Archive for July 15th, 2008

Fitch downgrades Indian currency, who downgrades fitch?

July 15, 2008

There has been a lot of speculation for many days now that credit rating agencies would downgrade India ratings.

Fitch was the first and it downgraded local currency default rating from Stable to Negative. The overall rating stays the same at BBB-. The press release says (requires a free login):

The revision to the local currency Outlook is based on a considerable deterioration in the central government’s fiscal position in 2008-09 (FY09), combined with a notable increase in government debt issuance to finance subsidies not captured in the budget,” said James McCormack, Head of Asia Sovereign ratings.

Fitch forecasts the central government deficit may increase from 2.8% of GDP in FY08 to 4.5% of GDP in FY09 based in part on higher on-budget subsidies, interest payments and public wages. The agency expects bonds issued to oil and fertiliser companies to reach at least 2% of GDP this year, implying an underlying central government deficit of 6.5% of GDP or higher.

The markets reacted and fell across all kinds of markets.

The higher  fiscal deficit has been one of the weakest links in Indian economy for a long time and there is no surprise. I also calculated the off-balance sheet items and clearly it makes the entire fiscal deficit much larger than reported.

However, what is ironical is Fitch downgrades India but we don’t have any mechanism to downgrade Fitch itself? I am sure Moody’s and S&P will follow as well and we all know their role in the recent sub-prime mess. Should these ratings continue to be so important that they lead to a bloodbath in markets? The markets clearly seem to be valuing them still despite they failing time and again to safeguard the markets.

Addendum:

I had some more thoughts. Just imagine Fitch sayinga after a few years that India downgrade on this date was due to a modelling error!!

On a serious note, I also didn’t see any of the anchors on various business television channels raise the issues pertaining to these credit rating agencies. Why couldn’t anyone say shouldn’t the raters set their house in order first? Instead. there was a big hue and cry over the entire downgrade.

I am not saying that fiscal deficit is not a problem. It surely is but again, it has always been a problem with India. Still the foreign money kept poring in.

A good review of today’s inflationary trends

July 15, 2008

The recent speech from Andrew Sentance, member MPC, Bank of England is a good one. It reviews trends, causes and future expectations over inflation.

The summary is we might have to live with high prices for a while now unless the emerging markets growth declines and lowers overall demand for these products.

Understanding the Fannie Mae and Freddie Mac mess

July 15, 2008

The sub-prime crisis doesn’t seem to end and after the private sector firms, now is the time to focus on government sponsored firms. Both Fannie and Freddie have been in limelight in the last week as people feel they are going to be bankrupt. Both are not involved in any sub-prime mortgages, However, the overall housing prices have fallen so much, that people expect that they will not be able to service their liabilities.

Treasury worked out a deal with Fed on the weekend (Market movers has an interesting take on the Paulson statement) and there have been a lot of comments on the issue.

Addendum:

The problems with FF have been known for a while now. Greg Mankiw had raised this systemic issue in 2003 in a fantastic speech. He had highlighted concerns and they have just been proved to be true. He also wrote an article in FT in 2004 on the same issue

Assorted Links

July 15, 2008

1. WSJ Blog points over economists’ reaction on fannie /freddie crisis. It also ponders is Fed’s mission becoming too high

2. Ajay Shah pointsto new papers on emerging markets

3. TTR points to reality in corporate boards. He says

Most boards are clubby affairs. Those invited to serve as “independent” directors are pals of the CEO, they brush shoulders in the same watering holes and they are often retired people who value the handsome fees that many companies pay these days.

He should add belong to the same alumni as well.

4. NB points to visual nudges to control speeding vehicles

5. PSD Blog points to a paper on middle class


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