Xiamen, China BRICS 2017 Summit

Taken from our blog “Brink of economic thoughts”

Xiamen, China BRICS 2017 Summit

 

 

BRICS nations have gathered to attend the meet at Chinese city of Xiamen for the 2017 summit from 3rd -5th September. Given the uncertainty which is happening in the region due to Korean peninsula situation and sanctions on Russia by USA {as of interference in 2016 US presidential elections, Crimea and military operations in Eastern Europe}, BRICS was becoming a ground where it was expected that some new declarations will be made which will reshape the world.

BRICS as a block represents nearly 40 % population of the world. Also collectively 5 nations have total GDP of US$16.6 trillion, equivalent to 23 % of global GDP.World bank has estimated that the group nations will grow at a pace of 5.3 % for the year 2017.BRICS as a meet not only allows the nations to discuss multilateral issues, issues related to global economy and climate change, but along the side lines provides the opportunity to discuss bilateral issues.

History

BRICS has come a long way since its formation in 2009.Initially it had Brazil, Russia, India and China as the founding nations. By 2010 South Africa was also included into the group. So formally BRICS as an organisation was formed in 2011 intended to enhance economic, cultural and political ties.BRICS so far has not only formed a financial institution to counter west dominated IMF and World Bank, but also started financing the infrastructure projects in the nations.BRICS has come up with the Contingent Reserve arrangement and Payment system in 2015.BRICS was coined by Jim O Neil, paper  Goldman Sachs Asset Management,  in his research publication Building Better Global Economic BRICS.Currently many nations are willing to join the group, namely AfghanistanArgentinaIndonesiaMexico .While EgyptIranNigeriaSudanSyria  Bangladesh and Greece have also expressed interest in joining BRICS.

 

What importance does this meet hold?

 

This can be referred to the joint statement which has been released by the nations. The theme of the summit is “BRICS: Stronger Partnership for a Brighter Future”. It shows the resolve to share a common vision for the future development of the participating nations.BRICS leaders also praised the formation of New Development Bank (NDB) and the Contingent Reserve Arrangement (CRA), formulating the Strategy for BRICS Economic Partnership. Recalling the success of past summits it has been expected that nations will continue to participate with each other for people’s welfare.BRICS now believe that they have potential to lead towards a more  just and international economic order .Same way these nations expects that world will continue to operate to safeguard international peace based on the central role of United Nations.

Excessive focus has been made on mutual economic cooperation. BRICS have broadly agreed on encouraging and improving trade cooperation and investment cooperation mechanism among them. Nations agreed among the finance ministers and central bank governors about cooperation on Public Private Partnerships (PPP).It is also agreed to financially integrate the network of financial institutions, within the nation’s regulatory framework and WTO compliances. A understanding has been made to promote innovation, industrial cooperation, research development, BRICS energy cooperation, green development, environmental cooperation, agricultural cooperation, wildlife conservation assistance for African continent,anti corruption cooperation, more interaction for manufacturing, e-commerce and skill development, strong labour market information system, competition protection, trade facilitation, mutual respect for use of outer space for space activities, natural disaster management and risk mitigation, making and economic order which gives voice to emerging market and nations, reiteration  towards commitment to the implementation of the outcomes of G20 summits, to achieve a fair and modern global tax system .

The declaration also had points to clarify the BRICS stand on international security.BRICS committed to   enhance communication and cooperation on issues concerning international peace and security.BRICS reaffirmed commitment to the United Nations as the universal multilateral organization entrusted with the mandate for maintaining international peace. Concerns have been made about Terrorist attacks and organisation in the region.BRICS reaffirmed the commitment to fully implement the 2030 Agenda for Sustainable Development. Need of Reform in UNSC were made.

BRICS are looking forward to 2018 summit to be held at South Africa.

 

What is in it For India ?

 

Russia

 

 

Modi and Russian president met along the sidelines of the BRICS meet. Putin thanked Modi for India’s high-level participation at the Eastern Economic Forum, being held in Russia’s eastern port city of Vladivostok.

Both leaders discussed several aspects of bilateral issues in sectors like cooperation in the natural gas and oil sector

 

 

China

India has been having lots of issues related to trade ties with China. We have a huge trade imbalance with China, heavily in favour of China. Our borders have not yet been demarcated properly and local standoffs have been taking place. Use of Brahmaputra river has also become a issue of conflict between China and India due to construction of Zangmu dam and Lalho dam by China .Same way the issue of India’s inclusion to NSG have to be discussed. In the bilateral meet between Chinese premier Xi Jinping and Indian PM Narendra Modi, views were exchanged with regards to mutual cooperation, and non interference among member nations. Recall of Panchsheel to mutual respect for each others territorial integrity have been made.

As of now it seems that both nations have decided to move with mutual dialogue to resolve the issues given a fact that both nations are large and are bound to have differences. Indian PM and Chinese Premier bilateral meet can be considered forward looking to enhance mutual trade. Peace along the border is important .There is a difference in opinion in both nations’ media. Chinese media has considered Indian army troops move as forceful trespassing on Chinese land. But they never make mentions about Chinese excursion deep into Indian territories. Same way the pain of suffering of terrorist activities in India has to be understood.

Post border standoff between it was a meet that had to be successfully conducted. Nations expect the next decade to be golden decade for BRICS. We must look forward to more and more cooperation among the BRICS nation so as to benefit the populace of the emerging nations.

 

Harsh Vardhan Pathak.

 

 

 

 

 

 

 

 

New Development Bank-Its Indian projects

Taken from our blog,”Brink of economic thoughts”

New Development Bank-Its Indian projects

 

New Development bank was in news last week as of the approved projects in Indian state of Madhya Pradesh for infrastructure projects, to be exact about the district road up gradation projects. Just recently  New Development bank ,{which is a collective step of BRICS nation and has headquarters at Shanghai,China}and Government of India signed an agreement of loan provision for financing road up gradation worth 350 US $ in Indian state of Madhya Pradesh. This is going to be the first such project which is going to be financed by this new BRICS initiated financial institution in India. It holds very much significance for a nation like India since; we are also one among the founding members of the financial institution. Among the concerns which are raised about some form of competition among the NDB and various older institution existing like World Bank, IMF, or even upcoming institutions. This is a great development-centric declaration and move. Since its start various bodies have shown willingness to work with BRICS conceptualized bank. Obvious reasons indicate a fact that a population which is significant on planet cannot be neglected which is one among the fastest developing population Bloc.

This was one among the objectives of the formation of this new BRICS bank which was established in July 2014 .It had been one among the brainchild of BRICS leadership .It had been largely felt to have a need to a new financial group which could look after the capital needs of the BRICS nation and also generate the funds for infrastructure related projects.

 

Main objectives of the New development bank can be categorically summarized as to promote socially and environmentally sustainable projects ,{like way of issuance of green bonds} and also to enhance a multilateral collaboration with different global bodies in terms of generating projects which are fulfilling the requirements and providing growth momentum to the member countries.

 

We have seen till now the main  focus of NDB has been towards green financing. We also need to have  clarity about what exactly are green bonds and what significance do they hold in modern global economy, along with the challenges also posed in front of them.

Green Bonds are instruments in which the proceeds will be exclusively applied (either by specifying Use of Proceeds, Direct Project Exposure, or Securitization) towards new and existing Green Projects – defined here as projects and activities that promote climate or other environmental sustainability purposes.

There are 4 types of Green bonds

 

1-Green Use of Proceeds Bond

2-Green Use of Proceeds Revenue Bond

3-Green Project Bond

4-Green Securitized Bond.

 

 

New Development Bank has shown the interest in development of projects related to highways. Railways etc and funded promoting highest environment sustainability concern.

 

As of now the NDB has approved major 7 major projects in all the member nations.

 

In July 2016, NDB had successfully reported about issuance of bank’s first green financial bond with issue size of RMB 3 billion. The bond’s nominal interest rate stood at 3.07%. The bank became the first international financial institution that issued a green financial bond in the China onshore bond market.

 

 

Even in Indian markets, NDB plans to raise around 500 mn US $ via use of Masala Bonds {rupee denominated bonds}.Masala bond is a term used to refer to a financial instrument through which Indian entities can raise money from overseas markets in the rupee, not foreign currency. Indian spices have been popular all over the world since ancient times.  ‘Masala’ bonds reflect the Indian angle to it.

 

In other words, they are rupee-denominated bonds issued to overseas buyers. This is how it is different from other instruments.  Before Masala bonds, corporate had to depend on avenues such as External Commercial Borrowings (ECBs).

By issuing bonds in rupees, an Indian entity is shielded against the risk of currency fluctuation, typically associated with borrowing in foreign currency. 

The first masala bonds were issued by the International Finance Corporation (IFC), an arm of the World Bank, in the year 2013. Similar offerings from other countries have also been after the food or culture of that country like “dim sum” label for Chinese offshore issues or “Samurai” bonds for Japanese offshore issues.

 IFC was established in 1956 and owned by 184 member countries

As masala bonds are denominated in rupees, foreign investors will be taking the currency risk. So the key for the success of these bonds will be a stable exchange rate. Masala bonds are the first rupee bonds listed on the London Stock Exchange.

Owing to the needs which nation like Indian has had and vast diversities witnessed within our geographical stretches, we have to find the partners for our developing stories of our time. It will also be interesting to see the way in which NDB will later takes its shape in running profitable projects and also at same time addressing challenges faced.

 

 

HARSH VARDHAN PATHAK

 

email—–harshvardhanpathak88@gmail.com

US pulling out of Trans Pacific Partnership {TPP}

Taken from our blog,”Brinks of economic thoughts”

US pulling out of Trans Pacific Partnership {TPP}

 

{US has been witnessing many efforts to make changes in policies adopted during the time of Obama’s president ship. Obama had come up with Obamacare, an affordable health care act, which was intended to benefit nearly 25 million Americans. On Friday although Donald Trump did not succeed in removal, but he has been trying to alter the previous regimes policies. I am in this article trying to make a short note about USA’ s pulling from Trans Pacific Partnership}
US president Donald Trump had signed executive orders to pull out formally from negotiations for the process of Trans-Pacific Partnership. Had USA not pulled out of TPP trade deal, it would have been the world’s largest such deal in history. Protectionism can be argued. In a world which is now interrelated due to complex ties at economic and political level. Any of major or even minute steps do have their sets of repercussions. Globally we are seeing rise in sentiments, about ensuring that none of new steps must affect the benefits of local population.UK surprise exit from EURO union, or even Trump electoral win are an indication of rising dissatisfaction among the masses as of neo liberal policies which they seem to have affected their interest.

 

TPP was one among the major international trade initiatives taken by earlier US president Barrack Obama, so as to set new rules for trade in 21st century and bind the allies together to curtail the growing Chinese regional economic dominance.

It took nearly 5 years of series of thorough negotiations and discussions after which, TPP was signed by trade representatives in Feb 2016.But it had to be ratified by all of the individual countries.

TPP was conceived as an effective trade pact among the 12 pacific RIM nations,US,Japan,Malaysia,Vietnam,Singapore,Brunei,Australia,New Zealand,Canada,Mexico,Chile, and Peru. It was historically one among the most trend changing possible trade deals which could have been arrived at.

It intended to clearly slash the tariffs on most goods traded between countries which were participating in the deal. One of the interesting figures was that these nations are home for nearly 800 mn peoples, and also accounting for nearly 40 % of world’s trade. Ideally it could have created one unified market like EU.

While during the election campaign for US president ship in 2016, Trump had repeatedly referred to TPP as a “job killer” and a potential disaster” for the country. He had pointed it in one of his videos of US pulling out the moment he enters into the office. Trump had been contesting election on grounds of benefitting the nation’s economy, bringing jobs to USA.Many critics of the deal pointed to it “seeking fairer negotiations”.

 

It would have set new terms for trade and business investments among the nations, whose annual GDP stood as high as nearly 30 tn $.It also aimed to curtail the growing influence of China in the entire region. One of the independent studies conducted by a research think tank concluded that, Brack Obama wished to establish the “gold standard” of rules of the 21st Century. But it also had one shortcoming, as would have definitely resulted into increased US exports and imports, but not enhancements in US job figures.

China was also reluctant and very cautious of the development taking place. Had the deal come into practise, it would have straightway removed tariffs in full range of cases.Eg Japanese carmakers like Toyota, Nissan and Honda would have got cheaper access to US, one of their biggest export markets. Same way US vehicle exports would have found new markets if tariffs of close up to 70 % were slashed in countries like Vietnam and Malaysia, US farmers and poultry firms stood all chances to benefit, so did Vietnamese textiles goods.

There was immense discontent back in Trumps own constituency, TPP was looked as a reason for further job losses or stagnant wages, with many people already having discontent due to globalisation and trade agreements .

China looked up to TPP as a very suspicious move. It viewed it as a ploy by US to tighten its control over the region. Chinese media had sharply criticised the deal as “economic arm of US‘s geopolitical strategy to make sure that Washington rules supreme in the region”.

Many nations although still insist that they will move ahead even in absence of USA.

Same way we had seen Trump making comments about the H1B Visa program, which was used widely to hire cheap technology workers, who was widely believed to be taking jobs from US work force.

Any case, despite after USA pulling, the TPP cannot still be written off as nations still are willing to participate in it.

 

Harsh Vardhan Pathak

 

 

 

 

Eurozone Financial Crisis-An anatomy of the crisis

This has been taken from our blog”Brinks of economic thoughts”

 

Eurozone financial crisis-An Anatomy of the Crisis

[This was one of assessment of eurozone financial crisis and it was also used by my then instructor MR Siba Sankar Mohanty in his website Lok katha. Although it was the times of Greek bailout and given that last year we saw unexpected BREXIT,this article is little irrelevant. But this was among the old blogs which I had written.]

 

 

 

Euro as a common currency was introduced in 1999.Unified interest rates post euro’s introduction allowed members to borrow heavily .Bonds which were issued by southern countries were considered to be equally safe as the ones issued by nation like Germany. Nations like Greece, Italy & Spain lie in southern Europe.

We can relate crisis of US sub –prime mortgage market which further got transmitted to European nations. Easy availability of money encouraged a debt –fuelled boom in PIGS nation which witnessed real estate growth on unprecedented scale.

 

 

US housing prices peaked in late 2006, whereas   European housing prices did peak a year later.

We all are aware of the manner in which financial crisis  did  strike  US  from  later part of 2007 & start of 2008 when Bear Sterns ,Fannie Mae were taken over by US government.

 

Later in month of September, we saw Lehmann Brothers filing for bankruptcy, which triggered financial crisis globally. Sub-prime debt obligations made in US held around the world caused global financial shock & worldwide housing bubble bursted in UK, Spain, Ireland as well as US.

 

American International Group required 180 billion $ bailout to cover CDS[Credit Default Swaps],insurance against bond defaults underwritten without reserves. Stress on banks around the world led to shrinkage in availability of credit.US government however released bailout packages of 700 billion $,then 800 billion $ & then 847 billion $,There was a significant  decline in exports of nations worldwide as US imports dropped.

 

It was conceived that Euro as a currency  would compete effectively with American $ and Chinese Yuan [RMB].However this aura of invincibility did not sustain.

 

Before formation of Euro , European leaders agreed to limit borrowings to just 3 % of their economies total output. This was expected that at least nations in Eurozone will not be accumulating too much debt..However in later years [Euro was formed in 1999], nations did not stick to the rule.

 

Germany, Italy & France , these nations started breaking rule of 3 %.IF we compare nations struck with crisis ,we will find that Spain’s government had smallest debts relative to size of its economy.

 

Greece had its own  wayward  ways on which it moved. Role of rating agencies such as Goldman Sachs did come under heavy scrutiny after the revelation that it artificially manipulated financial status of Greek  government  &  presented a nice image of Greek economy. Goldman Sachs had been deeply involved in covering up the Greek government’s mismanagement of its state budget & finances .IN 2001, after induction of Greece to European union  , Goldman Sachs helped the government quietly borrow billions.

 

Fact remain that birth of Euro came with an original  sin . Nation like Greece entered monetary union with bigger deficits than the ones permitted under the treaty that permitted common currency. Greek government is  blamed  as rather reducing spending ,it artificially reduced its deficits with derivatives.

 

Germany must have been under immense trouble as of its reckless borrowings , however that did not turn out to be the case. Germany had transformed its economy into an export power–house. It was exporting more to the rest of world than imports. And it had an excess of cash on its exports .Germany has been considered safe market ,with investors willing to lend even at historically low level[Germany 10 years bonds yield is merely 1.5%,,whereas as of now yield on Spainish bonds has been often crossing 7 %,,,which is considered unbearable level for a government to repay].This is not same with rest of European nations.

 

In late 2009, new Greek government found that its predecessor lied about its borrowing,& were running under huge debts. This revelation provoked  a drastic loss in investor’s confidence, spreading nervousness,, who started pulling their money out of the country 7 demanded punitive interest rates on its debt.

There were serious threats of sovereigns debt-default,& to avoid  it EU-IMF approved a 3 year emergency 146 billion $ credit line to Athens in May 2010.Investors had started turning to economies of Portugal, & Spain, but even losses as of bursting up of housing bubble saw nations like Ireland, Portugal & Spain seeking bailout packages.

 

EFSF [European Financial Stability Facility] was constituted in May,2010,intending to provide loans to countries in financial difficulties,& financial recapitalisation of financial institutions through loans to government. EFSF had a capacity to lend 440 billion euro.

 

This was supposed to be increased but then major nations of Europe saw a bifurcation of opinion among masses , like in Germany as majority of it would be provided by Germany & German masses were reluctant to allow German government to pay for it.

 

European financial institutions were under stress.,

 

  • BNP-Paribas was forced to close funds in August 2007.

 

  • German banks IKB ,West LB,& Saschen LB were bailed out by the government.

 

 

  • Irish banks were given government deposit guarantees.

 

European central Bank injected liquidity into European banks,& did not lower interest rates  until October 2008, as of it’s focus to curb on inflation.

EU approved additional 157 billion $ package in July,& parliament adopted strict austerity measures. Now Greece’s debt/GDP ratio had reached 115% in 2009.Greece’s government found itself in dilemma after it received bailout package .Greek government had to increase sales taxes ,reduce public sector salaries ,pensions ,elimination of bonuses ,reduction in minimum wages, liberalisation of labour laws which allows employers to increase working hours.

 

These strict measures have led to a deep contraction in growth , which has only further undermined confidence. Country received a second bailout of 130 billion euro from EU & IMF last  year. There were possibilities of Greece even exiting from Euro. Greece received 130 billion euro from IMF & other eurozone members , but it had to abide a condition that it will reach a deal with it’s existing private  sectors lenders to reduce it’s debts. This would be done through a swap of old bonds with newly issued bonds that would be worth a lot less & pay less interest. Private owners will take 53.5% nominal loss on Greek debt which will work out to be 74%.This way Greece will be able to wipe half of it’s debt of 485 billion euro.  Total aims are to reduce Greek government total indebtedness from 160% of GDP now to 120.5% by 2020.

WE can however learn few things from it about Euro.

 

European governments did try to act together , but did not successfully implement it. There was a limited impact of falling exports due to extensive internal trade relationships. And Greece as of now is facing difficult adjustment problems ,as European are avoiding losses on Greek bonds.

 

 

 

 

[SOURCE,,THIS WAS WRITTEN BY ME IN 2012 LAST PARTS,,LAST MONTHS,,,THIS HAS BEEN USED IN MY TEACHERS WEBSITE MR.SIBA SANKAR MOHANTY WEBSITE ”LOK KATHA”WITH NAME OF ‘’AN ANATOMY OF GREEK CRISIS’’..I AM USING ONLY THAT ARTICLE WHICH ACTUALLY HAD BEEN ASKED TO SUBMIT AS AN SUBJECT ASSIGNMENT WHEN WE WERE STUDYING PUBLIC ECONOMICS..DURING 3RD SEMESTER WHEN WE WERE STUDYING PUBLIC FINANCE]

I HAD USED NEWS FROM ONLINE AS MAJOR SOURCE,,,AND THEN ARTICLES FROM MAGAZINES,,,TRYING TO ENSURE THAT I CAN WRITE INCIDENCES PROPERLY,,,]

 

THANKS,]

harsh vardhan pathak

doon university

 

A note on outright monetary transaction carried out by ECB in 2012..

This has been taken from our blog ;Brinks of economic thoughts”

A note on outright monetary transaction carried out by ECB in 2012..

 

OUTRIGHT MONETARY TRANSACTION.

SOURCE..

 

[during the peak of euro zone crisis,,we saw many efforts made by strong economies to get the stuck economies of PIGS out of the mess….this was one such attempt…conducted by ECB…

there were times when yields on 10 years bond were touching 7 % ,,which is in  a way considered punitive charges by lenders…there were serious doubts about capabilities of nations to repay back the debts…

we witnessed trouble withing euro zone nations too…Germans were many a times reluctant to help and fund for the discipline lack in conduct of financial matters in south European nations…which was main center of euro crisis…

German have carved their economy into a strong exporting powerhouse,,thus attaining them exports surplus..they have strongest economy in europe…

OMT was effort by ECB to buy the bonds so as to ensure that rates on them do fall,,,,,and normalcy is restored…]

BBC NEWS,,,ECB OFFICIAL WEBSITE FOR PRESS RELEASE.]

 

 

 

 

Outright Monetary Transactions (OMTs)

 

 

INTRODUCTION,,AND DEFINITION

 

The term used for the European Central Bank’s programme of buying government bonds with maturities of between one and three years with the aim of reducing a specific country’s borrowing costs. OMTs were only triggered if a country had applied to the European Financial Stability Facility or European Stability Mechanism for financial assistance and were conditional on a government putting in place financial reforms approved by eurozone financial authorities and monitored by the International Monetary Fund.

 

 

 

EUROPEAN CENTRAL BANK APPROVED IT..

 

Mario Draghi, president of the European Central Bank, had unveiled details of a new bond-buying plan aimed at easing the eurozone’s debt crisis in 2012,September. The ECB aimed to cut the borrowing costs of debt-burdened eurozone members by buying their bonds. ECB’s actions came in response to eurozone economic contraction in 2012, with continued weakness which was likely to continue into 2013. It was  insisted that the ECB was “strictly within our mandate” of maintaining financial stability, but reiterated the need for governments to continue with their deficit reduction plans and labour market reforms.

 

 

 

OMTs were only to be carried out in conjunction with European Financial Stability Facility or European Stability Mechanism programmes.

In other words, countries had to request a bailout before the OMTs are triggered.

 

The maturities of the bonds being purchased was to be between one and three years and there was to be no limits on the size of bond purchases.

 

 

 

IMMEDIATE REACTION IN THE BOND MARKETS AND SHARE MARKETS

 

 

The Spanish government raised 3.5bn euros on the debt markets, selling bonds due to mature in 2014, 2015 and 2016.

 

The implied cost of borrowing over two years fell from 4.71% to 2.80%; the three-year rate went from 5.09% to 3.68%; and the four-year borrowing cost fell from 5.97% to 4.60%.

 

On the secondary market, where government bonds already in circulation are traded by banks and other financial institutions, the yield on 10-year bonds fell below 6%. In recent months[during 2012 september], yields had topped 7%, the level at which Ireland, Portugal and Greece had been forced to seek international bailouts.

 

The yield on Italian 10-year bonds also fell.

Investors in European companies also appeared upbeat about the plan. European stock markets closed up.

 

The FTSE 100 ended 2.1% higher; the German Dax, 2.9%; the French Cac 40 index, 3.1%; and the Spanish IBEX, 4.9% at the close.

 

Bank shares in particular rose sharply, as they stand to lose billions of euros should any eurozone government default on its debts as a consequence of the crisis.

 

French banks Credit Agricole and Societe Generale both closed up 8%, while in Germany, Deutsche Bank rose 7% and Commerzbank, 5%. In London, Lloyds banking group rose 7%.

 

POLITICAL RISK AND  GLOBAL THREATS…

 

 

Jens Weidmann, president of Germany’s Bundesbank, remained vigorously opposed to the ECB’s plan, concerned that member states could become hooked on central bank aid and fail to reform their economies sufficiently.

 

But the majority of the 23 ECB council members support the plan.

And the Organization for Economic Co-operation and Development (OECD) added its support for the ECB bond-buying plan on Thursday, as it warned that the eurozone crisis posed the greatest risk to the global economy.

 

 

 

PRESS RELEASE[FROM ECB]

6 September 2012 – Technical features of Outright Monetary Transactions

 

 

As announced on 2 August 2012, the Governing Council of the European Central Bank (ECB) has today taken decisions on a number of technical features regarding the Eurosystem’s outright transactions in secondary sovereign bond markets that aim at safeguarding an appropriate monetary policy transmission and the singleness of the monetary policy. These will be known as Outright Monetary Transactions (OMTs) and will be conducted within the following framework:

 

 

Conditionality

 

A necessary condition for Outright Monetary Transactions is strict and effective conditionality attached to an appropriate European Financial Stability Facility/European Stability Mechanism (EFSF/ESM) programme. Such programmes can take the form of a full EFSF/ESM macroeconomic adjustment programme or a precautionary programme (Enhanced Conditions Credit Line), provided that they include the possibility of EFSF/ESM primary market purchases. The involvement of the IMF shall also be sought for the design of the country-specific conditionality and the monitoring of such a programme.

 

 

The Governing Council will consider Outright Monetary Transactions to the extent that they are warranted from a monetary policy perspective as long as programme conditionality is fully respected, and terminate them once their objectives are achieved or when there is non-compliance with the macroeconomic adjustment or precautionary programme.

 

Following a thorough assessment, the Governing Council will decide on the start, continuation and suspension of Outright Monetary Transactions in full discretion and acting in accordance with its monetary policy mandate.

 

Coverage

 

Outright Monetary Transactions will be considered for future cases of EFSF/ESM macroeconomic adjustment programmes or precautionary programmes as specified above. They may also be considered for Member States currently under a macroeconomic adjustment programme when they will be regaining bond market access.

 

Transactions will be focused on the shorter part of the yield curve, and in particular on sovereign bonds with a maturity of between one and three years.

 

No ex ante quantitative limits are set on the size of Outright Monetary Transactions.

Creditor treatment

 

The Eurosystem intends to clarify in the legal act concerning Outright Monetary Transactions that it accepts the same (pari passu) treatment as private or other creditors with respect to bonds issued by euro area countries and purchased by the Eurosystem through Outright Monetary Transactions, in accordance with the terms of such bonds.

 

Sterilisation

 

The liquidity created through Outright Monetary Transactions will be fully sterilised.

 

Transparency

 

Aggregate Outright Monetary Transaction holdings and their market values will be published on a weekly basis. Publication of the average duration of Outright Monetary Transaction holdings and the breakdown by country will take place on a monthly basis.

 

Securities Markets Programme

 

Following today’s decision on Outright Monetary Transactions, the Securities Markets Programme (SMP) is herewith terminated. The liquidity injected through the SMP will continue to be absorbed as in the past, and the existing securities in the SMP portfolio will be held to maturity.

 

FEW ONLINE VIEWS

 

 

 

‘’New proposal is different from the ECB’s previous bond-buying programme in important ways.

 

The bank accumulated more than 200bn euros in bonds issued by Greece, Ireland, Portugal, Italy and Spain under its Securities Market Programme, but those purchases were always described as limited, and they were never accompanied by any formal conditions.

 

The OMT, on the other hand, is described by Mr Draghi as potentially unlimited in size.

Countries will first have to apply for assistance to eurozone bail-out funds, and they will have to agree to ‘strict and effective’ monitoring of efforts to reform their economies.

 

Ideally, the ECB would like the International Monetary Fund to be involved in that process too, and the Fund says it is ready to co-operate.

It all begins to sound like ‘bail-out lite’ – and it puts the ball firmly in the court of political leaders like Mariano Rajoy in Spain and – a little further down the line – Mario Monti in Italy.

 

They will have to decide whether they want more intrusive external surveillance of their economies – something they have been keen to avoid.’’

 

ASSIGNMENT ON OUTRIGHT MONETARY TRANSACTIION [OMT]

FOR

ECO. OF BANKING

BY

HARSH VARDHAN PATHAK SSEI-09

MSC INTEGRATED ECONOMICS

5TH SEMESTER

USA Sub Prime Mortgaze crisis 2008

This has been taken from our blog’Brinks of economic Thoughts”

USA SUB PRIME MORTGAGE CRISIS,,2008

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university

 

sources 

 

‘It is believed that someone who has experienced near to death re-evaluates his priorities and values in life”

 

joseph stiglitz freefall

 

i had lots of memories of 2008 crisis,, me just sitting lone at home,,,who was  watching that oil prices are jumping 147 $ a barrel,,,just thenn saw lehmann brothers collapsing,,,and read in hindi news paper about details of crisis,,,

shrinking of Japanese economy,,,USA bailout,,indian rbi measures to inject nearly 1.75 lakhs cr in markets,,,,just to enhance demand,,[reminder of keynesian economics,,,increase demand]…

 

 

sources,,,

 

”freefall” joseph stiglitz,,,

 

”time for a visible hand-lesson from 2008 crisis”]

 

 

RECESSION OF 2008[SUB PRIME MORTGAGE CRISIS]

 

 

Sub prime mortgaze crisis  had been affecting USAs bank from 2006 itself,,,by 2008 start Bear sterns had suffered and was turned out to be a casuality…same was case with Freddie mac and Fannie Mae.

By September 2008,,we saw giant like Lehmann brothers collapsing,,,same was with Meryll lynch,,Wachovia,,and many prominent banks of USA,,,what transpired in USA did shock the entire world markets,,and lead to meltdown in global economy..

 

We saw Japanese economy shrinking for 2 consecutive quarters,,,in later part 0f 2008,,,we saw USAs government releasing bail out packages,,,Citigroup was to about to be bifurcated…

 

What were the main causes,,that has been discussed here..

 

Many factors contributed to the 2008 problem, including lax regulations and a flood of liquidity. There were incentives for providing misleading information and conflicts of interest. Two additional elements were present: incentives for excessive risk-taking and fraudulent behaviour (a problem that played an important role in the savings and loans, S&L, debacle).5 Perhaps more important though than these perverse incentives was a failure in modelling: a failure to understand the economics of securitization and the nature of systemic risk.

 

 

Few reason for crisis..

 

Incentive problem

 

Executives compensation system

 

Executive compensation schemes (combined with accounting regulations) encourage the provision of misleading information. Executives that are paid with stock options have an incentive to increase the market value of shares, and this may be more easily done by increasing reported income than byincreasing true profits.

 

Though the Sarbanes-Oxley Act of 2002 fixed some of

the problems that were uncovered in the Enron and related scandals, it did

nothing about stock options. With stock options not being expensed, shareholders often were not fully apprised of their cost. This provides strong incentives to pay exorbitant compensation through stock options.

 

-INCENTIVES FOR ACCOUNTING FIRMS

 

-SECURITISATION

 

-RATING AGENCY INCENTIVES

 

-NEW CONFLICTS OF INTEREST AND A NEW CULTURE:

REPEAL OF GLASS-STEAGALL

 

 

-THE BERNANKE-GREENSPAN PUT AND MORAL HAZARD

-CREATING A CREDIT FREEZE

 

-TRANSPARENCY AND COMPLEXITY

 

-INCENTIVES—AND OPPORTUNITIES—FOR FRAUD

 

-REGULATORY AND ACCOUNTING

ARBITRAGE,,MISPRICING RISK AND EXCESSIVE LEVERAGE

 

-Modeling Problems

 

-FAILING TO UNDERSTAND DIVERSIFICATION

DETECTING PONZI SCHEMES

 

INTELLECTUAL INCOHERENCE

 

The failure of the financial system to perform its essential functions:

 

  • Housing Price Bubble and Collapse.
  • Financial Market Freeze and Collapse.
  • US Housing Bubble created by
  • Low interest rates
  • Lax regulation of sub-prime mortgages with adjustable rates, two year teaser rates
  • Securitization of  mortgages, sold to unwary buyers as highly rated
  • US Bubble popped when
  • Interest rates rose in 2006, housing prices fell
  • Subprime mortgages and securities defaulted
  • Subprime Debt Obligations made in USA held around the world caused global financial shock.
  • Failure of Lehman Bros in September 2007 caused massive panic over counterparty risk. AIG required $180 billion bailout to cover Credit Default Swaps, insurance against bond defaults underwritten without reserves.

 

  • COURSE OF THE CRISIS

 

  • MORTGAGE CRISIS.

 

  • COLLAPSE OF COMMERCIAL REAL ESTATE

 

  • BANKING CRISIS

 

  • DECLINING VALUE OF EURO.

 

Few steps and suggestions to correct that crisis

 

It is believed that someone who has experienced near to death re-evaluates his priorities and values in life. There was a completer need to reform the economics and check the innovation economics. Something which can be referred as ‘’reform economics’’. There was need felt for efficient markets and markets with proper information.

 

We need to ensure that our resources are properly allocated, and we must shape our values properly, it is more about moral decline, and lack of peoples who take responsibility.

 

There were a series of financial sectors reform

 

A  strong and independent financial product safety commission to protect ordinary Americans against rampant abuses prevalent in the industry.

A systematic regulator who sees the system as whole.

 

Curbs  on excessive risk sharing.

 

Curbs  on derivatives.

 

Few things from this USA crisis later on transpired some effect to Euro zone crisis..

 

 

harsh vardhan pathak

msc integrated economics

doon university