Archive for October 20th, 2008

ING gets a capital injection from Dutch Government

October 20, 2008

Dutch Government has injected Euro 10 billion of capital in ING. The details of the deal are here.

ING is thus using the facility offered by the Dutch government, since 9 October 2008, to sound and viable financial enterprises that are facing unexpected external shocks. The Dutch government has made EUR 20 billion immediately available for the recapitalisation of the financial sector that is now proceeding internationally. 

The government obtains EUR 10 billion in securities, which have largely the same features as shares. These securities qualify as core capital (Core Tier 1 as approved by DNB). There is to be no dilution of the share capital held by current shareholders.

The rate of return on the securities is 8.5%. That shall only be paid out if dividends are also awarded over the preceding year. Should the dividend in the relevant year exceed the coupon of 8.5%, this coupon shall be increased: in the first year to 110% of the dividend, in the second year to 120% and in subsequent years to 125%. This structure is an incentive to ING to withdraw from this government participation as soon as justified by the share price and the path of dividends

This is atleast much simpler than Swiss version of TARP. But still quite a bit of capital structuring going on.

RBI presses panic button; cuts repo by 100 bps

October 20, 2008

This time Indian economy managers press a panic button. RBI reduces Repo rates by 100 bps to 8%! Record-high inflation, high money suypply, high credit and we have a rate cut and that too by 100 bps. In this global rate-cut coordination only Australia has cut rates by 100 bps.

The crisis has not just reached Indian shores but has created its tsunami as well. The numerous statements from Indian economy managers (see this)that things are well don’t sound good at all.

It looked like a liquidity crisis earlier and this was solved by CRR rate cut by 150 bps (10 Oct 2008; actually on 6 Oct 2008, RBI lowered CRR by 50 bps and on 10 October 2008 this was reviewed and another 100 bps was added to lower CRR by 150 bps). Then on 15 Oct 2008, RBI reviewed the situation again and lowered the CRR again by 100 bps to 6.5%. The liquidity situation improved dramatically and the liquidity infusion by RBI lowered from 90,00 cr on 10 Oct 2008 (add this and this) to net 1615 cr of infusion on 17 Oct 2008 (net this and this).

However, what looks now is that liquidity crunch has become a credit crunch in India as well. The RBI statement says:

India too is experiencing the indirect impact of the global liquidity constraint as reflected by some signs of strain in our credit markets in recent weeks. In order to alleviate the pressures and, in particular, to maintain financial stability, the Reserve Bank has decided to reduce the repo rate under the Liquidity Adjustment Facility (LAF) by 100 basis  points to 8.0 per cent with immediate effect.

I don’t know where is the credit crunch as on 10 Oct 2008 indicates credit has been growing at almost 25% compared to levels in 2007 which is higher than 23% seen in 2007! So, may be we see the credit crunch in next weeks data. Another possibility is that credit is not really going to the certain productive sectors, but then we don’t have sectoral distribution so we are not sure of this.

So, what explains this rate cut? One cue you get from Governor Subba Rao’s speech at IMF (on October 11, 2008):

Risk aversion, deleveraging and frozen money markets have not only raised the cost of funds for Indian corporates but also its availability in the international markets. This will mean additional demand for domestic bank credit in the near term. Reduced investor interest in emerging economies could impact capital flows significantly. The impending recession will also impact on Indian exports.

So, the rates could have been lowered as RBI expects demand for bank credit to go up. The funding sources from both debt and equity market (partcularly foreign markets) are expected to dry up. And as India Inc would need money to finance its investments and push growth, a lower interest rates (lower interest leads to higher investments) would lead to lower costs and more investments.

Another rationale for the rate cut is to join the global bandwagon. As John Taylor specifies in his speech at San Fransisco Fed (22 Feb 2008):

This phenomenon is seen all over the world. People in other countries try to predict what the Fed and other central banks will do and they base their predictions at least in part on policy rules. An email I got this week from a financial economist in Mumbai India is typical: “Should [the Reserve Bank of India] cut rates because the US is cutting rates?” he asked. Of course, central banks take account of the expected actions of other central banks when they make their own interest rate decision.

In a recent Monetary Policy Report, the Norges Bank stated that “It cannot be ruled out that a wider interest rate differential will lead to an appreciation of the krone. This may suggest a gradualist approach in interest rate setting.” In other words, actions by the Federal Reserve to lower the interest rate may factor into decisions by other central banks to lower interest rates. Deviating from expected responses can make it hard for other central banks to do the right thing.



You know who would have asked the question 🙂 The problem right now is opposite as Indian rupee is not appreciating but depreciating. But anyways, this global coordination cannot be ruled out.

But what about other things like still record inflation, still strong money supply etc? Though, GDP growth is expected to slip from 9% to 7.5-8% levels it is much higher looking at relative global growth levels. Even when India grew at 9% plus global economy was growing around 4.5%-5% levels. So relatively we seem to be much better off. The markets are also surprised by the magnitude of the cut. The debt markets are rallying but surprisingly equity markets are correcting. Clearly equity markets either want more interest rate cuts as they see the Central bank willing to cut 100 bps in one time  or may be they interpret the signal as some dangers lurking somewhere.

Overall summary is the rate cut looked like coming mainly because of global stress, the magnitude of the cut is a puzzle.


Another reason to lower the Repo could be to lower the interest rate costs for the government. The government fiscal deficit is expected to be much higher as oil bonds and fertiliser bonds are accounted in the deficit. Moreover, higher bond issuances are expected for managing both the government expenditure and also for the oil companies and fertiliser companies. So a repo rate cut would also lead to lower interest rate costs for the government

Assorted Links

October 20, 2008

1. WSJ Blog revisits Helicopter Ben. WSJ Blog points to an interview of Hungary’s Central Bank blaming market rumors for the Hungarian mess.

2. After World Bank’s previous Chief Paul Wolfowitz, it is now turn of IMF chief

3. JRV on the Indian Mutual Funds mess

4. MR on the financial crisis

5. FinProf points car dealers demand more down payments

6. DB Blog says lawyers will become hip after the crisis

7. Econbrowser summarises recent economic releases and not good news there

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