Why and How of 'AAA' rating cut of the United States - An Interesting Read from NY Times

Floyd Norris, the Chief Financial Correspondent of The New York Times writes on Why and How of ‘AAA’ rating cut of the United States by S&P. He also answers various questions related to future repercussions on the US ability to pay its debt.

Q. Why did Standard & Poor’s lower the credit rating of the United States to AA+?

A. The rating agency thinks the United States has too much debt, or at least will: “Under our revised base case fiscal scenario — which we consider to be consistent with a AA+ long-term rating and a negative outlook — we now project that net general government debt would rise from an estimated 74 percent of G.D.P. by the end of 2011 to 79 percent in 2015 and 85 percent by 2021.”

There has been a series of articles and notes in different newspapers and online domains which explain the likely impact of the Emerging Nations including Developed World including the future of Dollar.

Our Central Bank, The Reserve Bank of India (RBI) also came out with a note on Recent Global Development; it stated that it has been closely monitoring the global developments and its likely impact on India in terms of liquidity, exchange rates and forex reserve portfolio which may see a flight of capital.

As Friday’s market behaviour demonstrated, India is not insulated from such developments. It may, however, be noted that in the worst phase of the recent global financial crisis, the economy grew by 6.8 per cent, suggesting high resilience emerging from domestic factors. While downside risks to growth may have increased in the wake of global developments, they are likely to have limited impact. However, the policy and regulatory framework must anticipate and be prepared to respond to turbulent financial market conditions arising out of external developments.

Fingers are crossed; the Emerging Market Economies (EMEs) are preparing themselves to avoid any likely large impact on them out of this headwind which exacerbates the global outlook.

Happy Reading!

-          Amar Ranu

Planning QE-III? Think of Zimbabwe’s One Hundred Trillion Zimbabwe Dollar bill

For a long time and the history says that inflation, predominantly hyperinflation works against the country. The classic example is Zimbabwe which used to have a note of One Hundred Trillion Zimbabwe Dollar bill, which are 100 followed 12 zeroes. John B Taylor in his blog abstracted a great article from Patrick McGroarty and Farai Mutsaka and states that printing money beyond a limit can create conditions like this. He has been asking Fed to rethink on the idea of going beyond QE-III.

Though there is no relation with this piece of junk dollar vs QE-III, but the situation may arise. The QE-I and QE-II have created conditions conducive to US growth story but not to a large extent. The 10-year US Bond note has reached to 3 per cent range where it stood before QE-II and also, the GDP growth slowed down to 1.8 per cent, much below the market expectation.

Perhaps US must think again and again before committing to QE-III as the world dynamics are also dependent on it. Funds may again move to Emerging Market Economies (EMEs) creating the nightmare of volatile capital flows for these nations creating a unbalance on their deficits.

Note: Zimbabwe bank notes have already been discontinued with new series of notes. This blog has already reported a story on it – here.

Corporate Bond Markets - Robust Credit Cultures a Key to Development

Post the recent global economic crisis, there has been a significant shift in powers from developed nations to emerging market economies (EMEs). The sovereign crisis of European Countries, famously called as PIIGS (Portugal, Ireland, Italy, Greece and Spain) have questioned the dominance of emerging nations. In order to boost the economy growth, several developed nations have pledged to keep their interest rates at or near zero for an elongated period. The sovereign ratings of PIIGS have been cut and their fiscal deficits have reached to a record high.

The Asian story depicts a different perspective; the strong domestic consumption especially in India and China has led to the rally in the economy which has forced the central banks and governments to roll back their accommodative measures to tame the inflation. Out of these issues, it remains an important question how developed our bond markets – government bonds and corporate bonds are and it helps in measuring the pulse of the economy.

While the Asia-Pacific countries have made a good progress in developing local corporate bond market, they have a long way to go ahead. In India, Government Securities market are fairly developed on account of large quantum of government borrowings which have led to active trading and price discovery in securities of all tenures. However, in corporate bond market, we have a long way to go.

M. T. Raju, Upasana Bhutani and Anubhuti Sahay (2004) in their working paper “Corporate Debt Market in India – Key Issues and Policy Recommendations” have rightly pointed out for the need of “Single Trading Platform” instead of different platforms operated under NSE, BSE and FIMMDA. It tells that the different platforms allow liquidity bifurcated. They also emphasized the need of repo market in corporate debt. Recently, the RBI allowed the repo trading in corporate bond which might provide the liquidity in corporate bonds.

In another commentary report by Standard & Poors – “Fostering Robust Credit Cultures Is Key to Developing Deep and Liquid Corporate Bond Markets in Asia-Pacific”, Thomas G Schiller rightly pointed out that many Asia-Pacific seek to build market maturity and sophistication so as to attract many issuers to their countries. They have been emphasizing on robust credit cultures which are built on key elements such as transparency, independent and objective credit analysis, risk-based pricing, creditors’ rights and arm’s length relationships. In his commentary, he explained about the growing and maturing corporate bond markets in Australia, Hong Kong, Japan, Korea, Malaysia, New Zealand, Singapore, and Taiwan, and emerging markets in China, India and Thailand. About India, he mentions that India is a mostly sound credit culture that is still improving in some areas such as creditors’ rights. India’s corporate bond market is small but growing rapidly. Issuance grew by about 60 per cent over the two years to end-financial year March 31, 2010. However, the recent regulatory developments are enabling bond market development, including: the easing of issuance and listing requirements; the enhancement of disclosure requirements for issuers; the clearing of bonds through stock exchanges; and the introduction of credit default swaps (CDS) and interest rate swaps. He concluded that the process of building capital markets in banking dominated environment is a long and laborious one because it involves changing of a country’s business culture.

Read more about other countries here.
Happing Reading!

- Amar Ranu

(Permission sought from S&P to post their articles on this blog)