Archive for January 23rd, 2009

UK Govt should present its liabilities correctly

January 23, 2009

BBC pointed to this intertesting news:

The Commons Treasury sub-committee said the government had failed to reveal its “significant liabilities” in full. Accounting for nationalised and part-nationalised banks must be at least as good as for those in the private sector, it added.

In its report, the committee said: “In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed.”  The accounts for fully and part-nationalised banks should be “at least as comprehensive as those made by major banks”, and go beyond minimum accounting standards, it suggested.

 The mentioned report is here. The report further says (emphasis in the report):

 18. Northern Rock was taken into temporary public ownership on 17 February 2008 and the Treasury Resource accounts were published on 16 July 2008, suggesting that it took five months for HM Treasury to identify an accounting treatment of Northern Rock which the National Audit Office (NAO) would accept as true and fair.From this we must infer that the treatment of the part-nationalisation of the banks also remains to be addressed.The nationalising transactions of 2008–09 raise some complex accounting questions for the Treasury. In order to ensure that the Treasury Group’s 2008–09 Annual Report and Accounts can properly be laid before Parliament before the summer adjournment, we recommend that the Treasury engages early with the National Audit Office to agree appropriate accounting treatments for the transactions surrounding the nationalised and part-nationalised banks.



19. It is already apparent that the Treasury Group’s 2008–09 Resource Accounts will throw up a number of equally complex accounting issues: the treatment of the Government’s revised equity stake in Northern Rock; the transactions with Abbey Santander and Bradford & Bingley; and its investment in the part-nationalised banks.

20. Louise Tulett, HM Treasury’s Director of Finance, Procurement and Operations, told us that the accounting treatment of the Treasury’s transactions with Abbey Santander and Bradford and Bingley had not yet been agreed with the NAO. 

22. In its report on the Performance of HM Treasury in 2007–08, the NAO highlighted that no fewer then five liabilities relating to Northern Rock were disclosed in the Treasury’s Resource Accounts as contingent liabilities but listed as ‘unquantified’.These are shown in Table 3.



23. By nationalising financial institutions, th Government has taken on responsibility for significant liabilities. In order for public scrutiny to be effectively performed, the magnitude and nature of these liabilities must be comprehensively disclosed. We recommend that the Treasury quantify and disclose the liabilities involved in the nationalisations and part-nationalisations of financial institutions. These disclosures should appear in the Treasury Group Resource Accounts, must be at least as comprehensive as those made by major banks and should go further then meeting the minimum acceptable accounting standards.


See table 3 on page 13.

This is quite interesting. Just like the case of India, UK seems to be presenting its financial statements excluding certain liabilities (off-balance sheet liabilities). In this case the liabilities seem to be its acquisitions of financial firms in the crisis.

This is a global program now and part nationalisations have happened in quite a few economies. These problems wiil be present in their accounting statements as well. And above all, how do you value these financial firms at this moment? 


Confusions galore in India’s financial markets

January 23, 2009

Mint edit piece y’day said there is no finance minister in the country. This has become a big problem as suddenly we have been flooded by comments from various Indian policymakers and politicians.

  • On Jan 20 Planning Commission chief said India had more room for monetary and fiscal policy
  • On Jan 21, he said no more stimulus for 2008-09
  • On Jan 21, another news item says PM’s apex economic committee (which includes Plan Com chief) are readying Stimulus III package

These are news items and can still be clarified (however, unlike SEBI no one issues any clarifications) . On various newswires the confusion is worse. We have comments after comments from various key people often with conflicting views. This confuses the stance of financial markets.

For instance today a leading policymaker expressed different views to two seperate newswires. On one he said rate cuts are desirable (indicating rate cuts could come in monetary policy) to other he said though desirable, he didn’t expect it on Tuesday’s monetary policy. He also adds that he has changed his view on central bank monetary policy stance and RBI is an independent body and he is not involved.

Likewise, comments are flowing thick and thin from policymakers each trying to sooth his audience. It is becoming a nightmare. This is all the more evident in case of government debt markets where comments on inflation, govt deficit has an immediate impact.

The policy statements are adding their own volatility premium to the already high volatility.

EAC presents India Economic Review 2008-09

January 23, 2009

Prime Minister’s Economic Advisory Council has released its review of Indian economy for 2008-09. I haven’t read it. Will post my comments later.

Denmark to be 17th EMU member?

January 23, 2009

I had pointed the dilemma of EU members in this paper – some want to quit and some want to join in.

Denmark is a member of EU but not EMU (Denmark Central Bank still is responsible for its monetary policy and still has its own currency). Denmark always prided on being a non-member until this crisis happened. I have noted the problems with Denmark’s monetary policy and the problems on its economy.

The Denmark Central Bank Governor Nils Bernstein gave a speech to Danish parliament. In this he outlined Denmark’s case for joining EMU and accepting Euro as a currency.

Danish participation in the euro can be expected to lead to slightly lower interest rates, a small increase in foreign trade and lower transaction costs. In normal, calm periods, interest rates will be only marginally lower than under the current fixed exchange- rate regime.

The real reason is:

In the current situation with a financial crisis and a global economic slowdown, the Economic and Monetary Union demonstrates its strength. The single currency and single monetary policy are stabilising factors that prevent the individual member states from seeking their own – often mutually competitive – monetary solutions to the crisis. This would only make it escalate further, as we saw in the 1970s. It is and has been the general view of Danmarks Nationalbank that Denmark’s adoption of the euro is a natural extension of our fixed-exchange-rate policy and would not involve major economic upheavals.

He also points how ECB is a great institution which has extended support to non-EU member is the crisis. He also says ECB works in a coordination fashion and Denmark’s voice will be equally heard.

Eurointelligence also points out Denmark is set to join EMU and Euro adoption from the political angle.

Exciting times. Would UK, Sweden, Norway follow as well and initiate public debate on the topic? I havent read much on Norway and Sweden but in UK discussions are already on. Willem Buiterhas been advocating the same in his blog and also points to a recent publication of leading economists/policymakers on the issue.

India’s Growth: Potential/Forecasted vs Actual?

January 23, 2009

This is a fairly old paper (Sep 2007) but still is worth revisiting. It is written by Hiroko Oura of IMF and is a literature survey of the various research papers estimating growth of India.

With India’s GDP expanding at a rate above 8 percent in recent years, the debate about whether India is overheating revolves mainly about whether growth is above potential-that is, whether the economy is exceeding its “speed limit.” This paper attempts to shed light on this debate by providing up-to-date projections of India’s potential growth, including by clarifying differences in underlying assumptions used by various researchers that lead to a range of estimates. Estimates of potential growth on this basis range from 7.4 percent to 8.1 percent for 2006/07, and about 8 percent for the medium term.

Oura covers 4 papers that estimate India’s growth:

  Rodrik-Subramanian (2004) Poddar-Yi (2007) WEO (2006) Bosworth Collins (2006)
Potential Growth (2006-07) 6.8 8.8 8.1 7.4
Potential Growth (2007-08 to 2012-13) 7.3-7.6 9.5-9.8 8.7-9.0 8.0-8.4

All these 4 papers basically have used different methodologies to arrive at these growth numbers. And they have missed their mark widely. In 2006-07 the actual growth was 9.6% much higher than forecasted. An average growth rate of 8% plus from 2007-08 to 2012-13 looks very difficult as well with growth expected to touch 7% in 2008-09 and 6% in 2009-10. Even if growth recovers in 2010-11 and 2011-12 improve to 7% and 8% respectively,  average would still be 7.0-7.5%. Rodrik-Subramaniam might be the closest to the long-term forecast.

Though am worried about future growth forecasts, the question that always interests me is – How did India manage this average growth rate of 8.9% from 2003-04 to 2007-08. No model could forecast this high a growth rate. Out of the 4 papers mentioned abpove, 1 is in written in 2004, 2 in 2006 and 3 in 2007. So only the one in 2004 is applicable and it predicted 7.0% around levels. I had also analysed how private forecasters fared and realised they started forecasting higher growth rates only after the actual was higher than their previous forecasts.

Shankar Acharya and Arvind Virmani have presented their analysis which suggests surge in investment was the key. In 2004-05 average quarterly investment growth was 18.0%, 18.0% in 2005-06, 21.4% in 2006-07, 13.4% in 2007-08 and 11.0% in first half 2008-09. So, a slowdown seems to have already kicked in from 2007-08  and looks like quite sharp in 2008-09. It will be interesting to see invesstment fares in the next quarterely GDP data releases.

But what is still not understood is what led to the higher investments?

  • Was it because of expceted higher future growth? This then becomes full circle- investments rise because of future growth, and higher investments lead to higher current growth.
  • Was investment just bubble driven (see this paper by Cecchetti for details) where bubbles lead to optimistic  views on economy and drives high investment which then collapses as the bubble burst.
  • Was it conducive business environment  that led to higher investments? (though Doing Business Surveys suggest it has only worsened)
  • Was it economic polices?
  • Great Moderation worldwide?
  • Plain Good Luck?
  • The easiest of all answers- mix of all??

I still have not fully understood what did India do that it jumped to this near 9% growth trajectory and managed it for 5 continuous years? Any answers?

Assorted Links

January 23, 2009

1. 2 prominent research conferences in India. IGIDR’s Annual Money and Finance conference -2009. Ajay Shah pointsto NCAER’s Neemrana conference 2009.

2. Time for some Krugman humor. He takes on Barro who does not like fiscal stimulus

3. WSJ Blog pointsto Chinese mantra for the year – Bao Ba meaning protect the 8 (8% growth rate). EAPB analyses China’s GDP nos

4. CTB points to research on east Europe stock markets

5. WSJ Blog points Obama to get daily economic briefing

6. CMB has an astonishing graph which compares CPI in 1929 and now. Inflation is much lower now. Time to do the helicopter drop?

7. FinProf points who is the largest oil company in America? It is Morgan Stanley!! It also points that ex-Merrill CEO  John Thain who then moved to BoA (as BoA took over Merrill) spent USD 1.2 mn on his office!!

8. WSJ BLog points to Bini Smaghi interview

9. TTR points Indian banks still looking good but not become complacent.

10. Urbanomics points to behavioral models of finance. Also read the excellent post on 3 broad models of banking bailouts.

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