for rescue. It is looking at a $5.26 billion stimulus package to support the crumbling economy. Many Mexicans used to illegally immigrate to US for better jobs. Jobs in Texas would pay them 40 times the daily wages they would earn back home in Mexico. Now, companies are sending these workers back and denying employment to new workers from across the border.

Will Mexico will be the next in line?