Deleveraging the National Balance Sheet

The countries across the world are facing the crisis of huge national debt, and some are on the brink of default. A few countries in Europe like Portugal and Ireland have already been downgraded to 'JUNK' grade by Moody's. US is also facing the problem with its national debt. Though it is not as high as European countries and is manageable (net debt at 65% of GDP), it has reached the ceiling of $14.3 trillion, which if not revised by the Congress, may lead serious repercussions in US and obviously the world over. I came across the article "Handle with care" in 'The Economist, July 9th-15th, 2011 issue'. The following are the excerpts from the article on how to reduce the national debt.

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Debt can be reduced in several ways. It can be paid off with the help of higher thrift (though not everyone can spend less than they earn at the same time). Its burden can be reduced through higher inflation or faster growth. Or it can be defaulted on. In practice, rich countries seem to be using different combinations of these approaches.
In America, where overall debt levels have fallen fastest, a lot of the reduction in household debt has been thanks to mortgage defaults and write-downs. In Britain, where there have been virtually no mortgage write-downs, relatively high inflation has pushed down the overall debt burden. Spain, in contrast, has seen virtually no reduction in its debt load, despite fiscal austerity, partly because that very austerity has contributed to weak growth and low inflation which have kept down nominal GDP. Tough rules on mortgage have made it hard to reduce unpayable household debt.

European Mess

The economic mess in Europe is getting messier day by day. Some time back a new term PIGS was coined, to refer Portugal, Ireland, Greece and Spain. These four countries are most financially troubled and debt burdened countries in the Euro area and one among them Greece is almost on the verge of bankruptcy.

European union, IMF etc. have helped them in past by providing additional line of debt to temporarily take care of debt liabilities, but these oxygen supplies have not helped them in long term and the trouble continues.

The deficit in Greece is touching 14-15% levels. Recently Greek government announced austerity measures for civil servants, which faced a lot of opposition in the country. People there are afraid that these austerity measures may soon expand to all business sectors including privatr firms. infact some people have already started planning to emigrate to other countries. The wages and salaries are not increasing, but the inflation is, and so are the taxes. Banks are refusing to lend money fearing that borrowers may not be able to repay. Worse still, the unemployment level is going up gradually.

When Eurozone was created in late 90s, the member economies gained a lot of attention worldwide, particularly on the strength of strong economis such as Germany. The FDI and financial flows increased manifold. This is not the case anymore. There have been allegation that these PIGS countries are affecting other Eurozone economies, particularly on trade performance. There have been some serious suggestions to do away with the Eurozone and the Euro as common currency. So far, the Euro is surviving on the continuing commitment of member countries and as an alternative to the US dollar in Asia and Middle East.

PIGS countries have received significant amount of bailout in the past and continues to receive further bailout packages as and when required. Now Eurozone is planning a permanent baiout fund known as European Stability Mechanism (ESM), which will be operational from 2013/2014. But will that solve the problem, only time will tell. The major problem is that countries like Greece are not capable to repay such huge debt. Therefore without a formal restructuring of their debts, the bailout packages are only providing temporary relief and just delaying the inevitable.

Greece has become insolvent as its debt has reached 160% of its GDP. Economist has been suggesting that Greece can not sustain more than half of its existing debt. The formal restructuring of debt seems more of a preferred option as an austerity drive can not reduce deficit significantly, and would have lot of internal opposition. An otherwise chaotic default would be very harsh not just on lenders to Greece, but would indirectly affect most of the economies globaly. Moreover, in case of default the lenders may not be in position to recover even half of their money, which could be recovered though an orderly restructuring.

Solar Power May Already Rival Coal, Prompting Installation Surge

Source: http://www.bloomberg.com/news/2011-04-05/solar-energy-costs-may-already-rival-coal-spurring-installation-boom.html

Solar panel installations may surge in the next two years as the cost of generating electricity from the sun rivals coal-fueled plants, industry executives and analysts said.

Large photovoltaic projects will cost $1.45 a watt to build by 2020, half the current price, Bloomberg New Energy Finance estimated today. The London-based research company says solar is viable against fossil fuels on the electric grid in the most sunny regions such as the Middle East.

“We are already in this phase change and are very close to grid parity,” Shawn Qu, chief executive officer of Canadian Solar Inc. (CSIQ), said in an interview. “In many markets, solar is already competitive with peak electricity prices, such as in California and Japan.”

Chinese companies such as JA Solar Holdings Ltd., Canadian Solar and Yingli Green Energy Holding Co. are making panels cheaper, fueled by better cell technology and more streamlined manufacturing processes. That’s making solar economical in more places and will put it in competition with coal, without subsidies, in the coming years, New Energy Finance said.

“The most powerful driver in our industry is the relentless reduction of cost,” Michael Liebreich, chief executive officer of New Energy Finance, said at the company’s annual conference in New York yesterday. “In a decade the cost of solar projects is going to halve again.”

Installation Boom

Installation of solar PV systems will almost double to 32.6 gigawatts by 2013 from 18.6 gigawatts last year, New Energy Finance estimates. Manufacturing capacity worldwide has almost quadrupled since 2008 to 27.5 gigawatts, and 12 gigawatts of production will be added this year. Canadian Solar has about 1.3 gigawatts of capacity and expects to reach 2 gigawatts next year, Qu said.

“You have to get better at it as well,” said Bill Gallo, CEO of Areva SA (CEI)’s solar unit. The French company could shave another 20 percent from the cost of making its concentrating solar thermal technology, and the same proportion from building and deploying plants, he said.

Electricity from coal costs about 7 cents a kilowatt hour compared with 6 cents for natural gas and 22.3 cents for solar photovoltaic energy in the final quarter of last year, according to New Energy Finance estimates.

Comparisons often overstate the costs of solar because they may take into account the prices paid by consumers and small businesses who install roof-top power systems, instead of the rates utilities charge each other, said Qu of Canadian Solar.

“Solar isn’t expensive,” he said “In many areas of the solar industry you’re competing with retail power, not wholesale power.”

Rooftop solar installations also will become cheaper, the executives said.

“System costs have declined 5 percent to 8 percent (a year), and we will continue to see that,” SolarCity Inc. CEO Lyndon Rive said in an interview. The Foster City, California- based company is a closely held installer and owner of rooftop power systems.

To contact the reporter on this story: Ehren Goossens at the BNEF Summit in New York at egoossens1@bloomberg.net

To contact the editor responsible for this story: Reed Landberg at landberg@bloomberg.net

Travelogue on the day of India v Pakistan epic

This is the travelogue details, when I was traveling to Chennai instead of watching the India v Pakistan clash in the Cricket World Cup 2011.

All this started on 28th March, when I got a call from a bank in Chennai asking me to attend a meeting on 30th March regarding a company, for which I was working a debt refinance scheme. I told them, the agenda of the meeting is very simple and there is nothing related to me, so I may be excused, but still my presence was insisted. I talked to my boss next day, who was also reluctant to send me because we were not paid the fee for long time and also because of the India v Pakistan clash. It is difficult for me to say, which was the primary reason and which was the secondary.

Any way, I booked both sides ticket and embarked on the journey next day.

0650 hrs. I woke up. Usual morning calmness. Prepared to leave for airport.

0720 hrs. Cab driver called up. at least half an hour early then I had asked him to report. I asked him to wait.

0740 hrs. Had two Gobhi paratha for breakfast.

0750 hrs. Left home for airport.

0845 hrs. Reached airport. I was told this is the international flight, so I have to go to the check in counter at international terminal. Luckily, Hyderabad airport do not have separate terminals for domestic and international operations, it is just that one side of the terminal is used for domestic operations and other side for the international operations. checked in at the counter, I asked for the seat near exit, thinking it would be the comfortable one with more leg space and would be convenient to exit, but I was given the seat near emergency exit in the middle of the aircraft. then I cleared the custom desk and moved near the scheduled departure gate. There were a couple of Muslim family perhaps traveling for Holy Haj, with males wrapped in a white towel or similar looking cloth. Everything except that was quite at the Terminal.

0910 hrs. I sat near the departure gate, where my flight was supposed to leave. I looked around if I could find some familiar face only to meet disappointment.

0945 hrs. Finally the boarding started. People at boarding desk checked my boarding pass, and tore off one portion of it. I moved to clear the CISF jawan and then in the aero bridge. I clicked a pic of the aircraft and posted to my facebook wall.

1015 hrs. Flight started moving. In another 5 minutes it was airborne. A few turbulence in the initial phase, which are quite uncommon for a bigger aircraft like A-319, in which I was flying. This reminded me of the fake pilot scam recently unearthed in India. However, realizing that since I am already airborne, there is nothing I can do now and I have good amount of insurance I relaxed back on my seat and took out the book 'Immortals of Meluha', which I have been reading on past 2-3 journeys.

1040 hrs. The flight stabilized at a height, and air hostess and stewards brought a small box containing so called breakfast. (A tip to all home sick people, that you should travel Air India, where you will feel like your mother and father are serving the food).

1110 hrs. Landed at Chennai airport. Came out of Chennai airport.

1115 hrs. Came outside of the Chennai airport, to find driver was not there. Made some quick calls to my office. After waiting for about 10 minutes, I found the driver. He was waiting for me at internal arrivals.

1225 hrs. Reached the bank. Bank officer asked me some help regarding the provisions he had to make in the account. I opened the RBI circular on my laptpo and convinced him that three different things he is inquiring with me are one and same; and whatever calculation has been done by him is correct and even if it is wrong let auditors point it out and also provide the correction. After that I made a reply, which the bank branch was supposed to provide to its corporate office.

So far, there was nothing related to India v Pakistan match.

1420 hrs. Left for lunch. Ordered Veg American Choupsey and shared with a bank person. The match started at 1430 hrs. The restaurant had an LCD TV, and while eating the Choupsey, we both enjoyed Sehwag hitting Umar Gul all around the park. After finishing the lunch, we both left the restaurant with about 6-7 overs match over and Sehwag returning to pavilion.

1600 hrs. Reached the meeting venue along with bank official. Wow! they had arranged a small TV in the meeting hall for match. We watched a few overs, while waiting for other participants to arrive. In the meanwhile, some old and not so young bankers exchanged a few expert comments about the match, regarding who will win/ loose, what should India do to win, and whether Sachin should score a century today or not. The meeting started in some time, with mute volume. Everybody excited with the match, kept the meeting very short and the official gup-shup was over in not more than 30 minutes. Bankers proceeded to sign documents one by one, waiters served some snacks and everyone enjoyed the match.

1830 hrs. The Indian inning was over they made 260 runs (a not so good score but still fairly defend-able) and we left the meeting premises. Some bankers had came in my cab, so I had to drop them back. On the way, they asked me for some documents, which I told I had already e-mailed a few days back. Banker asked me to wait till he checks his e-mail. Holy shit! I am not going to wait for you , I told in my mind. I made a nice excuse and started back for airport immediately after dropping the bankers at their branch.

1930 hrs. So many people mushroomed beside road, affecting the traffic flow. I though it might be some fight or an accident. But it was an electronic showroom, who had installed a giant TV, in which India v Pakistan match was being played.

1945 hrs. Reached Chennai airport. showed my e-ticket to CISF people, who were discussing that if Pakistan loose two more wickets they are in trouble. I moved inside the terminal, took my boarding pass and cleared the security. Airport had a small TV in the boarding area showing the match, the score was 2 wickets down. I watched the match for a few minutes and then moved near my boarding gate. After a little while, the terminal building was filled with huge roar of people, which indicated that Pakistan had lost its 3rd wicket. Another applause followed a little later, indicate 4th wicket. I checked the internet on my cell phone to confirm the same.

2050 hrs. Boarding for my flight started. The flight was delayed by about 5 minutes or so. Some passengers suggested the Jet airways staff that they can delay the flight by two hours if they wish to, which was obviously ignored.

2120 hrs. The flight was airborne, and I took out 'Immortals of Meluha'.

2200 hrs. Flight attendant announced the score. 40 overs 180 runs 6 wicket down. Every one in the flight was excited, India has a chance.

2220 hrs. Another announcement. 45 overs 199 runs 8 wickets. Yes! India can do it.

2245 hrs. Flight landed at Rajiv Gandhi International Airport, Hyderabad. I switched on my cell phone immediately and logged on to cricinfo.com. 5 balls remaining 30 runs required. India has almost done it, and then after a few minutes, India has won and entered in the Cricket World Cup 2011 Finals.

2330 hrs. Moving towards home, I observed mad rush of people waving Indian Tricolor on bikes and cars.

India had finally beaten arch rival Pakistan.

Before the match Prasoon Joshi had written a wonderful poem on the match, which was telecast on Headlines Today. Here is the link

http://www.youtube.com/watch?v=9yLQK317Vbs

Economic Impact of Japanese disaster

As the subcontinent is dipped in colors of the Cricket world cup, as political parties prepare for forthcoming state assembly elections in five states in India, a tragedy stuck in Japan. It was hit by 8.9 M earth quake followed by devastating Tsunami on its North-eastern coast and now news about accidents in its nuclear reactors.

Enough has been discussed in various media about the damage the tragedy has caused such as monetary loss of billions and trillions of dollars and loss of human population, not less than 10,000 in number; and I am sure much more discussion will take place on these subjects in the time to come. However, I am writing this blog post to identify some potential impact this tragedy will have on the economy.

• As investors and corporates in Japan, try to recover from the tragedy, then would require huge amount of cash for the same. They might withdraw their investments from the government treasuries/ bonds and equity markets.
• The equity markets will fall because, first investors will be withdrawing money from the market by selling their equities and their are less numbers of people willing to buy these securities; and second because company's performance itself would be under pressure, due to temporary stoppage of work, high raw material prices etc.
• As people start to withdraw money from government securities, government will find it tough to raise money from the market. This will result in the yield on these instruments going northwards.
• As government is not able to raise money from the market, it has no other option but to borrow money from abroad or to print the money. Borrowing money from abroad may not be very feasible idea, considering lower rate of interests in Japan and definitely printing Yen, would be the most attractive idea for Japanese government. More money = more inflation.
• Inflation will go up, first because government will print more money for reconstruction and other normal expenses, but second because simply their is little supply against high demand.
• Food prices will go up. World is already reeling from the poor staple crops last season and the Japanese disaster has made the matter worse.
• A significant portion of the electronic items has equipments sourced from Japan, which is definitely going to be affected at least for a shorter period.
• As Japanese bonds themselves not buying enough buyers, their demand for US securities will reduce significantly, which may affect the economic recovery in the US.
• Japanese economy may ultimately show some positive growth, after showing years of stagnancy, as it tries to rebuild the lost infrastructure.
• Global companies dealing with providing infrastructural support may benefit from the reconstruction in Japan.
• The most hit would be the reinsurance companies, who would be approached for the claim on loss of properties and lives. Many smaller insurance companies would not be hit significantly, as they typically re-insure and pass on the risk to bigger insurance giants. The share prices of reinsurance giants has already taken hit (to the tune of 15-20%). These were already under pressure, after recent floods in Australia and earthquake in New Zealand. However, as insurance companies are smart, they would probably increase the premium amount for new insurance (similar thing happened in US after 9/11, when re-insurers increased the air insurance premium by USD 1 per head). The higher premium would definitely surprise (positively) the market in terms of expected earnings for the next financial year.
• Overall, I believe Indian economy may have very little impact due to this disaster

The comments of readers are invited.

The Importance of being on LinkedIn

This is the story about a professional networking site LinkedIn, which is not so popular in India as are other social network sites like the Orkut was a few years ago and now the facebook is. And this is the story of my boss, who has presence in LinkedIn and Facebook (Presence on Orkut has not yet been known) under some kind of cover or anonymity (I will ask him the reason someday and write about it).

So, as I said, my boss is using some kind of alias name on LinkedIn and suddenly yesterday (minus a day or two), he got linked up with some old room mate of his, who happens to be a hot shot prof at some American University and has got published enormous research papers and articles in the field of finance and economics. Now, boss has decided that he will do away with the alias name on the LinkedIn and appear in his true avatar there.

However, I had discovered him on LinkedIn much before (2-3 months), and also sent my request to get connected. However, it was not approved. Now, I guess is the right time to send the invitation again and hopefully this time it will get accepted. I have found out his presence on Facebook also, but never sent an invitation. So, I am sending connect request to him on both sites shortly.