Eurozone crisis and its impact on Indian companies

The European Monetary Union was a moment of triumph for nations used to holding on to the coat tails of a superpower like the US. But in the rush to create a common currency, many potential trouble points were swept aside by nations basking in euro glory. The 2008 meltdown has exposed those fault lines. ET Intelligence Group reviews the impact of the crisis on Indian companies with significant exposure to Europe.

If you thought recent economic data emanating from the US was bad, look over to the other side of the Atlantic and you'll see things are a lot more worrisome there. And what's worse is that India Inc as a whole appears to have greater exposure to the euro zone than to the US going by our exports. As of March 2011, 10% of our total exports were to the US while 18% were to Europe.

When Winston Churchill called for a "United States of Europe" little did he think that this unification would be so disastrous!

In an effort to form a monetary union among European Union member states, the European Central Bank was established in 1999. Thereafter, a single currency - the euro - was introduced which replaced other regional currencies completely. Over time, several member states joined the exchange rate mechanism by bringing their currencies and monetary policies in line with the euro.

But when this single currency was created, it now appears that, the founding members had not fully taken into account the ramifications, if any, of uniting strong and weak countries alike. A crisis of the magnitude we are seeing today was not envisaged at that time, and therefore, no process for correction was evolved. As a result, all EU member countries find themselves in a mess today -regardless of the strength of their economies -as the stronger ones have no option but to keep bailing out the weaker ones.

All was well till the global economic crisis of 2008 showed that the fault lines in the over-leveraged economies of Europe - a result of weak governance - ran very deep.

By late 2009, Greece had announced that its budget deficit was actually 15.4% of its gross domestic product (GDP) - and not 3.7% as stated earlier. And by mid-2010, this shipping and tourism dependant economy had to seek help from fellow euro zone members and IMF to avoid default.

It soon became apparent that the budget deficits of Ireland, Spain, Portugal and Italy were also in the danger zone. Despite a string of bailout packages and a number of austerity plans from these beleaguered nations, the problems have only worsened.

Most European economies are growing at an extremely slow pace, if at all. Their banks continue to post losses and stock market declines persist. They not only have to deal with high fiscal deficits, but also with pension deficits as a result of an ageing population and low birth rates.

In Germany, the region's strongest economy, GDP growth fell from 4.6% in March to 2.8% in June. Consumer confidence dropped from 110 to 100 since January 2011. In France, GPD growth fell from 2.1% in March 2011 to 1.6% in June, and consumer spending in the manufacturing and retail sectors is also decelerating. In the United Kingdom, GDP growth declined from 4.7% in December 2010 to 4.6% in March 2011. Meanwhile, consumer confidence, industrial production and manufacturing have been rapidly declining.

In such an environment it becomes extremely difficult for businesses to run profitably. And it's not just European companies that will bear the brunt. There are a number of Indian companies that have significant exposure to Europe. If they haven't already been affected, earnings for these companies are likely to be impacted in the future. But the key question is to what extent?

NAME- DEEPAK KUMAR JHA

PGDM(3rd sem) 2010-12

Rupee rises from 2 year low, tracking euro rise; US Fed eyed

MUMBAI: The Indian rupee rose on Wednesday to pull back further from a two-year low touched in the previous session helped by a firm euro and domestic equities.

Traders said the outcome of the US Federal Reserve's two-day meeting which started Tuesday was keenly awaited as the Fed is expected to announce a rebalancing of its portfolio to help push longer-term interest rates lower and boost growth.

At 9:16 a.m., the partially convertible rupee was at 47.89/90 per dollar, stronger Tuesday's close of 48.05/06 when it had hit 48.24, a level last seen Sept. 25, 2009.

The euro was $1.3715, higher from $1.3682 at end of rupee trade on Tuesday, while the index of the dollar against six major currencies was 76.929 points from 77.105 previously.

The local benchmark share index was up more than 0.2 per cent in early trade after jumping more than 2 per cent on Tuesday
PRABHAKAR MANI
PGDM 3 SEM

New Delivery Architecture worth 3,00,000 crore a year is a game changer but faces many issues

A World Bank study released earlier this year enumerated the rot in Indian welfare programmes. About 91% of subsidised grain meant for the poor in Bihar never reached them. Only 32-51 % of the pensions for the elderly, destitute, widows and the disabled reached them.

These are holes that Finance Minister Pranab Mukherjee sought to plug in Budget 2011, when he announced that, in the coming years, all welfare benefits would be deposited into the bank accounts of beneficiaries, starting from June 2012.Seven months on, India's journey towards cash transfers is looking muddled. Too many players. Too many approaches. There is confusion and conflict at each of the four steps to cash transfers: identification, opening bank accounts, payments and transactions.

...and the New Delivery Architecture is Facing Many Issues

Step 1 IDENTIFICATION

Identify beneficiaries correctly Who is doing it? UID was asked to record biometrics for 200 million, National Population Registry for the remaining 1 billion What is the issue? UID wants to do all, by 2017, for 17,000 cr. So does the NPR, which could duplicate expenditure. Unwilling to wait till 2017, some ministries and states are launching their biometric programmes

Step 2 ACCESS

Give them bank accounts or equivalent Who is doing it? The RBI has told banks to open no-frill accounts. Telcos and payment-card companies are pitching for their alternative channels What is the issue? Banks are not keen on no-frill accounts, as they are not viable. And the RBI is not keen on the alternative channels, which also have their own problems

Step 3 PAYMENTS

Authenticate their identity and move the money to their accounts Who is doing it? UIDAI is developing software for both. Banks are moving to full connectivity with each other What is the issue? Accounts managed by banking correspondent (BC) firms for banks are not linked to the overall system. So, how will one know payment has been made to the right person?

Step 4 TRANSACTIONS

Enable them to access their bank accounts Who is doing it? Primarily BCs for now. Others like telcos and payment-card companies want in What is the issue? A village will have only one BC agent, giving him huge clout. Villagers don't have the choice to choose BCs. UIDAI wants a new system where villagers can access their accounts through any agent, any BC, any bank.

Identification issues: UIDAI, NPR and the growing list of identifiers

Ram Sewak Sharma, number two in the government organisation overseeing the national identity drive, cites a family incident to assert the importance of an ID. He comes from a village near Firozabad in Uttar Pradesh, whose government gives Rs 40,000 to a family in the event of its breadwinner's death.

When his cousin passed away, Sharma's sister-in-law received a cheque. But she could not encash it because she did not have a bank account. And she could not open one because she did not have any paper ID-no voter ID, no PAN, no ration card, nothing. "People feel the need for some identity document that is also valid across the country," he says.

The Unique Identification Authority of India (UIDAI), headed by Nandan Nilekani, was conceived to service this need. It would give every Indian a unique number called Aadhaar, which would supercede all existing numbers and forms of identification. After Finance Minister Pranab Mukherjee, in Budget 2011, announced cash transfers as the eventual model to distribute welfare benefits, the UID became the anchor point for this movement of cash: for money to go into the correct person's account, he or she, to start with, had to be identified correctly.

However, increasingly, other arms of the government, both at the Centre and in the states, want their own anchors. The ministry of rural development is planning pilots to test its biometric ID cards for National Rural Employment Guarantee Scheme (NREGS) workers. Orissa and Kerala are using smart cards of the national health programme to identify beneficiaries for other schemes.

The plan to allot UIDs to all Indians is showing scatter, putting under threat its adoption for all cash transfers.

PRABHAKAR MANI PGDM 3 SEM

finance news

Swiss franc edges up versus Euro as Greek anxiety rises

The Swiss franc ticked up against the euro on Monday due to mounting worries about Greece's debt mountain, in what could become the first real test of the Swiss National Bank's resolve not to let the franc appreciate past 1.20 per euro.

After the 'Swissie' gained some 20 percent against the common currency in the space of a few months, threatening to tip Switzerland into recession. With exports slumping and politicians warning of rising joblessness, on Sept. 6 the SNB announced it would set a ceiling on the franc.

There was little impetus for investors to test the SNB's resolve to defend its target last week as there was relatively little news about euro zone sovereign debts spooking investors last week.

But the euro dived to a seven-month low against the U.S. dollar and a 10-year trough versus the yen on Monday, on worries that the euro zone's support for Greece is wobbling and that the country may be forced to default on its debt.

Fears about a Greek default rose after senior politicians in German Chancellor Angela Merkel's centre-right coalition started talking openly about it.

The franc was trading slightly higher against the euro compared with the New York close, at 1.2058 per euro at 0907 GMT. It was marginally weaker against the dollar at 0.8883 per dollar.

"Increasingly tough talk from other European leaders towards Greece in the face of political tension from their own electorates has raised further fears that Greece will be unable, or unwilling to meet the requirements of the next bailout tranche, and thus lose funding, and ultimately default on its debt," Michael Hewson, market analyst at CMC Markets.

The SNB holds its quarterly monetary policy review on Sept. 15. According to a Reuters poll of analysts the SNB is expected to keep rates unchanged and to be able to defend its ceiling on the franc.


NITESH RANJAN
PGDM 3RD SEM

MCX gets SEBI approval for IPO: Spokesman

MUMBAI: The SEBI approved an initial public offering by Multi Commodity Exchange (MCX), the country's biggest commodity exchange, on Friday, its spokesman said on Monday.

MCX will sell 6.43 million shares constituting a 12.6 percent stake in the company through the IPO, its chairman had said in March.

Promoter Financial Technologies will sell a 5.18 percent stake, while State Bank of India will sell a 4.14 percent stake.

 

VIVEK KUMAR

PGDM - 3 rd sem

Rupee down 38 paise; over 1-year low against dollar

MUMBAI: The rupee today fell by 38 paise to trade at over one-year low level of Rs 46.94 against the US currency in early trade, amid weakness of the euro and other Asian currencies against dollar.

Dealers said a slide in the euro, which hit a six-month low against the US dollar and a lower opening in the domestic stock market mainly kept pressure on the rupee.

The rupee had tumbled by 37 paise to close at a fresh one-year low of Rs 46.56/57 against the American currency in the previous session on Friday due to a steep fall in local stocks amid a firm dollar overseas.

Meanwhile, the Bombay Stock Exchange benchmark Sensex fell by 287.27 points, or 1.70 per cent, to 16,579.70 in opening trade today.

 

ANIMA SINHA

PGDM 3rd Sem

Eurozone preparing for growing possibility of Greek default

PARIS: The resignation of the top German official at the European Central Bank could hardly have come at a worse time for euro zone policymakers as they grope for a way out of the deepest crisis in the single currency's 12-year history.

The ECB is the one institution that has kept the euro zone afloat in the sovereign debt crisis and prevented a bond market meltdown. The European Union has no federal government or common fiscal authority and speaks with many dissonant voices.

Juergen Stark's departure from the ECB's Executive Board in despair at the policy of buying government bonds to prevent the crisis spreading comes as policymakers in Berlin and beyond are preparing for the growing possibility of a Greek default.

It seems bound to complicate the next round of crisis management because it has injected the poison of inter-state politics as well as ideological division into the independent central bank. "It's the ECB that is holding the show together, so anything that weakens the ECB is bad news," said an EU official involved in financial crisis management.

Stark's walkout will further sap the ECB's credibility with Germany's conservative financial establishment, which saw the bond-buying as an improper means of financing government debt, and among voters in Europe's largest economy.

That could make greater fiscal integration in the euro zone politically harder to achieve at a time when Chancellor Angela Merkel is coming to realise that a big leap forward in economic governance is needed to preserve the single currency. It risks importing a north-south divide, between self-styled virtuous creditor countries and peripheral states seen as profligate and feckless, into the central bank.

At worst, Stark's departure may constrain the ECB's ability to act decisively in the coming months when the debt crisis enters an even more dangerous phase.

HAMSTRUNG

"This comes at a very, very bad time and it's certainly serious," said Jean Pisani-Ferry, director of the Bruegel economic think-tank in Brussels.

"If the ECB is shackled in its ability to buy Italian and Spanish bonds and at the same time we have to do a real restructuring of Greece's debts, with a proper haircut, we risk a contagion shock spreading to other countries. If the ECB is hamstrung by a lack of consensus, that is the risk."

A growing number of policymakers, as well as market economists, are convinced it is only a matter of time before Greece, which keeps falling behind on its fiscal targets, will have to default.

A source at this weekend's G7 finance chiefs' meeting in Marseille said the troika of EU, ECB and IMF inspectors, who suspended talks with Athens last week, would probably find a formula in its progress report to allow the next 8 billion euro ($11 million) tranche of bailout funds to be paid in October.

PRABHAKAR MANI PGDM 3 SEM