India’s banking system is flirting with a Lehman moment
economist.com
economist.com
The American Govt trusts everyone and lets them go about their business and self report while keeping the option to audit or selectively target the bad actors. Its why foreigners love to start businesses in the US. Its so refreshing.
IL&FS apparently has funded quite a large number of infrastructure projects, which unlike Lehman have tangible value. NHAI, the state highways agency is said to owe a great deal of payments to IL&FS (rumoured to be on the order of $ 5 B).
The MSME sector, which is touted to employ 92% of India's labour has widely been reported as having taken a very bad hit after the double attack of GST and demonetization. RBI on the other hand is said to favor vulture funds (resembling IMF's 'solution' during the Asian crisis).
Then again, the Indian state has let high profile defaulter escape with impunity in the past few years. There are indications that this was done consciously, through PMO/CBI intervention.
All in all, I have very little trust in any institution of the Indian state.
(I'm glad to see Economist reflect my understanding.)
No person in India cares much anybody or anything else. Unless they are directly affected by it.
People optimize so much personal good, that bad things happening to others are actually celebrated.
Quote from the article
It's crystal clear actually. Decades worth of stupid decisions (or indecision, as many claim) are finally bearing fruit. Unfortunately the current government, the first in many years that is actually taking some decisions to get the ship in working order is gonna get caught in the quicksand created by its predecessors.
Citation (and additional information) required on this part, please.
Well, the current government did its part in letting the tycoons, who took large loans, get out of the country. The currency ban was another stupid mistake (source:https://www.nytimes.com/2018/08/30/world/asia/modi-india-rup...) that led to chaos and people lost trust in the banking system. They don't know if they will easy access to their money in the banks with the cash withdrawal limits and ATM issues.
If people lose trust and don't deposit the money, eventually the whole system would collapse.
Construction of roads and toilets, GST, IBC, electrifying of all villages and all other reforms initiated by the current government are part of a larger scheme that's taking us back to the vedic period.
There is no honest and frank financial reporting on the current imbroglio even in the financial press, aside from some vague reports on the fight between the government and the central bank, RBI.
What is the exposure due to ILFS default? What are the projections? What are the fallouts? How much recapitalisation is necessary? Is it only ILFS? No discussion.
What was the demonetisation for? No discussion.
The fin min has been trumpeting "consolidation" of public sector banks. Isn't this "too big to fail" coming up? Do we really need this? No discussion.
-- Another fact that I sometimes worry about: after demonetisation, real estate has stagnated, and mutual funds have seen a boom. Hence the exposure of the economy to bad loans made by the banks has increased in the last 2 years. So the catastrophe, when and if it happens, might be much more enormous than might otherwise have been.
They claim emergency at a drop of a hat, the SC makes a lot of decisions unilaterally frequently crossing its constitutional mandate without accountability to anyone.
I would say that the media is doing a bad job of unearthing the actual facts and not being able to portray anything impartially without a political angle to it.
The fact remains that this govt has been cleaning the sins of the 2005-2013 years and initiatives like GST, demonetization even with their short term pains are a much needed antidote in the long term cleaning up of the system. There has been a significant jump in the tax collections from individual taxpayers in this year and last and these are changes that will contribute in the cleanup.
In the last 15 years, ever heard any media house criticize Sonia Gandhi ? Even after the umpteen scams. That is what real power is.
Sure they make fun of Rahul Gandhi, but every few months articles and reinvention of his persona is done.
This is in contrast with the hounding of Modi from his CM days and nowadays where every tangential issue is attributed to him. Will Modi answer is like the Thanks Obama version of India.
Of course they did name Sonia Gandhi. Do you remember the India Against corruption movement which gave rise to AAP? The movement had posed questions to MMS and Sonia Gandhi and media had championed the movement. There was no equivocation about it from any mainstream channel, neither about the multiple scams that preceded it. Media houses had done their duty in speaking truth to power especially in UPA2 days.
What I am trying to say is your opinion about Modi's hounding in media seems to be built on what gets printed in wire/print/caravan etc. Although these sources might be heavily represented in your FB timefeed their influence/readership is miniscule compared to a news channel and news papers which have extremely lenient to Modi. Just think how hard media was on UPA2. That same level of scrutiny is sorely missing.
The credit rating system is necessarily bayesian, and EM markets all have their most recent defaults within the models' event horizons.
The other one I can think of was the downgrade of the coupon on WW1 war bonds from 5% to 3.5%. Again, seemingly everyone agreed with this, so there is some debate over whether it was an actual default.
[1] https://www.theglobalist.com/a-brief-history-of-u-s-defaults...
The real difference is that the US or European countries are borrowing in their own currency and under their own laws (well for euro area countries, sort of). So they will inflate their debt away. EM countries typically borrow in USD and often under foreign law and don't have the option to inflate away.
But Greece found itself with effectively a foreign currency debt (EUR which they don't control) and ended up defaulting (well, technically "restructuring" but that's the same).
As long as the USA willing to increase the size of their debt, that doesn't happen.
For this to continue, people need to keep lending the USA money, so that the USA can pay off their old debts. People are willing to lend the USA money as long as they don't think the USA will start inflating their debt away.
There isn't really a limit to this. Loans to the USA are stable because people keep loaning to the USA because loans to the USA are stable. The size of the debt doesn't affect that equation.
You say this, but it doesn't work nearly as easily as you seem to think. You cannot just devalue your currency and pay people off with zero effects. And if that was actually a threat, the US would not have an AAA credit rating.
https://en.m.wikipedia.org/wiki/United_States_federal_govern...
If Somalia decides they love their goats too much and are not handing them over, their ratings get trashed.
Hedge funds have a long history now, and the core of their business model is (simplifying) to arbitrage such differences. So what's left? Whose currency is irrationally treated? Which lenders make a borrower more/less secure?
I am no fan of carrying enormous amounts of debt. I critically disagree with the United States economic and fiscal policies of the last twenty years, including most quantitative easing initiatives.
But if you think the AAA credit rating is somehow fake or corrupt, no metric-driven analysis that even remotely resembles fairness would agree with you. Only theories like "the music will stop" do.
The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
The numbers are staggering, the economic growth isn't there. The US has a technological edge and a big army, but at the end of the day it is 'just' a country like all the others. At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
This hasn't happened unless you count QE as printing money to pay debt, which would be a pretty serious twist of logic.
>> The issue is, if someone lends the US enough money to buy a coffee, it is difficult to see why they believe they are guaranteed to get a coffee+ worth of money back.
>> At this point, a reasonable observer could conclude that the political process is locked in to running up debt until the interest can no longer be paid. Neither the Republicans nor Democrats are in a position to improve the numbers.
If you think this is actually true, there is a ton of money to be made on the open markets by securing your position with capital. There's plenty of financial instruments you can leverage to back your position.
>> After the '07-'08 era crisis, it seems a legitimate question to ask why the taxpayer should pay their debts if the financiers seem to get a pass when it all gets too hard for them.
This is a legitimate criticism but separate from your other claims. QE is protectionist and massively contributes to inequality (in more ways than just income). I am quite critical of the USG and their economic policies.
Now I can admit that and also admit that the United States is probably the safest credit risk on the planet, primarily due to the hegemony-driven policies we exert globally. You might argue that this is not for long, but I highly doubt this to be true, and the rest of the world acts as if.
Credit ratings are forward-looking though. The US's financial position is the worst it has ever been - public debt to GDP is on wartime footing in a long period of peace between major powers.
And from my admittedly highly unreliable sources, a number of states aren't in great financial health and there is a pension crisis afoot.
The fact that the US is going to hand out the nominal value of its debt is not comforting in light of this.
> ... there is a ton of money to be made on the open markets by securing your position with capital
That isn't a fair challenge and you know it, there are a lot of ways to lose everything being clever with derivatives even if the macroeconomic assessment is right. Profiting off something isn't the only way to be right about an opinion.
> This is a legitimate criticism but separate from your other claims.
No it isn't. If the US isn't honoring the capitalist system inside their markets, it is legitimately risky to assume that they will treat foreigners with more respect.
There is an argument that they will, but it isn't a sure thing by any stretch. If something does change, by the time everyone admits that it will be far too late for investors.
The US is chronically unable to balance its budget. The first thing to give could easily be foreign-owed debt, because foreigners don't vote.
ITs an entirely different mechanism. Think of the difference between breaking styrofoam apart and pulling atoms apart.
This seems to be the econ 101 answer all modern day Chicago - school influenced economists give out.
Student: if the US has a debt that's more than their current GDP, isn't that bad? If a family had a credit card debt higher than their current salary, we'd say that they were in bad financial shape.
Economist: The macroeconomics of a nation work much differently than a single family's budget.
Student: Well, when the family has no plans to cut expenses, continues to charge more and more each year on the credit card, and their solution involves some vague plan of getting a huge raise sometime in the future, how does this not end in disaster for the family, but turn out fine for a government doing the same thing.
Economist: Running deficits and borrowing money in perpetuity is good for a large country to do, just not for an individual. It is known.
Student: well eventually the family's interest payments will be more than they actually make, leaving nothing left for actual expenses. At that point, their card is canceled and they have to sell all their stuff, move out of their home, and crash with the parents. And nobody lends to them again for a long time, and only at high rates. How does a nation avoid this outcome when the math is the same?
Economist: Trust us <waves Jedi hand>.
I get the feeling we're going to someday look at today's accepted macroeconomic theories, and wonder just WTF we we're thinking.
Economist: As I have told you multiple times by now, it isn't. That is what we taught you in first year. You can't simply arbitrarily scale up models from lemonade stand to international trade. Things are not all linear, simplifications in one model are simply not valid in another model.
Arguments like these always strike me as similar to "if evolution, then why are there still monkeys". Maybe you are right, everything is really simple and everybody else has been too stupid to see it. Or maybe people are right when they tell you that you don't quite understand what you are talking about.
An ordinary borrower has a number of ways they can get in to trouble - like losing their job and so being unable to repay a loan. The government avoids all that because government writes the law and it controls the creation of currency so it can always choose to technically not have a problem.
These changes make it almost meaningless to assess a government's debt in norminal terms (eg, 'the debt is $x trillion!' isn't actually a concern, because the government as a body can simply create $x trillion if it wants. Wish I could do that :P).
So we have to look at the governments debt in real terms, at which point we need a completely different model than a small time player, who is mostly concerned with by nominal issues. Then you run in to the issue that in real terms, nobody agrees on anything - which is why the economy is run with a nominal currency system. But there are people, like me, who think in real terms the US of today is a completely different beast from the US of the 1970s. There are massive demographic and political differences.
it sounds like you're saying that the debt load vs GDP is important, but the relationship in nominal terms doesn't say much. is that an accurate reading?
In this context, I believe debt load to GDP for the US after WWII, and that didn't cause a problem. The concern is that the US has a debt load consistent with a world war and conditions that are really quite favorable. So the obvious questions are "at what point does this get paid back?" and "in like-for-like real terms, assuming politicians are cynical and greedy, is there any reason to believe this debt will be honored?".
Only on bonds in their own currency! Argentina would be in a much better position if they could print dollars.
> 'just' a country like all the others
For this to be a problem the US has to fail in a way that doesn't bring the rest of the developed world down too
Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of.
Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for a large part of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth.
The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The effect of recency on our collective minds probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources.
While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.
There are good reasons to keep government debt low enough but long term possibility of repayment is not a huge worry when market real interest rates and safe asset returns are very low or negative. In the latter case, you can just wait and let the real debt evaporate through inflation.
btw, you are talking about credit ratings made by agencies that consistently rated Lehman's products as AAA.
In another, they don't care that a country's debt go to zero, they care that the titles they have (used to be paper, today it's all electronic - but they have a maturity date, a face value and some pay interest periodically) get paid. If they sold a new coupon to pay that debt they're paying now is not so important (usually)
But then again if the US or Japan/China/some big EU player defaults in a big way that suddenly becomes the least of your problems.
You mean Credit Default Swaps (CDSes)? [Or perhaps Mortgage Backed Securities?] Outside of the SEC being stupid enough not to regulate these instruments, the government didn't have much to do with over-leveraging of the private sector.
Though the government did give everyone who fucked up a fall from grace rather than what they deserved, which is bankruptcy and the other side of capitalism that our system tends to forget exists when it is convenient.
I understand this feeling and also wish that there was some sort of moral reckoning.
But I feel like the better end state for society is "everyone has access to the same fall from grace that the rich and powerful have" rather than "_everyone_ gets to experience the crushing, arbitrary justice system that those at the bottom rungs of society experience".
It will probably never be paid down to zero, but this doesn't matter. The debt is made of individual bonds, which have a duration (usually up to 30 years), and are paid back at the end of that duration. By taking out new bonds.
They are valuable because what else are you going to do with your money, when you have a large amount to safeguard?
Many investors in government bonds don’t want to be paid back. They just want interest payments forever. So the rating is really just about the confidence that it will happen.
I was chatting to a guy from Sybase once who had written some special date-handling code at the request of a customer who was still handling payment streams from the time of Napoleon.
The UK issued perpetual bonds starting in 1751. They were called Consol Bonds, but they were all redeemed in 2015.
The US has historically issued Consol bonds with the right of redemption. The last mention of Consol bonds I can find is the June 1935 Treasury report [1] so presumably that's when they were fully redeemed.
[1]https://www.treasurydirect.gov/govt/reports/pd/mspd/pre1997/...
With the US gov whether the republicans or the democrats are in power I can reasonably assume I'll get my money back, can I say the same about the various political parties in a third world country were they to be elected?
The AAA/AAB style ratings are simply estimates of that reality.
Other developed countries DO keep their deficit in check. And they make their payments on time. Indians don't trust their own government, why would foreign lenders?