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Contents

Who is to blame for this mess?Why Germany is as much cause of crisis as Greece 04

An ugly day ahead for Sensex: Blame it on Greece 06So you think the euro crisis is over? Think again… 07Greece govt is sinking, taking your money down with it 10Kiss the year-end rally goodbye as Greek plan injectsuncertainty till 2012 13

The referendum: What will the people of Greece decide?If Greeks say @#$%&!^$#@ to austerity, the eurozone is over 16Why bankers, brokers and bet hedgers don’t like democracy 19

What the experts saidSaving eurozone: Devalue the euro, slash rates to zero, says Roubini 23High rates can destabilise capital flows. Stiglitz explains why 25

The long negotiationWelcome aboard the slow train to ‘Eurogeddon’… 28Saving Europe: EU, banks reach deal to lower Greek debt 31

India’s part – more growth than assistanceIndia has few coins to throw in the Euro-Greek bowl 36Why India is the only game in town 38



Chapter 1

Who is to blame for this mess?



Why Germany is as much causeof crisis as Greece

R Jagannathan Nov 2, 2011

Global economics has a strange binary logic of heroes and villains. We worship the countries withriches and surpluses, and disdain those with excess borrowings and budget decits. We eulogisecountries with strong, macho currencies, and despise those with weak, wimpish ones.

The truth, however, lies somewhere in between. Surpluses and decits are actually mirror imagesof each other. Just as you cannot borrow without someone to lend to you, it takes two (or more) tolend and borrow. If you borrow unwisely and ruin yourself, it is only because there is someone whois lending unwisely and pretends he is god.

Let’s illustrate this with an

example: If the Swiss francis appreciating and the eurofalling, does it mean Swit-zerland is doing somethingright and the eurozonesomething wrong? Actu-ally, it means both are doingsomething wrong. The Swisshave to do something todepreciate their currency,

and the eurozone somethingto strengthen the euro. If Europe has to tighten its

belt, the Swiss must loosenthem. If both don’t work atit jointly, the outcome canonly be skewed.

The Greek arrow that has been shot at the heart of the eurozone’s “rescue package” will destroy the half-false story that the

Americans and the European PIIGS (Portugal, Ireland, Italy, Greece and Spain) are the villainsin the current global economic crisis because they have been living beyond their means while theGermans and Chinese are saints because they are virtuous savers and investors.

The markets are tumbling all over because Greek Prime Minister George Papandreou has an-nounced that he will hold a referendum to endorse the extreme austerity package proposed by thestingy Germans to throw them a rescue line. The referendum will effectively kill the package, fortwo reasons. By the time it is held it will be a couple of months. Europe cannot wait for so long toget its house in order. Moreover, the chances are the Greeks will reject unending austerity. This is

why the markets look at the referendum with horror.

Attempts are now being made to paint Greece as the villain, but the truth is the Germans aregreater villains. They seem to have learnt nothing from their own travails between the two world

wars – and are now doing enormous damage.



Between the two world wars, Germany was overburdened with World War I reparations, andhyperination. Despite this, Germany wants to burden Greece with the kind of austerity that ititself revolted against. The unemployment and hyperination of the 1930s gave rise to Hitler. DoesGermany want a new form of intolerance to rise in Greece and the other PIIGS?

Germany’s second sin is that it is trying to think in narrow nationalistic terms (we have to protectour banks, our markets) instead of manfully shouldering its wider responsibilities to the eurozone.

After all, it is the biggest beneciary of the euro project.

If you don’t believe this, one set of gures should explain why: even as total unemployment in theeurozone crosses double-digits (it’s over 16 percent in Greece and over 21 percent in Spain), Ger-many’s unemployment has fallen below 6 percent. So who has gained most from the euro?

If we accept that Germany is the prime beneciary of the euro (over half its exports go to the euro-zone), it has to carry the can for rescuing the currency and the zone, not Greece or the rest of thePIIGS. Normal human logic says the strong must protect the weak – not the other way around. ButGermany has unfairly put the burden on the hapless Greeks – and is now facing the prospect of adisorderly default or Greek crashout from the eurozone.

The same applies to China (and Japan, to a lesser extent) – the world’s biggest holders of surplusdollars. If the US has been living beyond its means, it is because China has been lending it money – and this is well known. And China lent it money because it wanted to export more. It did overthe last two decades (1990-2010) what the Japanese did in the 30 years before that during (1960-1990). It has salted away $3.2 trillion dollars in foreign exchange surpluses, and it is time to spendit.

The solution to the world’s problem lies equally between austerity by the over-borrowers and over-spenders and spending by the world’s over-savers and exporters. The burden of adjustment cannot

be borne just by the weaker economies.

As Ambrose Evans-Pritchard writes in The Telegraph: “The Greek referendum… has left ofcials inParis, Berlin and Brussels speechless with rage…but at least the Greeks are stripping away the self-serving claims of the creditor-states that their ‘rescue’ loan packages are to “save Greece”. They arenothing of the sort. Greece has been subjected to the greatest scal squeeze ever attempted in amodern industrial state without any offsetting monetary stimulus or devaluation”

Ditto for China. The US economy (or, for that matter, the European or Indian economies) can-not move towards better budgetary and external balances without an appreciation of the Chinese

yuan and compensating Chinese investment in eurozone bonds and the US and Indian economies.It also has to buy more from the world. Ditto for the Japanese. The trillions of dollars they havesalted away will turn to dust if they are not invested in decit nations – including India, which im-ports twice as much as it exports to China.

The key to solving the global economic crises lies with Germany, China and Japan sharing the bulk of the pains of adjustment.

If they don’t, Germany and China – the two big exporters to the eurozone and the world – should be seen as the new axis of economic evil. Both helped create the US and eurozone crises by lendingunwise money to their importers (the US and the rest of the eurozone), and thus helped create the

crisis.

It is their job to solve it.



An ugly day ahead for Sensex:Blame it on Greece

Venky Vembu Nov 2, 2011

A nother brutal day coming up for the Sensex, and it’s all about faraway Greece.

Here’s what happened overnight. The Greek prime minister is standing rmly by his bombshell an-nouncement calling for a referendum on the eurozone deal of last week, which will impose severeausterity measures on Greece to tackle its sky-high debt.

The news has the potential to acceleratethe break-up of the eurozone if Greeks

vote against the deal and the country isforced to default.

Stock market

That’s still a lot of ifs, but the consequenc-es of such an event would be catastrophicfor the monetary union – and for globalnancial markets.

Germany and France are in overdrive try-ing to avert such an outcome, but so farthe Greek prime minister is unyielding,

and claims the whole Cabinet backs themeasure.

On the other hand, the Greek ruling party is facing a revolt within its ranks, which could bringdown the government. That could just about avert a referendum, but bring in political uncertainty,

which is just as bad.

So, any way you look at it, Greece is on a slippery slope to an inevitable default.

That prospect unnerved stock markets in Europe and Wall Street overnight. And this morning, it’s

dragging down indices across the board in Asia.

As at 7.30 am, it’s a sea of red from Japan to Australia to Seoul to Hong Kong to Shanghai…Nifty futures are also down in early trades, and although curiously they’re bouncing back from a low,they’re still under water.

So, strap up for a rough and volatile day of trade.

Listen to the podcast

http://av.firstpost.com/2011/11/075839_0211-market.mp3



So you think the euro crisis isover? Think again…

Venky Vembu Oct 27, 2011

In a scene in the thriller ick Shock to the System, Michael Caine, playing the ad executive whokills for his promotion, playfully lays down the new ‘crisis management strategy’ at work.

“Whoa, let’s not all panic,” he says, bantering with a few colleagues. “You, you and you panic… therest stay calm.”

Over the past three years, the eurozone and the US have likewise taken it in turns to deliver shocksto the global economic system and spread panic around the world. Over the past few weeks, in therun-up to this morning’s dramatic announcement in Brussels of a deal to save the world, it was theturn of the European economies to set off alarm bells that were heard all the way from Brussels to

Bombay.

No commentary on eventhe Indian stock market

was complete without aritualistic invocation of the crisis in Europe. Ona good day, when thereseemed the promise of something like a deal

(even if it wouldn’t haveamounted to much),Mumbai joined therelief rally that was setoff around the world.

And on days when theentire European mon-etary union, which had

been stuck together with bubble gum and tied up

with strings, threatenedto fall apart, Mumbai gotthe blues as well.

Which is why in recent weeks, US leaders – from Barack Obama to Tim Geithner – were waggingtheir ngers from across the pond and urging European leaders to act to avert a catastrophe. Heck,even Prime Minister Manmohan Singh, whose own command over the Indian economy is in doubt,found his voice and piped up to ask Europe and other advanced economies to prevent a slide intorecession.

Only in America…

But barely a few months earlier, at the height of the debt ceiling showdown in Washington, it wasperverse politicking in the US that set off panic attacks and fears of a meltdown of the global nan-cial markets. At that time, European leaders, watching from afar, shook their heads and muttered



under their breath: “Only in America…”

After this morning’s deal in Brussels, the markets and analysts have been quick to proclaim theend of the eurozone crisis. Stocks in Asian markets are up, and so are index futures on Wall Street.(A few commentators have seemingly invoked the Michael Caine theory of Serial Panic Attacks tonote that with European problems out of the way, it may be time to start worrying about the USdebt crisis, particularly since Washington is no nearer to addressing its long-term debt burden.)

Yet, for all the short-term euphoria of markets today, Europe’s debt crisis is far from resolved.Much of the good cheer seems to spring from three critical details of the deal, which are based onawed premises.

The rst relates to the provision that private holders of Greek bonds (mostly European banks) willtake a 50 percent “haircut” as the price for their folly – and therefore lower Greece’s unsustain-able debt burden and avert the risk of a Greek default, which in turn would have dragged down theentire eurozone.

The numbers mirage

As commentators have been quick to point out out, that 50 percent number is something of a mi-rage. The actual writedown , if one factors in all the missing pieces, is only about 28 percent – andthat includes cuts for pension funds, which in turn will pass on the pain to pensioners, setting off another round of social unrest.

Secondly, a 50 percent haircut for creditors would, in the estimation of analysts, be considered a“credit event” – which is code for default, which would have the effect of triggering those dreadedcredit default swap contracts. In the absence of adequate safety nets, it would trigger concerns onnancial stability and potentially set off bank runs (since even Greek nancial institutions and

banks, which hold Greek bonds, would have to take the losses) and perhaps enhance the scope forcontagion.

A third pillar of today’s deal is on very shaky ground. This relates to the provision that the Euro-pean bailout fund – the ESFS – would be “leveraged” up by invoking insurance tools and acquiresufcient repower (of over 1 trillion euro) to buy bonds in the primary and secondary markets –and to recapitalise banks.

But the precise nature of the leveraging mechanism is a little opaque: the text of the agreementspeaks of “maximising the funding arrangements of the EFSF with a combination of resources

from private and public nancial institutions and investors, which can be arranged through SpecialPurpose Vehicles.”

What isn’t immediately clear is where the funds for the Special Purpose Vehicle will come from:those details must await a meeting of the Eurozone nance ministers in November. The generalassumption is that the funds will come from the IMF and from sovereign wealth funds and fromemerging economies. French President Nicholas Sarkozy is working the hotline to Beijing today,counting on cash-rich China to pitch in.

But, as we’ve noted earlier on Firstpost , China has thus far been unwilling to loosen its purse-strings. The notion that a middle-income country, which has enormous debt problems of its own,

should bail out rich and developed economies isn’t an easy sell in China, particularly in a yearleading up to a leadership change. Considering the “dollar trap” that China nds itself in, investingin euro bonds would be tantamount to throwing good money after bad. The only count on whichsuch a proposal ts in with China’s own needs is that it would serve China’s mercantilist mission of

http://www.firstpost.com/world/china-and-the-world-32277.html





keeping its currency undervalued relative to the euro, which is one of its biggest export markets.

The big story

Lastly, today’s deal only serves to calm frayed nerves for the moment: it does not address the un-derlying structural issues that peripheral countries – including Italy and Spain – face. No one hasany idea how these economies will grow sustainably. Nor is it clear that they will summon up thepolitical will to even implement these difcult austerity decisions they have committed themselvesto.

Put all these together, and today’s blockbuster deal looks a lot less like a ‘bazooka’ than it appearsat rst glance. Sure, there’s enough in it to get markets to rally in the short term, but it could be

just a matter of months before they revert to panic mode – and deliver yet more shocks to the sys-tem.



Greece govt is sinking, takingyour money down with it

Reuters Nov 2, 2011

A thens: The Greek government faced possible collapse on Tuesday as ruling party lawmakersdemanded Prime Minister George Papandreou resign for throwing the nation’s euro membershipinto jeopardy with a shock call for a referendum.

Caught unawares by his high-stakes gamble, the leaders of France and Germany summoned Pa-pandreou to crisis talks in Cannes on Wednesday to push for a quick implementation of Greece‘snew bailout deal ahead of a summit of the G20 major world economies.

The euro and global stocks were pummelled on nancial markets after the Greek move threw intoquestion the survival of crucial efforts to contain the euro zone’s sovereign debt crisis.

(More here on what the referendum means for the larger eurozone’s destiny; and more here on why your investments in equity markets could be affected for the rest of the year.)

Six senior members of Greece‘s ruling PASOK socialists, angered by hisdecision to call a plebi-scite on the 130 billioneuro rescue package

agreed only last week,said Papandreou shouldmake way for a “politi-cally legitimate” admin-istration.

Papandreou chaired acabinet meeting, ex-panded to include moreministers after the

referendum bombshell, where he was expectedto fend off demands tocall a snap election.

A leading PASOK lawmaker quit the party, narrowing Papandreou’s slim majority to 152 of 300seats, and several others called for a government of national unity followed by a snap election,

which the opposition also demanded.

Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it can-not be held. But his rst hurdle is a vote of condence on Friday.

Papandreou told the cabinet he believed he would both win the vote and hold the referendum asplanned. ”We believe the government will once again win a vote of condence in order to proceed

with its plans,” government spokesman Angelos Tolkas told reporters. “We will not back down on

http://www.firstpost.com/world/if-greeks-say-screw-austerity-the-eurozone-is-over-120847.html

http://www.firstpost.com/economy/kiss-the-year-end-rally-goodbye-as-greek-plan-injects-uncertainty-till-2012-120795.html

http://www.firstpost.com/economy/kiss-the-year-end-rally-goodbye-as-greek-plan-injects-uncertainty-till-2012-120795.html

http://www.firstpost.com/world/if-greeks-say-screw-austerity-the-eurozone-is-over-120847.html



anything we have to do to save the country.”

Euro zone leaders thrashed out Greece’s second nancial rescue since last year, in return for yetmore austerity, in the hope that it would ease uncertainty surrounding the future of the 17-nationsingle currency.

Instead, nancial markets suffered another bout of turmoil on Tuesday due to the new politicaluncertainty and the risk that austerity-weary Greeks could reject the bailout. Opinion polls suggestmost voters think it is a bad deal.

The euro fell nearly three US cents and the risk premium on Italian bonds over safe-haven GermanBunds hit a euro-lifetime high, raising Rome’s borrowing costs to levels that proved unsustainablefor Ireland and Portugal.

European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchangesuffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent.

“Grenade”

European politicians expressed incredulity and dismay at Papandreou’s announcement on Monday evening, which took even his own nance minister by surprise.

“Announcing something like this only days after the summit without consulting other euro zonemembers is irresponsible,” Slovak Finance Minister Ivan Miklos told Reuters.

Ireland’s European affairs minister, Lucinda Creighton, whose own country is struggling throughan EU/IMF bailout programme, said last week’s European summit was meant to have dealt withthe uncertainty in the euro zone.

“And this grenade is thrown in just a few short days later,” Creighton said. “Legitimately there isgoing to be a lot of annoyance about it.”

In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkelconferred by telephone, Sarkozy’s ofce said: “France and Germany are determined to ensure, withtheir European partners, the full implementation in the quickest time frame, the decisions adoptedat the summit, which are today more important than ever.”

The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into

throwing the euro zone a nancial lifeline.

It could also further undermine dwindling political support in northern Europe for aiding Greece.Dutch Prime Minister Mark Rutte told parliament in a letter that his cabinet was concerned aboutthe risk of delay and uncertainty.

Business executives in Greece expressed despair at how the country was being run and marketsspeculated on whether Italy will be the next euro zone country to slide into a debt crisis.

“I think by late evening this saga will have come to an end because he (Papandreou) will have lostthe slim majority that he has in parliament,” Athens Chamber of Commerce head Konstantinos

Michalos told Reuters Insider television. ”This referendum will not happen. I’m hoping and pray-ing for a government that will join other political forces.”

The chairman of euro zone nance ministers, Jean-Claude Juncker, said Greece could go bankrupt



if voters rejected the bailout package.

Defections

Papandreou, whose party has suffered several defections as it pushes waves of austerity throughparliament despite mass protests, said he needed wider political backing for the budget cuts andstructural reforms demanded by international lenders.

But the conservative opposition called for a snap election. “Elections are a national necessity,” op-position New Democracy party leader Antonis Samaras told reporters.

Lawmaker Milena Apostolaki quit the PASOK parliamentary group, reducing Papandreou’sstrength just before the vote of condence. Another MP, Hara Kefalidou, said she also opposed thereferendum but did not resign her seat.

More importantly, senior PASOK lawmaker Vasso Papandreou, not related to the prime minister,asked the Greek president to work for a national unity government to ensure Athens receives therescue funds, followed by an early election.

Papandreou did not even inform Finance Minister Evangelos Venizelos he was going to announcethe referendum on the latest EU aid deal, a government ofcial told Reuters.

“They must be crazy… this is no way to run a country,” said a senior executive of one of Greece’s biggest rms, speaking on condition of anonymity.

Cast adrift?

One senior German parliamentarian suggested the euro zone might cast Athens adrift, cutting off

its aid lifeline and allowing the nation to default on its huge debts.

“One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and, if it doesn’t full the agreements, then the point will have been reached wherethe money is turned off,” Rainer Bruederle, oor leader for the Free Democrats, junior partners inMerkel’s centre-right coalition, told German radio.

On the markets, players scurried for safer investments, hammering stocks and punishing the euro.



Kiss the year-end rally goodbyeas Greek plan injects uncertaintytill 2012

Reuters Nov 1, 2011

Greece‘s shock decision to hold a referendum on its euro zone bail-out package sent investorsscurrying for safer investments on Tuesday, hammering stocks and punishing the euro.

It scotched any immediate expectations for an end-of-year stock rally.

An unexpected fall in PMI data for China’s manufacturers also hurt investor risk-taking sentimentas did Monday’s failure of US trading rm MF Global Holdings Ltd due to euro zone debt expo-sure.

European stocks were down close to 3 percent and MSCI’s all-country world stock index shed 1.7percent.

Greek Prime MinisterGeorge Papandreou’sannouncement onMonday that he willput Greece‘s bailout toa referendum immedi-

ately cast doubt on theeuro zone’s plan to hand

Athens 130 billion eurosand arrange a 50-per-cent write-down on itshuge debt.

It raised the possibility of a disorderly defaulton its debt if Greeks vote

against the plan.

But more broadly it alsothrew into chaos the eu-rozone’s wider attemptsto stop the debt crisis spreading to more signicant economies such as Italy.

Attempts to get countries such as China and Brazil to fund an enhanced euro zone rescue fund, forexample, will have hit a major barrier, given that it is not clear that the euro zone’s grand compro-mise agreed last week will stand.

“The risk is that a ‘no’ from the Greeks will completely derail the rescue efforts,” one Paris-basedtrader said.

Furthermore, the referendum— details of which have not been announced — is not expect until the



beginning of next year, which means uncertainty is likely to continue throughout November andDecember.

“We can kiss the year-end rally goodbye,” the trader said.

The FTSEurorst 300 index of top European shares was down 2.7 percent after tumbling 2.2 per-cent in the previous session.

Euro zone banks were hammered, with Italy’s UniCredit down 8 percent and France’s Credit Agri-cole down 11.5 percent.

Earlier, Japan’s Nikkei closed down 1.7 percent.

EURO KNOCKED

On foreign exchange markets, the euro fell more than one percent versus the dollar and yen asinvestors cut exposure to the common currency, fearing a disorderly default.

The dollar dipped slightly versus the yen, however, having pulled back from a three-month high asthe impact of Japan’s massive intervention on Monday faded a touch. It last traded down 0.1 per-cent at 78.10 yen , with market players wary of further yen selling by the Japanese authorities.

“The Greek referendum is a real curve ball, nobody saw it coming and it injects a lot of uncertain-ty,” said Steven Saywell, head of FX strategy at BNP Paribas.

Some analysts, meanwhile, said investors would be wary of buying the dollar too aggressively givena two-day Federal Reserve meeting that concludes on Wednesday and key U.S. jobs data due onFriday. Any hints that the Fed is considering further monetary easing, or signs the economy is ag-

ging, could drive the greenback lower.

Worries about the impact of the Greek decision on other euro zone countries sent the difference between yields on Italian and Belgian 10-year bonds and those of benchmark German counterpartsto lifetime highs.



Chapter 2

The referendum: What will the peopleof Greece decide?



If Greeks say @#$%&!^$#@ toausterity, the eurozone is over


Here’s the deal. I will forgive you half the money you owe me, if you take pay cuts, accept reduc-tions in pensions, reduce the number of people you employ (maid, cook, driver), and generally accept a continuously declining standard of living for the next nine years. Plus, of course, you needto pay more tax.

But mind you, I will put my own accountant in your house to see that you don’t cheat on yourpromises. And after nine years, if we still think you are solvent, we may welcome you back as anequal to our club and lend you money again like old times.

Deal? Your rst response will probably be the unprintable @#$%&!^$#@. And this is probably what the Greeks will say when the eurozone rescue package calling for extreme austerity fromthem is put to the vote. Greek Prime Minister George Papandreou, shaken by months of continu-ous street protests and public anger at what they are being asked to swallow, sees no other way tosalvage his government but to ask for a referendum.

The odds are even that the Greeks will ask Europe to shove it up when asked for their opinion. Thisis why markets in Europe have been tanking as soon as news got around that Papandreou is plan-ning to ask his people for their opinion on the eurozone’s bad idea.

There is fear that the messy compromise solution that emerged from the eurozone summit last week will end up with a Greek thumbs down and a disorderly winding down of Greek debt – prob-ably through default of a partial repudiation. After that, all bets on the euro are off.



The three main elements of the eurozone package for debt-ridden Greece are a 50 percent reduc-tion in private debts with banks and pension funds taking a “haircut”, a €100 billion debt reduc-tion, in return for severe austerity measures. But at the end of it all, Greece will still have 120percent of GDP as debt – twice as much as the European Union limit.

By any stretch of logic, if even nine years of pain and belt-tightening is not good enough to solvethe problem, it makes more sense to default and take destiny in your own hands. The eurozoneleaders will then have to decide whether to turf it out or otherwise quarantine the Greeks in some

way.

However, the problem isn’t Greece. There’s a huge north-south divide in Europe – with the Ger-mans and the French being stronger than their Mediterranean cousins.

It’s the south that could fall like dominoes after Greece, with Portugal, Spain and Italy following inshort order. Portugal is already under EU-IMF administration, and Spain is slashing its budgets tomake ends meet.

All of them are up to their necks in debt and headed the same way as Greece in terms of rising un-

employment rates, rising cost of money, and falling public condence in a recovery.

While Greece is already about to go under,Portugal and Spain aretilting towards the preci-pice. “Portugal appearsto have entered a Gre-cian vortex and mone-tary trends have deterio-

rated sharply in Spain,”says a report in The Tel-egraph, UK, quoting Si-mon Ward of HendersonGlobal Investors. Andremember, Portugal’sdebts are worse thanGreece’s: 350 percent of GDP versus Greece’s 160percent.

Why is Europe is such bad shape? The answeris a lack of political will to really build huge repower to tackle this mother of all nancial crises.

The latest package was simply too little, too late. The eurozone leaders have used mirrors to raisethe value of the €440 billion rescue fund by leveraging it and make it look like €1 trillion, when

what was required was more than $2 trillion to see that the contagion does not spread beyondGreece to Portugal and Spain.

But this is exactly what has been achieved. And the reason for it is that all the leaders of the euro-

zone are thinking country, not continent. Germany is ghting its last war (hyperination betweenthe two world wars) and reluctant to reate. France is worried that any larger rescue package

backed by further debt will mean a downgrade of its own AAA credit rating.



If the two biggest beneciaries of the eurozone – France and Germany – have chickened out of bolder measures, little wonder the package is coming unstuck as the richer north forces the poorerparts of southern Europe to tighten belts and swallow bitter pills.

As Ambrose Evans Pritchard writes in The Telegraph: “The two halves (north and south Europe)are locked together in a broken marriage. The structural gap cannot be closed by debt-deation inthe south. It could arguably be mitigated by ECB (European Central Bank) reation (easy money),

yet the central bank has done the opposite, blighting the chances that Spain might just be able tostruggle back to viability.”

The eurozone is in a slow-motion dance to death and disaster. It will need a miracle to rescue thecommon currency.

But if the Greeks say screw the rescue package and austerity measures, the eurozone as it now stands will be history.



Why bankers, brokers and bethedgers don’t like democracy

Tristan Stewart-Robertson Nov 2, 2011

N ever let democracy get in the way of a good economy.

Voting is, for a large number of people, a pain in the posterior, but the clashes between the repre-sented and representers are becoming more common and disparate.

The Greek prime minister’s decision to throw the European Union bailout to a referendum sentthe market into a tailspin because, in a country currently on perpetual strike, everyone knows thepeople would reject austerity, not to mention foreign control of government departments.

If the Greeks are given a voice, it will spell the end of the euro and possibly the entire EU, if someare to believed.

The Financial Times’s Gideon Rachman wrote on Tuesday that: “The Brussels authorities react tothe prospect of a referendum like a vampire to garlic. Little wonder — the record of the EU in refer-endums is dreadful. The Irish and the Danes have voted several times to reject EU treaties. Mostsignicantly of all, the Dutch and the French voted to reject the proposed EU constitution in 2005.These votes really shook the European project.”

Whatever you do, don’t let the people decide.

The UN heritage and education agency UNESCO is already paying the price for using democraticprinciples. When they voted overwhelmingly to give full membership to the Palestinians, it trig-gered American laws forcing the withdrawal of $60 million in funding.



Electing Hamas to power in the West Bank and Gaza Strip in 2006 already cost millions in aidmoney for the Palestinians. The West wanted democracy in the Middle East, but the right kind.

The same attitude emerged immediately after the Tunisians held their rst free elections and the West immediately expressed concern over the choice of an Islamist party.

Let the people decide, but with provisos.

The Anna Hazare team is again threatening PM Manmohan Singh that the activist will resume hishunger strike if the government fails to pass the Lokpal Bill.

The group is largely anti-corruption, butnobody elected them,in contrast to the gov-ernment, similar to themany “Occupy” groupsaround the world.

But all those groupsclaim to properly repre-sent the people, particu-larly with their motto,“We are the 99 percent”.The American Tea Party movement doesn’t ac-cept the elected Presi-dent Obama and so

believes they are the true voice of “the people”.

Is an unelected groupmore or less democratic than the government representatives now?

Democratic votes have been used by the majority to suppress minorities in various countries overthe decades. Just last week at the gathering of Commonwealth countries, Uganda hit back at Brit-ish PM David Cameron’s threats to withhold funding if they did not uphold rights for homosexuals.The people of Uganda are in favour of such moves, if the press and government are correct.

Germans elected Nazi politicians repeatedly in the 1920s and 1930s knowing fully their anti-Semit-ic policies. Do majority votes justify such moves?

Sometimes, democracy makes me nervous. Ballot initiatives in several US states have banned gay marriage, limited access to abortion and forbidden sharia law being introduced. All target largely minority populations — how do any of us know if we might someday nd a majority voting againstus?

Some in the digital community like to talk about power being given to the people through socialmedia and the internet more generally.

E-petitions have allowed strong and quick support for measures such as restoring the death pen-alty in the UK. But does a vocal e-group mean that’s what the population want?None of these hesitations are reasons to scrap democracy, of course. But there is hypocrisy over

http://www.firstpost.com/topic/person/anna-hazare-profile-29586.html

http://www.firstpost.com/topic/person/manmohan-singh-profile-618.html

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how and when democracy is applied by those on top, and a failure to recognise by campaigners onthe bottom how awed the system can be, whether through lack of education, whipped up hysteria,or growing apathy.

Disillusionment with democratic institutions does not excuse people from not voting, then set-ting up parallel institutions on the grounds they are more democratic. Both can co-exist but thereshould be more dialogue, as the leaders of St Paul’s Cathedral seem to have recognised in theirconfrontation with the Occupy London Stock Exchange protestors.

Technology cannot solve any of these problems — even if you brought in e-voting in Greece, therest of the EU still doesn’t want them exercising their votes.

And if the ups and repeated downs of the markets have proven anything lately, it’s that we are atthe mercy of democracy, or rather a subset of it — capital democracy.

Stock brokers, money lenders and bet hedgers vote with their gut to make as much money as pos-sible, as quickly as possible. They decide as a collective majority what future the world has. And,like voters themselves, they cannot be held accountable — you hold the elected to account, not the

electors. You cannot vote them out of ofce, or suspend their “voting” rights.

They’ve repeatedly destroyed rms and government bank balances, in the past few years especial-ly, and now are essentially preventing the Greeks from voting. We might even call that fascism insome quarters — the minority controlling the majority.

So just maybe, while some countries learn to build new democracies and others reassert them, weshould limit the voting rights of the bankers who would rather we didn’t. I’d vote for that.



Chapter 3

What the experts said



Saving eurozone: Devalue theeuro, slash rates to zero, saysRoubini

PTI Oct 25, 2011

Perth: The world’s advanced economies face a more than 50 percent chance of plunging into re-cession in the next year as the eurozone crisis rattles markets, said New York University econom-ics professor Nouriel Roubini today.

Roubini said without meaningful reform by European leaders, the eurozone could start to fall apartand lead to another nancial meltdown worse than in 2008.The severity of the downturn hingedon whether the Eurozone could avoid a messy break-up as Greece and other nations struggle withcrippling debt.

Roubini, who earned the “Dr Doom” moniker for predicting the last global economic crisis long be-fore it hit, also warned China faced a “hard landing” and could not maintain its status as the worldeconomy’s growth engine.

“In my view, there’s asignicant probability,more than 50 percent,that over the next 12months there’s going to

be another recession inmost advanced econo-mies,” he told a Com-monwealth businessforum in Perth.

“Whether you call it adouble dip recession, acontinuation of the rstrecession or a second

recession doesn’t mat-ter, it’s semantic.”

Roubini said much de-pended on a meeting of European Union nationsthis week that will seek to thrash out a deal to avoid a full-blown Greek default and limit contagion

within the eurozone.

He said markets were looking for policies that would kickstart real economic growth in strugglingeurozone countries, rather than “nancial engineering” that saw wealthy EU nations take on the

debt burden of poorer ones.

Unless Europe’s leaders enacted serious changes the Eurozone could start to crumble, potentially dragging down the world economy in the same way the collapse of US investment bank Lehman



Brothers did in 2008, he said.

“In a situation where it becomes disorderly, with defaults by a number of countries and a resultingexit of a number of states from the eurozone and its eventual break-up, the shock that could occur… could be as large, if not larger, than the fall of Lehman in 2008,” Roubini said.

“A recession that is severe in advanced economies, the collateral damage even on emerging mar-kets could be signicant.”

Roubini recommended devaluing the euro to stimulate exports from the eurozone and slashinginterest rates. “If they were serious about restoring growth in the short-term, they would cut ratesdown to zero,” he said.



High rates can destabilise capitalows. Stiglitz explains why

PTI Nov 1, 2011

New Delhi: Criticising the Reserve Bank’s tight monetary policy, Nobel prize winning economistJoseph Stiglitz today warned that rising interest rate could result in “destabilising” capital owsfrom abroad.

“Raising interest rate generate ow of capital (from abroad) that could itself be destabilising. So,unfortunately they (RBI) will have to be very careful about instruments they use to ght ination-ary pressure,” he told reporters on thesidelines of a public lecture at Jawaharlal Nehru University.

The Reserve Bank, he said, was drawing a “very delicate line” to deal with the problem of ination

by raising interest rates.

In its bid to contain rising ination, the central bank has raised key policy rates 13 times sinceMarch 2010.

Interest rates havegone up making Indiaattractive for foreigncapital and ination hascontinued to remain at

near double-digit mark.It was 9.72 percent forSeptember.

Answering questions oneurozone sovereign debtcrisis, Stiglitz said theEuropean Union has notdealt with problems inGreece in a timely man-

ner.

“When the euro cur-rency was founded, mosteconomist found it asan extremely difcult

project. They have taken away interest rate and exchange rate power but did not put any mecha-nism in its place. They were very slow to deal with the Greek crisis and now the crisis seems to bespreading. The steps they have taken may not sufce to address the very deep problem that they face,” he added.

Worried over the global economy slipping into double- dip recession, the G-20 leaders at theirsummit at Cannes in Paris on November 3 and 4 will try to come out with some solution to deal

with the sovereign debt problems in Europe.



The issues concerning “destabilising” capital ows and the need to impose Tobin Tax were dis-cussed during the meeting of G-20 Finance Ministers and Central Bank Governors, but no decisioncould be taken because of differences of opinion among member countries.

Tobin tax refers to levies on ow of cross-border capital. G-20, a grouping of rich and developingnations, has been at the forefront in resolving the global crisis which began in 2008 with the fall of

America’s iconic investment banker Lehman Brothers.

The second global crisis is looming large and several experts, including RBI Governor D Subbaraohad emphasised that time is running out for solutions.

Subbarao in his intervention at an IMF meeting in Washington in September had said, “We arerapidly running out of solutions. The two big ash-points are: renewed anxiety in the US aboutrecession, and the deepening of the sovereign crisis in the euro area.”



Chapter 4

The long negotiation



Welcome aboard the slow train to‘Eurogeddon’…

Venky Vembu Oct 23, 2011

Dear passengers, welcome aboard the Eurozone Express. We’re now in Brussels for a summit of European leaders, but beyond this stop, nobody on board – not the driver, not the station master,not the army of ‘Eurocrats’ who claim to be in control of this 17-carriage Euro-locomotive – has thefaintest idea of where we are headed.

However, by a process of elimination, and by a study of our route map thus far, we can deduce where we’re most likely going. We’ve missed several wayside stops along the way – such as Orderly Greek Default and Bankers’ Haircut – and we’ve taken a prolonged detour into Core Contagion.

And now, it appears that our nal destination will be Eurozone Armageddon. A colossal crash-

bang, the likes of which the world hasn’t seen, awaits us.

But, dear passengers, don’t panic just yet. Although we’re nominally an express train, we are mak-ing every effort to delay our arrival at journey’s end. We’ve done it so far by the simple expedientof postponing the inevitable – by kicking the can down the railway line with bailout after bailout of peripheral countries that were well and truly bankrupt. And since we’ve become quite adept at thiscan-kicking business, we reckon we can keep on doing it for a little longer – until we reach Euro-

geddon, the end of the line.

God knows it’s been a wild ride – for us as much as it has been for you. And we know the effect we’ve had on your nerves and on the equanimity of investors all around the world who were fol-



lowing our rollercoaster-like lurching for many months now. But do enjoy the rest of the journey,and the spectacular views of the European countryside. And do avail of the hospitality at our LastChance Saloon, where we’re offering free drinks – as bets the welfare state we wanted to build ina foolish burst of socialist-minded romanticism without providing funds for any of it.

After all, where else in the world do workers get by on 35-hour workweeks, as they do in France?

And where else but in Greece can people retire at age 53 and enjoy welfare excesses – and pen-sions long after they are dead! And where the government resorts to the extraordinary device of us-ing Google Earth satellite pictures to track down thousands of private swimming pools, which taxdodgers hadn’t disclosed in their tax returns.

Overnight, as passengers on board the Eurozone Express – or as investors elsewhere whose for-tunes hinge on the fate of our train – you must have found it deeply distressing to overhear the

very public squabble between two of our stalwart engineers on board – Germany and France – on where we should proceed next.

Evidently the two leaders – Angela Merkel and Nicholas Sarkozy – couldn’t agree on the precise

nature of the “bazooka” needed – in the form of strengthening the European bailout fund – toavert the train wreck that many believe is inevitable. They sounded an awful lot like two enginespulling the compartments in opposite directions.

The mood at the meeting of European Ministers overnight, according to media accounts, was“grim – the worst mood I have ever seen, a complete mess.”

The worry now is that even if the bailout fund is enhanced – that is, Eurozone states throw goodmoney after bad – the entire 440 billion euro bailout fund would go towards keeping the Greek compartment from derailing into the abyss of insolvency and dragging other member-state railway

compartments with it.

It doesn’t also help that Germany, which is Europe’s most competitive economy which has ben-eted enormously from the articial European monetary union (at the cost of peripheral EuropeanUnion economies), isn’t willing to do as much as it uniquely can to end the crisis. That, of course,must begin with Germany acknowledging its role, economically and politically, in the genesis of the Eurozone crisis, where even to this day peripheral economies are subsidising Germany’s ex-port-driven economic growth.

The policy inertia across Europe was summed up bluntly by Luxembourg Prime Minister Jean-

Claude Juncker, who said: “We all know what to do but we don’t know how to get re-elected once we have done it.”

So much so that economic commentators who refused to contemplate a break-up of the Eurozoneare increasingly acknowledging the inevitability of a default by peripheral states. And althoughit’s Greece that draws much of the negative news, it is now more widely accepted that the problemruns much deeper.

With enforced austerity measures cramping growth in the peripheral European economies, andescalating their debt burden, the incentive for countries that are in colossal debt to default is in-creasing by the day.

And since it appears, from everything that’s transpired over recent months, right up to the over-night squabble, that credits and debtor nations cannot agree on how the burden of the economicshock should be shared, Eurogeddon appears inevitable



The train will be in Brussels for four days – until Wednesday, when the top European leaders meetagain. It’s quite literally our last chance to chart out a map for the way ahead. There are some sug-gestions that EU engineers are shunting and hooting about a plan to set up a single “Treasury” tooversee tax and spending across the entire Eurozone.

Nobody believes it will work. And even those who believe it will cannot lay out the route mapahead with any certainty. That’s the grim reality that confronts us today.

The only saving grace, dear passengers, is that either way, we’re fairly close to the end of the line.Enjoy the rest of the ride, but do brace for some rough stuff when we reach Eurogeddon.

Over and out…



Saving Europe: EU, banks reachdeal to lower Greek debt

FP Editors Oct 26, 2011

Big news coming out of Brussels this morning. It appears that after a long night of tough nego-tiations – going well past 3 am local time – eurozone leaders and banks are close to a deal on how much of a loss private bondholders should absorb on their Greek debt holdings.

Reuters reports, citing a European Union source, that the deal will likely see a voluntary 50 per-cent writedown. This should effectively lower Greece‘s debt over the next 10 years.

Late last night, talks were suspended after the failure to reach an agreement. The eurozone sum-mit was largely centered on agreeing a writedown or “haircut” with private bondholders on a

voluntary basis. Eurozone states want private investors to accept the haircut in an effort to reduce

Greece‘s debt burden by about 100 billion euros.

Failure to agree on a vol-untary writedown wouldhave led to a full-scaledefault in Greece‘s debt,

with a heavy knock-onimpact on markets.

To that extent, the sum-

mit has averted whatmany considered would

be a “eurogeddon” – amessy unravelling of theeurozone

There are still many more milestones tocross: how Greece andother indebted eurozonecountries can grow their

way out of their debtmess is in doubt. Yet, for

now, the world will see this as some sort of progress.

Here’s our live blog of all the overnight action…

10:30 pm: Greece is central to this drama. Greek PM George Papandreou says Greece is making asuper-human effort to get their nances in order

9pm: The latest is that the Greek bond “haircut”‘ talks have been suspended, which is not a happy

portent. (Here’s why.) The leaders are getting together in Brussels ( watch the action live here), butit appears for now that we won’t see dramatic progress. On Wall Street, the mood, which was buoy-ant, is now decidedly downbeat.

http://www.businessinsider.com/talks-on-bond-losses-suspended-in-europe-2011-10

http://video.consilium.europa.eu/webcast.aspx?ticket=775-980-10361

http://video.consilium.europa.eu/webcast.aspx?ticket=775-980-10361

http://www.businessinsider.com/talks-on-bond-losses-suspended-in-europe-2011-10



8 pm: Still waiting for some action out of Brussels. Meanwhile, here’s economist Nouriel Roubini with his thoughts on how the eurozone can be saved: by devaluing the euro and slashing rates tozero.

7.45 pm: A check on the markets. Wall Street in a buoyant mood on expectations of at least a “par-tial resolution” of the eurozone debt crisis. Gold still above $1.700/troy ounce.

7.30 pm: Meanwhile, across the pond, the US reported buoyant new homes sales, way higher thanexpected. More here.

7.15 pm: Here comes trouble. Bloomberg is reporting that talks on how much losses investors inGreek bonds should bear (the so-called “haircut”) are deadlocked. And that a European Union of-cial now says “involuntary” (that is, enforced) Greek haircuts cannot be ruled out.

The euro is selling off on the news, which is exactly the kind of bad news, with negative implica-tions for banks, that the markets didn’t want to hear.

And the always cheerful Marc Faber says investors should accept 90 percent Greek writedown!

7 pm: The vote is in. The German Parliament has voted to strengthen the eurozone bailout fundthrough leverage. The nal vote: 503 in favour; 89 against; and four abstentions. The vote waslargely in line with expectations. Germany had too much riding on keeping the monetary uniontogether.

The focus now shifts to the action in Brussels. Stand by for more.

6.30 pm: The German Parliament has begun voting on a leveraged ESFS - or bailout fund for in-debted eurozone countries. This could take a while. In the meantime, you could acquaint yourself

with all the acronyms and abbreviations of the eurozone debt crisis. It’s quite an alphabet soup outthere.

Coming to blows in Italy

5. 45 pm: Emotions are running high all across Europe. Earlier today, MPs in the Italian Parlia-ment came to blows (see picture here) Not sure what it was about specically. (h/t @AlbertoN-ardelli)

Looking to China to rescue Europe

5.30 pm: Once again, a heavily indebted Europe looks forlornly to China, with its $3 trillion in for-eign exchange reserves, to bail it out.

The head of the European bailout fund, Klaus Regling, is to visit China on Friday (28 October) tomeet investors in EFSF-issued debt, Bloomberg reported.

Although the upcoming visit and the talks with Chinese leaders were characterised as a “normalround of discussion with important buyers of EFSF bonds,” the intention is evident.

But as we’ve pointed out before, that expectation is unlikely to be met. China isn’t about to throw

good money after bad by buying European sovereign bonds.

Brazil says no

http://www.firstpost.com/world/saving-eurozone-devalue-the-euro-slash-rates-to-zero-says-roubini-116875.html

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http://twitter.com/#!/AlbertoNardelli/status/129152553479979009


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http://www.firstpost.com/world/saving-eurozone-devalue-the-euro-slash-rates-to-zero-says-roubini-116875.html



Overnight, Brazil rejected the idea that it would buy European bonds, reports ReutersBrazilian Finance Minister Guido Mantega said: ”I believe that European countries do not needfunds from Brazil to buy bonds. Brazil is not considering it… They have to nd solutions to theEuropean problems within Europe.”

The Reuters report quoted a “high ranking ofcial from an emerging market country” as sayingthat India and Russia too were not interested in offering more funds to help Europe and thatthere was no evidence that China planned to chip in.

Gold strong, dollar weak

5. 15 pm: As the world waits for word from the European summit, markets are essentially at.

Gold, however, has been on a tear since yesterday, and is trading at a one-month high, above$1,700 to a troy ounce (see chart). Analysts are reading this as a rush to a safe haven – even thoughin recent weeks, gold has behaved unlike any safe-haven the world has know,.

The US dollar is weak against most major currencies.

Bye-bye, Berlusconi? (Not so fast!)

4.45 pm: Earlier in the day, there were reports (subsequently denied) that Silvio Berlusconi, theembattled Prime Minister of heavily indebted Italy, had ironed out a “secret pact” under which hehad secured support from a coalition partner for critical pension reforms – in return for which he

would step down in December.

According to unconrmed reports in Italian newspapers, Berlusconi, who is under enormous pres-sure to x the pensions sytem and extend retirement age, had secured critical support from Um-

berto Bossi, leader of the Northern League.

The Prime Minister was to present the pension reform plan to the European Union at today’smeeting in Brussels. According to one Italian newspaper, the “secret deal” was sealed with theseimmortal words from Berlusconi to Bossi: ”Don’t make a fool of me in Brussels, and I promise that

we’ll go to elections in March.”

Whoa! Did Merkel actually say that?

4.30 pm: All eyes are on German Chancellor Angela Merkel, who faces a crucial vote in the Ger-

man parliament today on the plan that she and French President Nicholas Sarkozy claim they havepieced together.

In a speech to Parliament, Merkel gives a sense of exactly what is at stake. “No one should takeanother 50 years of peace in Europe for granted,” she says. Whoa!

“We are facing a tough test of monetary union,” says Merkel. Concedes that Germany cannot pros-per without a prosperous Europe.

But in the same breath, Merkel says that while Germany is economically the strongest economy inEurope, it was not the “centre of the world.”

4.15 pm: Welcome to the live blog of the summit of European leaders to address one of the biggestconcerns weighing on the minds of people around the world: a plan to save the global economy from sinking.

http://www.kitco.com/charts/popup/au24hr3day.html

http://www.bbc.co.uk/news/world-europe-15457900

http://www.bbc.co.uk/news/world-europe-15457900

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This is the 14th emergency summit of European leaders. And expectations running up to it werequite high. US Treasury Secretary Tim Geithner had urged European leaders to heed the world’scalls to avert the “catastrophic risk” of the debt crisis.

Yet, there is little sense of urgency about nding a denitive resolution of the sovereign debt crisisthat has Europe on edge.

What makes a deal?

What would constitute a satisfactory outcome?

1. Plans for an orderly writedown of Greece‘s debt, which would require private investors to take a60 percent “ bondholder haircut”

2. A conrmation from leaders that plans for recapitalisation of banks worth at least 108 billioneuros ($150 billion)

3. An agreement to leverage the €440 billion European Financial Stability Facility (EFSF), the Eu-

ropean bailout fund, so that it can acquire additional lending power – of at least €1 trillion

4. A realistic timetable to deliver on these commitments.

What are the odds that they will be met?

Reuters reported, a short while ago, that prospects for a comprehensive deal to resolve the cri-sis look dim. It cites “deep disagreement” remaining on critical aspects of a potential agreement.Summit leaders, who had been promising a “bazooka” at the summit, are now lowering expecta-tions.

The initial hope was that Wednesday’s summit would start with a gathering of all 27 EuropeanUnion leaders, followed by the meeting of the euro zone heads of state, and that by the end of it all,there would be detailed gures on how the debt crisis will be overcome.

But that hope now rests on slippery ground.

Not until November

Reuters reported, quoting an EU ofcial, that the numbers had not been yet nalised, and that it

still needed “a lot of technical work”.

It now looks like a nal resolution might have to wait until the rst week of November, when Euro-pean Union and eurozone nance ministers are to meet.

http://www.firstpost.com/topic/place/greece-profile-1406.html

http://en.wikipedia.org/wiki/Debt_restructuring#Bondholder_haircuts

http://en.wikipedia.org/wiki/Debt_restructuring#Bondholder_haircuts

http://www.firstpost.com/topic/place/greece-profile-1406.html



Chapter 5

India’s part – more growth thanassistance



India has few coins to throw inthe Euro-Greek bowl


India, say new reports, is willing to help the eurozone nd money to emerge from its Greek trag-edy. In a guarded statement, Pranab Mukherjee is quoted by Hindustan Times as saying that if theeurozone leaders “make a credible assessment of the solvency issue” then “supplementary nanc-ing could be considered.”

So is India going to throw some of its own money in the bottomless Greek pit?

Planning Commission Deputy Chairman Montek Singh Ahluwalia, speaking at Cannes on thesidelines of the G-20 summit, was quick to disabuse anyone of the idea that we are going to doanything of the kind. He said if any help is given, it will be done through multilateral institutions

like the International Monetary Fund (IMF). “We have not received any request for bilateral assist-ance (for Greece). We are looking at it more from a multilateral point of view. I think a lot has to

be done to handle the eurozone crisis (and it) has to be done by the eurozone countries,” Ahluwaliasaid.

The message from India to Europe, thus, is a polite ‘no, thanks, but please do ask the IMF, and we will put in a good word for you.”

This is, of course, theright approach, for India

does not have sparecash – either at home orabroad in terms of for-eign exchange reserves– to throw in the pot.Domestically, PranabMukherjee is borrowingmoney hand over st ina worsening scal situa-tion where 70 per cent of

the budget decit targetfor 2011-12 has beenused up in six months.

And he is borrowing Rs53,000 crore more than

budgeted and scrapingthe bottom of the barrelto pay his bills. Amongthem, Rs 65,000 croreof oil companies’ losses that have to be made good.

Externally, of course, the situation looks more robust with foreign exchange reserves currently standing at $318 billion. Surely, this means we can toss a few coins in the Greek bowl for friend-ship’s sake? A token of regard from the world’s largest democracy to the world’s oldest?

http://www.hindustantimes.com/business-news/WorldEconomy/India-ready-to-help-EU-out-of-debt-crisis/Article1-764224.aspx

http://www.hindustantimes.com/business-news/WorldEconomy/India-ready-to-help-EU-out-of-debt-crisis/Article1-764224.aspx



Actually, no. India’s $318 billion in reserves is matched almost equally by an external debt of $317 billion. Even though the ability to invest our reserves in any kind of debt, including Greek debt,does not depend on our external liabilities, the point is our reserves are really external borrowingsin another form. They represent money that has to be managed, but not spare cash that can begifted away. It is money owed, not money owned, by the people of India.

Moreover, India needs all the dollars it can hold, as its trade and current account decits are wors-ening. At last count, India’s current account decit (the gap between external earnings and ex-penses) was 3.1 percent of GDP – which is unsustainable unless we have equivalent capital inows.That hasn’t been happening of late, as the fall in the rupee shows. To pay our rising import bills, wemay, in future, have to draw down our reserves.

The country that really has spare cash is China – which had $3.2 trillion (Rs 3,200 billion) in re-serves, of which external debt is only $546 billion – that still leaves over $2.7 trillion in terms of atreasure chest that can be invested. But China is showing no great eagerness to lend money.

Japan, with nearly $1.2 trillion in reserves, is the next best candidate for Greek municence.

India can offer sympathy and hope. Hard cash is out of the question.



Why India is the only game intown

R Jagannathan Oct 28, 2011

W e are in completely uncharted territory again. The rich world is entering a period of mad, mad,mad, mad money – a period of ultra cheap credit nanced by ultra high government debts to -nance growth and jobs.

A world awash with state-powered liquidity can only lead to one of the following three, or all three,outcomes: higher general ination, higher asset prices, and massive cross-border movements of money from low-growth to high-growth regions.

This is where India ought to gain in the year (or years?) ahead. I think it will. Our markets will beon re, and our growth story will resume – but with high ination as a corollary.

Put the following facts together – higher interest rates in India versus near-zero or low rates inthe US, Europe and Japan, the rupee at Rs 50 to the dollar, and 7-8 percent growth rates, and theprospect of even higher growth in 2012-13 and beyond – and there is only one conclusion: India is

where the smart money should head.

The question is not whether, but when.

Here’s the underlying logic of this prophecy.

The US is the economy most likely to recoverfast – though it still hasa few years of painful

wealth reduction to con-tend with. The Ameri-cans – government andpeople – are doing twothings to correct theoverconsumption of the

past. One is reduce debtat the consumer level – which is why the Ameri-can recovery has been soslow. People are begin-ning to reduce debts, asa Wall Street Journalreport notes.

Says the WSJ : “Since thenancial crisis erupted,

millions of Americans have ditched their credit cards, accelerated mortgage payments and cut off credit lines that during the good times were used like a bottomless piggybank. Many have resortedto a practice once thought old-fashioned—delaying purchases until they have the cash.”



Quoting gures from the Federal Reserve Bank of New York, the Journal says that “total householddebt – through payment or default – fell by $1.1 trillion, or 8.6 percent, from mid-2008 throughthe rst half of 2011.” Little wonder the US is not seeing an early recovery.

At the government level, the Fed’s near-zero rate policy has unleashed an ocean of cash that willhave the net result of debasing the dollar’s intrinsic value. This is America’s revenge against China.

America’s cheap money policy will have two consequences. It will speed up the American recovery at the cost of ination and destroy a part of the Chinese advantage and dollar surpluses throughthe same route.

If US consumption and growth are slowing, where should investors head once the panic over theglobal nancial meltdown ebbs? The answer is India and other emerging markets, and not China.

China is hurting from US actions – and how. Says Ambrose Evans-Pritchard in The Telegraph:“Fed actions confronted Beijing with a Morton’s Fork of ugly choices: revalue the yuan, or hangonto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hoteconomy at the top of the cycle. Either choice erodes China’s wage advantage. The CommunistParty chose ination.”

Let’s hear what Satyajit Das, a derivatives expert and author of “Traders, Guns and Money” and“Extreme Money” says on China. Das told Bloomberg in a recent interview that the primary “axi-omatic law” of making a bad loan is that you have to write it off. By implication he suggests thatChina made bad loans to the US which brought on the nancial crisis, and this means it will haveto write off a big chunk of its $3.2 trillion reserves, most of it in dollars.

Says Das: “It’s unsustainable. That’s the lesson we should have learned from 2007. We insteadshovelled everything under the carpet, and it’s going to come back to haunt us. China’s going tohave to write off its $3 trillion.”

This will happen primarily through the American ood of cheap money which will dent the valueof the dollar and reduce Chinese wealth held primarily as dollar-assets. China is screaming bluemurder about the way the US handled its recent debt crisis which nally resulted in a sovereigndowngrade by S&P. It is also wary about US legislation to curb Chinese exports using yuan under-

valuation as excuse.

The reason why China will hit a speedbreaker stems from two incongruities. First, no economy of the size of China can ever become a permanent factory to the world without destroying the worldeconomy itself for the simple reason that the world market is not big enough for such a huge ex-

porter to monopolise it. A Korea can be an export tiger, a Singapore can be one, and so can a Tai- wan or a Thailand. But China is too big to succeed permanently by being a persistent net exporter.

Big economies like China and India have to nd growth within – and this is what China hasavoided doing all along. With investment rates as high as 50 percent of GDP, China’s economy isa stunted domestic consumer – and the lessons of the 20th century are very, very clear on this:sooner or later the party ends.

The Soviet Union in the rst half of the last century, Japan after the world war, and the Asian ti-gers in the last four decades built their growth stories around high investment rates and low do-mestic consumption. They all had to change gears and slow down.

The entry of the Chinese T-Rex in the exports game changed the rules of the world economy. Itcould go on only as long as the world’s largest consumer was willing to offer a willing market end-lessly. China tried extending this dream run by lending money to the US – just like a bartender

http://www.dnaindia.com/money/report_silently-world-power-swings-back-to-america_1603081

http://www.bloomberg.com/news/2011-10-17/china-will-write-off-3-trillion-says-das-of-extreme-money-.html



http://www.dnaindia.com/money/report_silently-world-power-swings-back-to-america_1603081



sells booze on credit to the drunkard who’s run out of cash. But when the music stops, the bar endsup with bad debts. The low-consumption-high-investment-high-exports growth model is as datedas T-Rex.

China now has to build a market within, and buy more from its trading partners. This means it hasto become the engine of world growth by consuming more, not by producing more. This involves amassive shift of resources from investment to consumption – which means higher wage ination(how else do you consume more?), and slower jobs growth as costs and lower export growth work their way through the system.

Who benets as the Chinese growth engine sputters? According to Ernst & Young, India will grow faster than China as early as calendar 2013. That’s just about a year away.

Says E&Y: “India and China are expected to be relatively less impacted among the 25 rapid growthmarkets (RGMs) in case of a deterioration of the eurozone debt crisis.” The reason: the large size of their domestic markets.

But India will do better than China. E&Y pegs “India’s real GDP growth rate to be the highest

among all the RGMs starting in calendar year 2013, when the economy is expected to grow 9.5percent, followed by China at 9 percent. In 2014, India is expected to grow at 9 percent and Chinaat 8.6 percent.”

The eurozone crisis is another trigger for this power shift towards India. The crisis has, thus far, been wrongly played out as the story of a frugal Germany trying to foil the overspending PIIGS –Portugal, Ireland, Italy, Greece, and Spain.

However, the truth is somewhere else. Within the eurozone, Germany plays the exact role thatChina plays in the US-China context: it is a huge exporter, which lends money to the rest of the eu-

rozone to create an export market for its goods. Germany is the eurozone’s biggest export economy and creditor.

Just as China can’t be factory to the world, Germany can’t be the eurozone’s biggest exporter for-ever because someone has to pay for what it sells. This is exactly why it has no option but to bailout the PIIGS. Just as China has to write off a part of its US debts, Germany will have to do so withthe PIIGS.

It is Germany’s reluctance to see this reality that is at the root of the eurozone crisis. The bottom-line is that Germany and German banks have to bail out Europe. If they don’t, Germany will be the

biggest loser in the crisis.

So let’s ask ourselves again: If the eurozone and Germany have to slow down to deal with theirinternal debt crisis, who benets? India and emerging markets.

A word about Japan is also worthwhile. Everyone knows that Japan has been a no-growth story for the last two decades. The worry is that Europe is now entering its own decade of slow or nogrowth when it grapples with its own demographic issues of an aging population, excess welfarecosts, and absence of structural reforms in the labour market which has resulted in high unem-ployment.

But Japan will be part of the US-Europe tsunami of liquidity for its own reasons. In recent months,the yen has been strengthening against the dollar to such an extent that the Bank of Japan willperiodically unleash a ood of yen to buy dollars and keep the exchange rate below 75 to the dollar.Beyond this, Japan will slow down even further as its export machine will come to a grinding halt.



The upshot: the US, Japan and Europe (not to speak of the UK and Switzerland) are collectively unleashing a ood of money that will raise ination all around and – once the panic ends – willmake investors move to the high growth zones of the world.

India and some of the smaller emerging markets will benet from that. The only question is when.If we don’t screw up on reform, we can get most of the inows where we want them – in infrastruc-ture, insurance, telecom, banking, and retail.

If we screw up – which we probably will, given the growing scale of our own money printing opera-tions to fund social security schemes – we will still benet, but will pay the price with high ina-tion.



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