After the meltdown, a $5 trillion debt wish

After the meltdown, a $5 trillion debt wish
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First Published: Wed, Jul 29 2009. 10 35 PM IST

According to many estimates, this year will see sovereign debt seek out at least $5 trillion. Ahmed Raza Khan
According to many estimates, this year will see sovereign debt seek out at least $5 trillion. Ahmed Raza Khan
Updated: Wed, Jul 29 2009. 10 35 PM IST
The economic meltdown has spurred pump-priming by many governments. That, in turn, has spurred the market for debt backed by governments.
According to many estimates, this year will see sovereign debt seek out at least $5 trillion. Since global gross domestic product (GDP) is estimated at around $50.6 trillion, it brings the deficit debt to an unsustainable 10.6% of global GDP (see table). It is worth noting that this figure does not include corporate debt.
This is beginning to bother many economists and market watchers. Where will all this money come from? Clearly, many governments will have to print more currency notes. And if the debt overhang is large, shouldn’t the countries’ economic ratings get downgraded? Won’t that make the business of raising funds that much more difficult? And, what impact will it have on devaluation/depreciation and inflation?
According to many estimates, this year will see sovereign debt seek out at least $5 trillion. Ahmed Raza Khan
Just last month, ‘The Economist’ reported on the consensus of economists who met in Washington: “Because economic growth is likely to be weak for several years after the recession ends, especially in countries such as America and Britain where over-indebted consumers must rebuild their savings, budget deficits will remain big. The International Monetary Fund economists’ baseline is that the government debt of the rich 10 will hit 114% of GDP by 2014. Under a darker scenario, in which economies languish for longer while fears about governments’ solvency push interest rates up, the debt ratio could be 150%.”
On paper, therefore, is does appear that the situation of countries such as the US, Japan and the UK will be far worse than that of India if one looks only at debt as a percentage of GDP.
But it must be remembered that these countries have the political, financial and economic discipline to stem leakages, suck back excess liquidity and even galvanize productivity more effectively than countries such as India can. So, India could see even more volatile times, unless it manages to take effective control of economic and administrative management.
In any case, the figures indicate that the financial meltdown is far from over. All the countries are sitting at the edge of a proverbial financial abyss.
Recommendation: Be prepared for almost anything.
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Is this the best way?
Last week, the Maharashtra State Road Development Corporation (MSRDC) confirmed receiving seven bids for collection of tolls and maintenance of flyovers in Mumbai. “We opened the technical bids today and, after scrutiny, will open the financial bids,” said MSRDC chief engineer Subhash Nage.
This is good news. But wouldn’t it be better if the state government (and other state governments and the National Highways Authority of India) issued road building contracts with an in-built road-maintenance precondition for the next 10-20 years? When backed with suitable bank guarantees, it would prevent road builders from using sub-standard material for road construction, and would ensure that the construction would withstand wear and tear for the next 10-20 years.
Giving toll collection rights as part of the road construction contract to them would also make sense, as it would ease the task of opening three tenders—one for construction, second for maintenance and third for tolls. In case the road construction company wanted another partner to take up the toll collection exercise, that would be a business arrangement to be entered into purely between the road contractor and the third party.
Surely, the ministry cannot afford to neglect the quality of work done.
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Markets and eclipse
An eclipse worries most Indians. But it worries almost everyone across the world, across all cultures. And this is what Gabriele Lepori of the Copenhagen Business School decided to study— especially the effect eclipses have on financial markets.
Lepori’s study covered all eclipses around the world from 1928 to 2008—approximately 80 years. And ‘The Economist’, in its latest issue, takes a look at this study and has this to report:
“He then matched these events against four American stock indices: Dow Jones Industrial Average, S&P 500, New York Stock Exchange Composite, and Dow Jones Composite Average. Finally, he computed average daily returns for each index and compared returns on days when eclipses occurred with those on days when they did not.”
The results were very interesting. Even though the “depressive” effect of the eclipse was slight at one-seventeenth of 1%, it was nevertheless definitely there, and provided an opportunity for arbitrage. Lepori calculated that if transaction costs were assumed to be zero, and if an investor bought the Dow Jones Industrial Average at the end of 1928 and held it till last year, his money would have multiplied 37 times.
“But if he had sold before each eclipse and bought back straight after, (he) would have multiplied the principal 55 times”.
Could it be that the Chinese got wise to this arbitrage opportunity during the recent eclipse? After all, notwithstanding superstition, the Chinese markets rallied excellently on the day of the eclipse.
It only goes to show that once a trend is discovered, someone learns to make money on it, superstition or not.
R.N. Bhaskar runs a company with significant interests in distance learning and examination certification and writes on corporate and business policy issues. Comments on this column are welcome at capitalist@livemint.com
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First Published: Wed, Jul 29 2009. 10 35 PM IST