euro-zone crisis: Greece, Ireland and Portugal should restructure their debts now

• It is a measure of European politicians’ capacity for self-delusion that Angela Merkel, Germany’s chancellor, called the euro-zone summit on March 24th-25th a “big step forward” in solving the region’s debt crisis. Something between a fudge and a failure would be more accurate. The leaders fell short on almost every task they set themselves. They agreed on a “permanent” rescue mechanism to be introduced in 2013, but couldn’t fund it properly, because Mrs Merkel refused to put up money her finance minister had pledged. The Brussels gathering did little to help Greece, Ireland and Portugal, the zone’s most troubled economies. Their situation is getting worse—and Europe’s leaders bear much of the blame.
• Portugal’s prime minister resigned on March 23rd after failing to win support for the fourth austerity package in a year. The country’s credit rating was slashed to near-junk status on March 29th, while ten-year bond yields have risen above 8% as investors fear Portugal will have to turn to the European Union and the IMF for loans. The economies of both Greece and Ireland, Europe’s two “rescued” countries, are shrinking faster than expected, and bond yields, at almost 13% for Greece and over 10% for Ireland, remain stubbornly high. Investors plainly don’t believe the rescues will work.
• They are right. These economies are on an unsustainable course, but not for lack of effort by their governments. Greece and Ireland have made heroic budget cuts. Greece is trying hard to free up its rigid economy. Portugal has lagged in scrapping stifling rules, but its fiscal tightening is bold. In all three places the outlook is darkening in large part because of mistakes made in Brussels, Frankfurt and Berlin.
• At the EU’s insistence, the peripherals’ priority is to slash their budget deficits regardless of the consequences on growth. But as austerity drags down output, their enormous debts—expected to peak at 160% of GDP for Greece, 125% for Ireland and 100% for Portugal—look ever more unpayable, so bond yields stay high. The result is a downward spiral.
• As if that were not enough, the European Central Bank in Frankfurt seems set on raising interest rates on April 7th, which will strengthen the euro and further undermine the peripherals’ efforts to become more competitive . Some politicians are still pushing daft demands, such as forcing Ireland to raise its corporate tax rate, which would block its best route to growth. Most pernicious, though, is the perverse logic of the euro zone’s rescue mechanisms. Europe’s leaders won’t hear of debt reduction now, but insist that any country requiring help from 2013 may then need to have its debt restructured and that new official lending will take priority over bondholders. The risk that investors could face a haircut in two years’ time keeps yields high today, which in turn blights the rescue plans.
• This newspaper has argued that Greece, Ireland and Portugal need their debt burdens cut sooner rather than later.That case is stronger than ever, not only because today’s approach is failing but because the risks of restructuring are falling. The spectre of contagion is receding. Spain, whose bond yields have fallen and whose spreads with Germany have tightened, has distanced itself from Portugal. Behind the scenes, sovereign-debt specialists are devising ways to minimise the impact of an “orderly restructuring” on banks. Most banks in the core of the euro zone can withstand a hit from the three small peripherals.
• The big obstacle is not technical but political. Since many at Europe’s core, particularly the ECB, remain implacably opposed to debt restructuring, the pressure has to come from elsewhere—not least from the peripheral economies themselves. Ireland’s new government is talking about forcing the senior bondholders of its bust banks to take a hit. Greece should stop pretending that it can bear its current debt burden and push for restructuring. But the best hope lies with the IMF. Its economists have the most experience of debt crises. Some privately acknowledge that debt restructuring is ultimately inevitable. It is time the Fund’s top brass said so publicly and, by refusing to lend more without a deal on debt, pushed Europe’s pusillanimous politicians into doing the right thing.

15 points were less in overall sensex

• The markets were quite volatile today and both the benchmark indices closed flat. Textile, brokerage, midcap banks and sugar remained the star performers of today’s trade and infra stocks also registered strong buying. The Sensex closed at 19687, down 15 points from its previous close, and Nifty shut shop at 5910, up 2 points.
• From the Sensex stocks on the losing side, Tata Power declined by 1.77 per cent, M&M (1.49 %), HUL (1.45 %), L&T (1.34 %), HDFC (1.03 %), Bajaj Auto (1.02 %), REL Infra (1 %), ICICI Bank (0.83 %), RIL (0.47 %) and ITC (0.38 %).However, gainers were Sterlite Ind rose by 2.83 %, REL Com (2.79 %), TCS (2.30 %), Tata Motors (2.04 %), BHEL (1.64 %), Hero Honda (1.61 %) and SBI (1.14 %).Among sectoral indices, BSE-CD firmed up 1.72 per cent, BSE-Metal by 1.33 per cent and BSE-Realty by 0.74 per cent.
• The total market breadth remained strong as 1,985 stocks closed in the green, while 994 ended in the red on the BSE. The total turnover improved further to Rs 3,698.77 crore from Rs 3,212.45 crore yesterday.
• The Indian rupee raced to a five-month high on Tuesday, the first trading session of the new fiscal year, driven by robust dollar inflows, but gains were capped by weakness in most regional peers.
• High oil prices have raised concerns about a higher subsidy bill for the government, inflationary pressures and high interest rates, marketmen said.
• For May delivery, crude oil settled yesterday at the highest level since September 22, 2008 and was close to USD 109 a barrel in New York.
• Selling in heavyweights like L&T, ICICI Bank, HDFC, RIL, M&M, HUL, Tata Power and ITC weighed on the market.
• A recent increase in U.S. inflation is driven primarily by rising commodity prices globally, and is unlikely to persist, Federal Reserve Chairman Ben Bernanke said on Monday.
• The Supreme Court lifted a ban on iron ore shipments from Karnataka on Tuesday, freeing up about a quarter of supplies from the world’s third-largest exporter as strong demand from China keeps prices firm.
• The United States will hit the legal limit on its ability to borrow no later than May 16, Treasury Secretary Timothy Geithner said on Monday, ramping up pressure on Congress to act to avoid a debt default.
• Had there not been a rise in TCS, Tata Motors, SBI, Sterlite Ind and BHEL, the fall in the Sensex would have been much more pronounced.
• “The subdued price action in today’s session was in sync with the lacklustre global cues as investors turned a little wary over rising crude oil prices,” said Amar Ambani, Head of Research (India Private Clients) – IIFL.
• Portugal’s biggest banks will stop buying government bonds and are urging the caretaker administration to seek a short-term loan to secure financing until a June 5 election, business daily Jornal de Negocios reported on Tuesday.
• In Asian markets, China, Hong Kong and Taiwan were closed for public holiday. The key indices from Japan ended down by 1.06 per cent, although Singapore and South Korean markets finished better.
• European stocks, however, were trading lower in their mid-sessions. The CAC was down 0.61 per cent, the DAX and the FTSE by 0.31 per cent each.
• The prospect of a good winter harvest is likely to bring down food inflation in India to about 8 percent by end-March, a senior government adviser said on Monday.
• Sales of small cars raced ahead in March as buyers flocked to more fuel-efficient vehicles, a trend major U.S. automakers expect to persist if gasoline prices continue to rise.
• The United States will hit the legal limit on its ability to borrow no later than May 16, Treasury Secretary Timothy Geithner said on Monday, ramping up pressure on Congress to act to avoid a debt default.
• U.S. inflation is likely to remain low for now, but policymakers will keep a close eye on potentially self-fulfilling consumer expectations for higher prices, a top Federal Reserve official said.
• Japan’s nuclear crisis is likely to lead to one of the country’s largest and most complex ever set of claims for civil damages, handing a huge bill to the fiscally strained government and debt-laden plant operator, Tokyo Electric Power Co.
• Credit rating agency Fitch downgraded Portugal on Friday saying the debt-laden country needed a bailout, while rival agency S&P cut Ireland’s rating after bank stress tests revealed another black hole.
• Nasdaq OMX and IntercontinentalExchange bid $11.3 billion for NYSE Euronext in an effort to trump Deutsche Boerse’s deal, and pushed their case with an appeal to U.S. patriotism.
• European banks heavily supported by the U.S. Federal Reserve at the height of the financial crisis have since weaned themselves off these loans, even as the struggle for funding in Europe gets tougher.
• Standard & Poor’s stripped Ireland of its last major ‘A’ rating on Friday, citing future risks to bondholders, but the 1 notch cut and stable outlook was less severe than feared and gave the thumbs up to the state’s bank bill.

Growth of tail risk ,hedging of investors interest

• “TAIL-RISK” hedging was the talk of Wall Street in 2008 after global markets nosedived and traumatised investors tried to figure out how they could protect themselves from extreme or “black swan” events—those well outside an ordinary distribution of outcomes—that cause massive losses. Interest is revving up again as revolutions in the Middle East and Japan’s earthquake have destabilised markets and increased volatility, leaving battered investors searching anew for protection.
• Peddlers of tail-risk products like to compare them to insurance: investors pay premiums every year to avoid financial catastrophe later. Some even get philosophical. Vineer Bhansali of PIMCO, a big fund manager, has likened tail risk to Pascal’s wager—the argument that you’re better off believing in God than suffering the consequences of being wrong. The same is true with drastic dives in markets.
• Tail risk is technically defined as a higher-than-expected risk of an investment moving more than three standard deviations away from the mean. For mere mortals, it has come to signify any big downward move in a portfolio’s value. There are different ways to hedge tail risk, but a popular one is to create a basket of derivatives that will perform poorly during normal market conditions but soar when markets plunge. These include options on a variety of asset classes, such as equity indices and credit-default-swap indices.
• Some banks have started to sell tail-risk products. Deutsche Bank has created the ELVIS index, which generates returns when stockmarket volatility increases. Big asset managers like BlackRock and PIMCO have made a business of advising customers on managing for the worst case. Hedge funds have also got in on the act. Several “tail funds”, which invest in assets that should rise in bad economic times, have started up in the past few years. These funds tend to lose around 15% each year when the market is normal but can return 50-100% when the market dives. Or more: 36 South, a hedge fund, saw its tail fund gain 234% in 2008. According to Gaurav Tejwani of Pine River, which launched a tail-risk fund last year that now manages over $200m, “It costs money in most good years or average years, but it makes you a fairly large return when all your other assets are performing very poorly.”
• Sellers naturally claim it is worth the cost. Mr Bhansali of PIMCO, which offers several tail funds, estimates that it costs investors between 0.5% and 1% of assets to hedge against tail risk, but that investors will break even in three to five years. That is partly because the market does not have to crash in the way that it did in 2008 for hedges to pay their way. PIMCO now oversees around $30 billion in tail-risk products, mostly in separate accounts. Other funds have also seen inflows. Take, for example, Universa Investments, a tail fund advised by Nassim Taleb, author of “The Black Swan”, which has grown from $300m in 2007 to around $6 billion today.
• Even so, Mark Spitznagel, the boss of Universa, complains about complacency among investors. Demand is very uneven. The price of hedging varies, rising when markets are volatile and investors most need it, and declining during bull markets. It is difficult, after all, to keep stomaching losses from hedged positions as markets rise: “The kids outside playing in the snow without sweaters and scarves seemed to have much more fun than those of us who were bundled up,” says Steven Englander of Citigroup.

economic and financial indicators:overview

• Corruption is dreadful in India, as shown by a current “season of scams”—over mobile-phone licences, the Commonwealth games and more. Politicians, notably the ruling Congress party, are now feeling the public’s ire. Worries have also grown that graft is scaring away foreign businesses.
• Circumstantial evidence points that way. A spokesman for a big Western firm mutters into his cappuccino about a recent High Court decision, which if upheld would cost his company billions. It was so strange, he says, it could be explained only by judicial graft. A representative of a British media firm, SIS Live, which broadcast the Commonwealth games from Delhi, in October, is furious—along with other contractors—at being left millions of pounds out of pocket because, he says, payments have been frozen by investigators digging up evidence of corruption at the event.
• Across the board, surveys regularly tell how graft is an unusually heavy tax on Indian business. An annual one published on March 23rd by PERC, a Shanghai-based consultancy, shows investors are more negative than they were five years ago. Of 16 mostly Asian countries assessed, India now ranks the fourth-most-corrupt, in the eyes of 1,725 businessmen questioned. Being considered worse than China or Vietnam is bad enough; being lumped with the likes of Cambodia looks embarrassing.
• Outsiders may get an exaggerated view. India’s democracy, with a nosy press and opposition, helps to trumpet its scams and scandals, more than happens in, say, China. Yet locals tell similar tales. A cabinet minister frets that there is so much ghotala(fiddling), “it tells the world we are all corrupt. It may be a dampener to investment.” Others agree. KPMG this month reported on 100 bosses who were asked about their own experience of graft. One in three said it did deter long-term investment.
• Judging how much difference it makes is tricky. Right now, investors may be spooked as much by the fight against graft as by the corruption itself. Arpinder Singh of Ernst & Young in Mumbai says foreigners, especially those with some connection to America, increasingly hire firms like his to help them comply with America’s Foreign Corrupt Practices Act. Once a foreigner holds more than about 5-10% equity in an Indian firm, it is seen as having some responsibility for how it is run.
• Now even Indian firms, if they want to raise money abroad, or if their bosses want to protect their own professional reputations, are doing the same. As other countries, such as Britain, bring in tough anti-graft laws like America’s, the trend will continue. Yet many Indian firms still fail to comply with higher standards, so deals falter. Mr Singh ticks off a list, “in infrastructure, ports, toll roads, irrigation, microfinance”, of deals he has worked on that collapsed over “governance problems”.
• None of this is enough to prove that graft, alone, is scaring off business. Pranab Mukherjee, the finance minister, insists there is no correlation between corruption and foreign direct investment (FDI). Jeffrey Immelt, the boss of GE, in Delhi last week, cheerily agreed, insisting that a fast-growing market trumps all other concerns.
• But something is keeping investors wary. In 2010 the country drew just $24 billion in FDI, down by nearly a third on the year before, and barely a quarter of China’s tally. There is no shortage of other discouragements: high inflation, bureaucracy, disputes over land ownership, and limits on foreign ownership in some industries.
• Even so, India is home to an unusually pernicious form of corruption, argues Jahangir Aziz of JPMorgan. Elsewhere graft may be a fairly efficient way to do business: investors who pay bribes in China may at least be confident of what they will get in return. In India, however, too many crooked officials demand cash but fail to deliver their side of the bargain. Uncertainty, not just the cost of the “graft tax”, may be the biggest deterrent of all.

investors have gone off India

• Corruption is dreadful in India, as shown by a current “season of scams”—over mobile-phone licences, the Commonwealth games and more. Politicians, notably the ruling Congress party, are now feeling the public’s ire. Worries have also grown that graft is scaring away foreign businesses.
• Circumstantial evidence points that way. A spokesman for a big Western firm mutters into his cappuccino about a recent High Court decision, which if upheld would cost his company billions. It was so strange, he says, it could be explained only by judicial graft. A representative of a British media firm, SIS Live, which broadcast the Commonwealth games from Delhi, in October, is furious—along with other contractors—at being left millions of pounds out of pocket because, he says, payments have been frozen by investigators digging up evidence of corruption at the event.
• Across the board, surveys regularly tell how graft is an unusually heavy tax on Indian business. An annual one published on March 23rd by PERC, a Shanghai-based consultancy, shows investors are more negative than they were five years ago. Of 16 mostly Asian countries assessed, India now ranks the fourth-most-corrupt, in the eyes of 1,725 businessmen questioned. Being considered worse than China or Vietnam is bad enough; being lumped with the likes of Cambodia looks embarrassing.
• Outsiders may get an exaggerated view. India’s democracy, with a nosy press and opposition, helps to trumpet its scams and scandals, more than happens in, say, China. Yet locals tell similar tales. A cabinet minister frets that there is so much ghotala(fiddling), “it tells the world we are all corrupt. It may be a dampener to investment.” Others agree. KPMG this month reported on 100 bosses who were asked about their own experience of graft. One in three said it did deter long-term investment.
• Judging how much difference it makes is tricky. Right now, investors may be spooked as much by the fight against graft as by the corruption itself. Arpinder Singh of Ernst & Young in Mumbai says foreigners, especially those with some connection to America, increasingly hire firms like his to help them comply with America’s Foreign Corrupt Practices Act. Once a foreigner holds more than about 5-10% equity in an Indian firm, it is seen as having some responsibility for how it is run.
• Now even Indian firms, if they want to raise money abroad, or if their bosses want to protect their own professional reputations, are doing the same. As other countries, such as Britain, bring in tough anti-graft laws like America’s, the trend will continue. Yet many Indian firms still fail to comply with higher standards, so deals falter. Mr Singh ticks off a list, “in infrastructure, ports, toll roads, irrigation, microfinance”, of deals he has worked on that collapsed over “governance problems”.
• None of this is enough to prove that graft, alone, is scaring off business. Pranab Mukherjee, the finance minister, insists there is no correlation between corruption and foreign direct investment (FDI). Jeffrey Immelt, the boss of GE, in Delhi last week, cheerily agreed, insisting that a fast-growing market trumps all other concerns.
• But something is keeping investors wary. In 2010 the country drew just $24 billion in FDI, down by nearly a third on the year before, and barely a quarter of China’s tally. There is no shortage of other discouragements: high inflation, bureaucracy, disputes over land ownership, and limits on foreign ownership in some industries.
• Even so, India is home to an unusually pernicious form of corruption, argues Jahangir Aziz of JPMorgan. Elsewhere graft may be a fairly efficient way to do business: investors who pay bribes in China may at least be confident of what they will get in return. In India, however, too many crooked officials demand cash but fail to deliver their side of the bargain. Uncertainty, not just the cost of the “graft tax”, may be the biggest deterrent of all.

living dangerously in this year too

• This was supposed to be a stress-free year for the global economy. By January the financial crisis had faded and Europe’s sovereign-debt crisis seemed less acute. America’s economy was resurgent. Investors piled into equities and sold some of the government bonds they’d bought for troubled times. If there was a worry, it was that emerging economies would grow too quickly, inflating commodity prices.
• The year without crisis is not to be. First, Arabian upheaval put oil markets on edge. Then earthquake, tsunami and a nuclear accident clobbered the world’s third-largest economy. How much of a setback to growth do these twin crises represent? And how should economic policymakers react to them?
• Japan’s share of world output has been shrinking for decades, but at 9% it remains large enough for the hit to the country’s growth to subtract noticeably from global output. Then there are the ripple effects on the rest of the world. Japan is a large—in some cases the sole—supplier of intermediate goods to the world’s electronics and automotive industries, from the hardened glass on Apple’s iPad to gearboxes in Volkswagens. Many makers of such parts have had to slow or halt shipments because of damaged roads, power cuts or the loss of components from their own suppliers. The effects have spread well beyond Japan, causing shutdowns from South Korea to Spain. Still, the history of such disasters is that much of that lost production is eventually recovered and reconstruction delivers a fillip to subsequent growth.
• Pinpointing the impact of Arab political turmoil is complicated by the fact that oil prices were already rising thanks to a brighter global economic outlook. Nonetheless, a good portion of this year’s 25% increase seems due to worries over supplies. A rule of thumb holds that a 10% increase in the price of oil trims 0.2 percentage points from global growth. At the start of the year, the world looked likely to grow by 4-4.5%. A crude estimate is that the two crises will subtract between a quarter and half a percentage point from that.
• That may not capture the full effect. Crises by their nature generate clouds of uncertainty . Businesses postpone capital spending and hiring until the clouds clear. Investors seek the safety of bonds and lose their taste for equities.
• Economic policymakers can’t make peace between Arab rulers and their people or stabilise Japan’s nuclear reactors, but they can minimise the collateral damage. The greatest burden is on the Bank of Japan. Its efforts to cure deflation over the past 15 years have too often been timid. That could not be said of its rapid response to the tsunami. It poured cash into the banking system in a pre-emptive strike against panic hoarding. And it expanded its purchases of government and corporate debt and equities. Still more “quantitative easing” can keep bond yields from rising as the government borrows for reconstruction, and help the fight against deflation.
• What should the rest of the world do? In a show of sympathy the G7 joined the Bank of Japan in selling the yen after it spiked dramatically. Such actions should be limited, however. Japan is too dependent on exports and its priority should be stimulating domestic demand and ending deflation, not cheapening the yen. A better way for outsiders to help is to ensure that concerns over radiation in Japanese products do not become an excuse for protectionism.
• Other central banks face a more complicated task. Even as higher oil prices and hobbled Japanese production reduce growth they add to mounting inflation risks (Britain is now fretting over inflation of 4.4%). But most rich-world economies have ample economic slack, and in several countries fiscal tightening will tug at recovery. Britain’s coalition government has reaffirmed its commitment to austerity with this week’s budget , and America has begun to cut spending. Both the Bank of England and the Federal Reserve should resist the temptation to tighten soon.
• The European Central Bank seems intent on raising interest rates next month. That would be a mistake. In the euro zone underlying inflation and wage growth are both subdued and inflation expectations are under control. By raising rates the ECB would strengthen the euro and frustrate the efforts of countries like Greece, Ireland and—the next in line for bailing out—Portugal to grow their way out of their debts.
• There is only so much economic policymakers can do about crises that spring from war or nature. In this case, the priority should be not making matters worse.

china is now happy

• The pursuit of happiness, runs one of the most consequential sentences ever penned, is an unalienable right. That Jeffersonian sentiment seems to have influenced even China’s normally strait-laced, rubber-stamp legislature, the National People’s Congress (NPC), which has just wrapped up its annual session. Increasing happiness, officials now insist, is more important than increasing GDP. A new five-year plan adopted at the meeting has been hailed as a blueprint for a “happy China”. The prime minister, Wen Jiabao, however, appeared downright miserable as he described the challenges he faces.
• At the end of the ten-day meeting, Mr Wen told journalists that his remaining two years in office would be “no easier” than the preceding eight. Keeping the “tiger” of inflation in its cage would be hard enough, he said (the NPC approved a target of 4% this year, compared with inflation of nearly 5% in February). But corruption was the “greatest danger”. A few days before the session began, the railways minister, Liu Zhijun, had been dismissed in connection with a huge bribe-taking scandal.
• The five-year plan called for 7% annual average growth in GDP between now and 2015, compared with a far-exceeded target of 7.5% set in 2006-10. Mr Wen said lowering growth without raising unemployment would be an “extremely big test”. But, he said, China had to change its pattern of economic growth, because it was (using a hallmark phrase) “unbalanced, unco-ordinated and unsustainable”.
• The idea of promoting happiness spread over the country like a huge grin early this year when provincial governments began laying out their own five-year plans. Guangdong province declared it would become “happy Guangdong”. Beijing (which is a province-level administration) said it wanted its citizens to lead “happy and glorious lives”. Chongqing municipality, another province-level area, said it wanted its people to be among the happiest in the country. Officials now often talk of setting up “happiness indices” by which government performance should be judged.
• The word’s popularity among bureaucrats is more an attempt to please leaders in Beijing and show sympathy for the less well-off than a sign of any real determination to change their ways. Many lower-level governments have continued to set investment-driven GDP-growth targets that are far higher than Mr Wen’s. Some of his goals, such as building another 36m subsidised homes by 2015, will require the co-operation of local governments. They are adept at evading such tasks.
• Mr Wen does not see political freedom as having much to do with happiness. In August last year he raised hopes among some liberal-minded intellectuals when he made a flurry of statements about the importance of political reform. Since then, the repression of dissidents has been stepped up. Dozens have been rounded up or put under surveillance in order to prevent them from responding to anonymous internet-circulated calls for an Arab-style “jasmine revolution” in China. To deter any protests, police security during the NPC was even heavier than usual.
• At his press conference, Mr Wen repeated some of the language he had used last August on the need for political reform. This included a warning that China’s economic gains could be wiped out if the country failed to reform politically. He also said people needed to be able to “criticise and supervise” the government. But he offered no guide to how this should happen, and stressed the need for change to be “gradual”, “orderly” and “under the leadership of the party”. He said it would be wrong to draw comparison between the situations in the Middle East and north Africa and that of China.
• The NPC’s chairman, Wu Bangguo, went further, telling delegates that the country faced an “abyss of internal disorder” if it strayed from the “correct political orientation”. He also declared China had achieved its goal of setting up a “socialist legal system with Chinese characteristics”. The Communist Party said in 1997 that it would do this by 2010, but never made it clear how progress would be assessed. China’s struggling band of independent lawyers, who are often spurned by courts and harassed by police for trying to defend victims of official wrongdoing, are probably not celebrating.
• The government’s crackdown on dissent apparently includes a strengthening of China’s internet firewall to make it more difficult to use software to evade blocks on sensitive foreign websites. Some websites in China recently carried a report that 11% of respondents to an opinion poll believed national happiness is boosted when they express themselves freely on the internet. If only they could