Unilever wants managers to invest bonus back in company??

I came across this news item on Unilever:

This blog is on a short break…

This blog is taking a short break. Though it is not the best time with so much happening and so much to read…..

Blogging will resume on coming Monday, 31 May 2010. On Monday, we have a very  important data coming out- GDP for Q4 2009-10 which will also lead to GDP calculation for FY 2009-10. As per CSO advanced estimates, 7.2% is expected for 2009-10.

	2005-06	2006-07	2007-08	2008-09	2009-10
agriculture, forestry & fishing	5.2	3.7	4.7	1.6	-0.2
Industry	8.1	13.6	9.3	3.1	8.8
mining & quarrying	1.3	8.7	3.9	1.6	8.7
manufacturing	9.6	14.9	10.3	3.2	8.9
electricity, gas & water supply	6.6	10.0	8.5	3.9	8.2
Services	10.2	9.9	9.7	7.7	7.7
construction	12.4	10.6	10.0	5.9	6.5
trade, hotels & restaurants	12.1	11.7	10.7	7.6	8.3
financing, insurance, real estate & bus. Services	12.8	14.5	13.2	10.1	9.9
community, social & personal services	7.6	2.6	6.7	13.9	8.2
GDP	9.5	9.7	9.2	6.7	7.2

The advance estimate were released on 8 Feb 2010 and we got Q3 2009-10 estimate on 26 Feb 2010. So, one can estimate expected growth in Q4 2009-10 as well. Here it goes:

	Apr-Jun 09	Jul-Sep 09	Oct-Dec 09	Jan-Mar 10 (implied growth	2009-10 Expected
Agriculture	2.4	0.9	-2.8	-1.2	-0.2
Industry	4.2	9.1	12.8	9.2	8.8
Services	6.8	8.3	6.2	8.4	7.7
GDP	7.1	6.5	8.7	8.8	7.2

We get, Agri and Services data when GDP numbers are released. But we can estimate industry growth as we have IIP growth for Q4 2009-10. It is at 12.4%. So, if agri and services on expected lines, then GDP growth could be higher than expected 8.8% in Q4 2009-10. Final GDP could be around 7.5% as RBI and EAC have indicated.

With all this info, see you on Monday.

Addendum:

Check out this new magazine – Inclusion. Got great articles from  leading indian policymakers/economists/thinkers. (HT: Gold Standard Blog, a superb blog from V Anantha Nageswaran. I have just started reading it thanks to Niranjan’s Meta Blog

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Lessons on loan provisions and bank charge-offs

Amidst all the macro papers, it is always nice to read a bit about micro especially banking practices. FRBSF economists Fred Furlong and Zena Knight in this short note look at two problems of banks:

Impossible Quadrangle of Indian public finances

I came across this very interesting lecture by late Raja Chelliah, one of the architects of Indian public finances. The lecture was given in 2005 but the overall context still remains.

He says despite numerous attempts and promises problems of fiscal deficit remain.

Assorted Links

• Krugman points why despite Bank of Japan increasing the monetary base, Japan faced deflation
• Conference on Nigeria Central bank’s 50 years. Some great looking ppts and papers
• Bank of Japan’s timely conference on Future of Central Banking under Globalization. Most papers are still not linked
• James Bullard, St Louis Fed President says Europe crisis will not result in second round of recession. WSJ Blog has a summary
• RBI continues its good  work of becoming more transparent. It discusses briefly the proceedings of 23rd Conference of the State Finance Secretaries. Earlier these conferences just went by.
• Nudges Blog points to a short new paper by Supreet Kaur, Michael Kremer, and Sendhil Mullainathan. In this authors look at how people prefer to be paid. There is also an excellent clock which is a must for every office
• John Taylor points to a paper questioning the fiscal multiplier.

The paper is quite technical, but the bottom line summary is that a one percent increase in government purchases (as a share of GDP) increases GDP by a maximum of 0.7 percent and then fades out rapidly. This means that government spending crowds out other components of GDP (investment, consumption, net exports) immediately and by a large amount.

• PFM Blog recommends fiscal consolidation lessons for advanced economies
• NYT Economix looks at the Bank Tax
• Menzie CHinn gives sector wise analysis of US GDP

Is Eurozone SPV like a CDO?

Wolfgang Münchau asks the same in this article. This is a must read article. Munchau is in top form. He has pointed the role German government has played in worsening the crisis.

He compares Eurozone SPV to a CDO product. Eurozone created a SPV to manage the bailout which is as complex as a CDO.

In last week’s column I remarked that it was no accident that the eurozone created a special purpose vehicle to manage this bail-out. It is not just the name that reminds us of those notorious financial structures that brought us the subprime crisis. There are in fact substantive parallels.

Like a dodgy subprime collateralised debt obligation, the eurozone’s SPV lacks transparency. The operational rules are not clear, and have been subject to disputes among member states since political leaders announced agreement. If you want to understand it, you had better read the small print.

One could also take a look at the debt the SPV insures. Colleagues at FT Alphaville dug up a brilliant report by the credit team at Credit Suisse, who pursued this question to the bitter end. Before the start of monetary union in 1999, EU countries borrowed at different interest rates, the spreads reflecting expectations about future exchange rate realignments and default probabilities. With the arrival of the euro, spreads almost disappeared. Just as subprime CDOs enjoyed triple A ratings because of the way they were constructed, the entire eurozone enjoyed a triple A rating on the back of Germany’s. This produced a massive credit boom in Spain and Portugal, and those credits were recycled through the eurozone banking system. Bankers in Düsseldorf, Munich and Paris bought those Spanish mortgage obligations and Greek sovereign bonds, proudly adding them to their fine collections of subprime CDOs.

Very well said.

He says though Eurozone has a lower debt than other economies, much of it is hidden.

Those numbers tell us that the eurozone is in a better position than the US, the UK or Japan. The problem is that those headline numbers exclude contingent debt and the interconnectedness of financial flows.

The biggest category of contingent debt is made up of the various guarantees the eurozone has been handing out in the last couple of years. European Union governments have effectively guaranteed the liabilities of their entire banking sectors. They have guaranteed all bank deposits up to a certain limit. The eurozone member states guaranteed Greek debt for the next three years, and then extended the scheme to the rest of the eurozone. And those guarantees will probably have to be doubled again.

In a very insightful piece, Paul De Grauwe says the same that though Eurozone debt is lower than others, the problem lies elsewhere. He points debt levels have zoomed in private and household sector.

Muncahu says Germany problems are far more than indicated. He even says if true, Greece might be asked to bail out Germany!!

 I have heard credible reports suggesting that the underlying situation of the German Landesbanken is even worse than those estimates suggest. Last year, a story made the rounds in Germany, according to which a worst-case estimate would require write-offs in the region of €800bn – about a third of Germany’s annual GDP. If you were to add this to Germany’s public debt, you might jump to the conclusion that Greece should bail out Germany, not the other way round. While that is probably a little exaggerated, there are serious questions about whether the eurozone is still in a position to issue such massive guarantees.

So, given what happened to those subprime CDOs, what hypothetical rating should we then attach to that €440bn eurozone SPV? A triple A? 

 He ends saying:

I make no predictions here. But recent financial history teaches us that we must ask those questions and not blindly trust implausible promises, whether made by bankers or by politicians. I suspect that for as long as those Landesbanken and cajas stay unreformed, investors have good reason to treat the eurozone in the way they should have treated subprime CDOs.

Great stuff but quiet pessimistic as well.

How European crisis could impact India? Understanding the linkages…..

Though this has taken longer than I wanted, but here it goes. The analysis is still in a very crude form. Will try and refine it as it goes: (Warning: it is a very very long post)

Assorted Links

I think I need to start posts under this category once again.  The reading material just keeps piling up.

Learning lessons on investor protection from Brazil’s economic history!

Amazing things economic/business historians discover. Aldo Musacchio of HBS has written a book on Brazil’s financial market history – Experiments in Financial Democracy: Corporate Governance and Financial Development in Brazil, 1882-1950,

Here is an interview where  author discusses the findings:

Review of macroprudential instruments and frameworks

BIS has released a timely paper on the same:

Interesting Links, interviews and conferences

Here it goes:

An overview of global financial crisis and policies

Franklin Allen and  Elena Carletti have a useful overview of the financial crisis and policies.

Until Lehman Brothers’ bankruptcy in September 2008, the conventional wisdom was that the crisis was the result of problems in the financial sector. However, after the dramatic falls in industrial production in countries such as Japan and Germany starting in the last quarter of 2008, it became clear that the origins of the crisis were deeper. This paper argues that there was an economic crisis that was due to the bursting of a property and stock bubble in the US and a number of other countries. Just as in Japan in the 1990’s, this greatly affected the real economy. The problems in the financial system were a symptom rather than a cause, but there was a strong feedback effect into the real economy. The structure of the global financial system and the nature of banking regulation have been severely inadequate. The paper suggests reforms in the structure of the IMF, the governance of central banks and the form of banking regulation.

Much of its is known but you always get some new insights.

Importance of good supervision

In this paper, IMF economists point to the importance of financial supervisors saying no in good times. 

Redefining monetizing government debt

Daniel Thornton of St Louis Fed has an excellent note on the topic.

WPI Inflation April 2010 Update

I will try and share more of these updates on industry (see this industry update) and inflation.

WPI index increased from 250.8 in Mar’10 to 253.7 in Apr’10. This implied inflation for Mar’10 at 9.59% (y-o-y), higher than market expectations of 9.5%.  Inflation was higher as market participants expected a lower inflation in manufactured pro.ducts sub-sector (explained below). For the month of Feb’10, the inflation was revised upwards from 9.89% to 10.06%.

Industrial Production 2009-10 Update

IIP for Mar-10 was at 13.5% (y-o-y) lower than market expectations of 14.9% (Newswire 18, y-o-y). The figure for February was unchanged at 15.1%.

In Mar-10 the index is at 347.3, the highest in the time series since 1993-94. Though industrial activity has been picking up leading to rise in index, it is also because of year end. On an average, between February and Mar- the index rises by around 10-11%. However, it rose by 9% between Feb10 and Mar-10. The market analysts had expected growth between February-10 and Mar-10 to be around 10%, which results in a 14.9% year on year growth.

How policymakers seek advice?

I came across this fascinating paper from Norges Bank economists on factors affecting policymakers seeking advice. 

Could Rupee and Renminbi be an international currency?

RBI published a very useful staff study on the subject of international currencies. It is written by Rajiv Ranjan and Anand Prakash, economists at RBI. It is pretty short one also.

One major topic of reform is international monetary system. Within international monetary system, an important question is which currency should be used for international transactions? US Dollar rules the international transactions space for many years now but this crisis has shown the need to have an alternate currency. The study looks at whether Renminbi and Indian Rupee can serve as alternatives. More importantly it looks at all the economics of international currency.

How do cities allocate and reallocate labour?

Rubén Hernández-Murillo,and Christopher Martinek of St Louis Fed have a superb short note on the topic. They say US economy and employment has shifted from low skill to high skill.

Between January 1990 and January 2010, for example, employment in iron and steel mills manufacturing declined by about 57 percent, while employment in textiles and apparel manufacturing declined by about 50 percent and 82 percent, respectively. In contrast, over the same period, employment in professional and business services increased by 53 percent, education and health services by 80 percent, and leisure and hospitality services by 40 percent.

But we do not see same trends across cities.

How Iceland was shocked when IMF endorsed capital controls

Arnór Sighvatsson, Deputy Governor of the Central Bank of Iceland gives an interesting speech talking about the topic.