It may be recalled that Paragraph 165 of the Annual Policy Statement of the Reserve Bank of India for 2008-09 proposed to review current stipulations regarding conversion factors, risk weights and provisioning requirements for specific off-balance sheet exposures of banks and prescribe prudential requirements as appropriate, in view of the recent developments in the global financial markets. Accordingly, the requirements were reviewed and it is proposed to bring about certain modifications, as outlined in the draft guidelines, to the existing prudential norms applicable to the off-balance sheet exposures of the banks.
Archive for May 30th, 2008
Standard & Poor’s have just downgraded 153 CDO tranches – all of them European and all of them synthetic; which means they’re based on credit default swaps.
Here’s the release:
LONDON (Standard & Poor’s) May 29, 2008-Standard & Poor’s Ratings Services said today that it has taken credit rating actions on 153 European synthetic collateralized debt obligation (CDO) tranches (see list below).
Specifically, the ratings on:
- 122 tranches were removed from CreditWatch with negative implications and lowered;
- One tranche was lowered;
- One tranche was lowered and placed on CreditWatch negative;
- 28 tranches were lowered and remain on CreditWatch negative;
- One tranche was raised.
The interesting part, though, is that while 39 of the tranches downgraded reference US RMBS, 113 are linked to corporates. Downgrades on corporate CDOs have been rare before now. Moody’s reported in March than just 10tranches of synthetic corporate CDOs were downgraded in 2007, compared to 1,572 structured finance – MBS and ABS – CDOs.
S&P’s action, then, is pretty significant, and reflective of a serious uptick in default risk in the market – perceived and actual.
The rating agency lists some of the key culprits – corporates which have seen severe downgrades and thus impacted CDS referencing them. For now, the list is dominated by subprime casualties – monolines FGIC and ACA, Countrywide Home Loans, ResCap, GMAC. But there are also – in perhaps a taster of things to come – a couple of leveraged buyout names: Alliance Boots, TXU.
Highly leveraged companies are going to see significant rating actions against them if debt market funding conditions don’t improve. And with that, there will be further downgrades, and with them, as above, more trouble for synthetic corporate CDOs.
So, we are seeing concerns in corporate CDOs as well. This is the concern I raised in my CDS report as well.
This is another surprise. Whenever you try and develop a view over economy, the numbers come and surprise you. So there was an emerging view that growth in Indian economy is moderating. Moreover, people felt we are having some stagflationary conditionswith rising inflation and falling growth. Though, I still do not know how can we really define stagflation. It needs some serious research. If we have stagflation, policymaking is really tough. I have a paper on the same here
The recent CSO press releasesays we are still growing at 9% ! So, atleast now the situation is clearer of high inflation because of high growth rates. There isn’t any stagflation. Industrial growth rates have fallen but stellar performance by agriculture and continued robustness in Services, the overall growth rates are still quite good.
Somebody asked me which of these papers is closest to you? After some thinking, I said the one on employment issues in India. Though, it hasn’t got me any comments (like the one on financial inclusion, impossible trinity etc) but this issue to me is one of the most important issue in India.
This issue nearly sums up what ails India as of now and the challenging path ahead for India. If the employment statistics are right then the trend of falling quality of employment is worrisome. Earlier the problem was of “growth without employment”. Now it is “growth without any quality employment”. Both ways, it implies, much of growth is shared by lesser number of people.
Similar thoughts were expressed by Dr Rangarajan in his paper. I also came across this paper in Fed’s International Finance Discussion Paper Series by Geoffrey N. Keim and Beth Anne Wilson which echoes very similar thoughts as well:
Projections of sustained strong growth in India depend importantly on the utilization of the huge increase in India’s working-age population projected over the next two decades. To date, however, India’s economic growth has been concentrated in high-skill and capital-intensive sectors, and has not generated strong employment growth. In this paper, we highlight the tension between India’s performance in output and employment, describe the characteristics of India’s demographic dividend, and discuss impediments to India’s shift away from agriculture.
Just a quick mention of the Mostly Economics Blog. Plenty of good stuff over there on current market and economic conditions..