Wednesday, November 16, 2011

GDP Growth Cuts Intensify

Macquarie Research has cut its 2012-13 GDP forecast to 6.9% from 7.9% citing lack of policy reforms and lagged impact of monetary policy tightening
The knives are out and they are chopping economic growth forecasts. Each day brings more news which confirms the trend of a slowing economy. The fact that economic growth will slow down in the current financial year and the government will miss its fiscal deficit target is a no-brainer.

Now, the pundits are gazing still further into the future. The picture they see is gloomier. Macquarie Research has cut its 2012-13 GDP forecast to 6.9% from 7.9% citing lack of policy reforms and lagged impact of monetary policy tightening.

Tanvee Gupta Jain of Macquarie said in a note: Incorporating the lack of policy reforms and the lagged impact of monetary tightening in the context of a continued weak global economic environment, we are now downgrading our FY13 GDP growth forecast to 6.9% from 7.9% ‘with downside risks’ estimated earlier. While the global environment is likely to remain uncertain, we believe domestic factors will dominate the growth outlook.

Macquarie is not the only one. Ambit Capital on 17 October has cut its next year GDP growth forecast to 6.2% from an earlier estimate of 7.2%.

Ritika Mankar of Ambit Capital said in a note: We are cutting our GDP growth forecast … as the persistence of macroeconomic uncertainty translates into weak investment demand growth which in turn affects industrial sector growth and services sector growth.

Note that economists are shying away from cutting current year forecasts. Motilal Oswal in its report dated 11 November has downgraded the current year GDP growth estimate to 7.2% from 7.6% earlier. BNP Paribas has sounded even more pessimistic. It expects the economy to witness ‘hardish landing.’

Richard Iley of BNP Paribas said in a note: While any marked improvement in WPI inflation is still a few months away, the latest activity data confirms that our long-held expectation for a hardish landing for the economy is now materialising. Given our forecast for a US recession and stagnation in the euro zone, GDP growth looks on course to drop below 7% in the coming quarters.

Richard Iley adds further: The risk is that the RBI’s revised growth projection is still too optimistic. Our GDP forecasts have been well below consensus since at least early summer. Current targets are for growth of just 7.2% for 2011-12 and 7.1% for 2012-13.

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Wednesday, November 16, 2011 by ESG-Network ·


Tuesday, November 15, 2011

EU Curbs CDS Trading

EU parliament gives final approval to short-selling law. European Commission to debate sovereign ratings “blackouts”
The European Union pushed ahead with its regulatory crackdown on Tuesday by giving the green light to curbs on trading sovereign-debt related derivatives at the heart of the euro zone crisis.

The bloc’s financial services chief Michel Barnier will also unveil a measure at 1400 GMT to inject competition into the credit ratings sector dominated by the Big Three: Standard & Poor’s, Moody’s and Fitch Ratings.

Many EU policymakers are keen to push ahead with the new rules, saying a ratings downgrade of Greek sovereign debt in 2010 made it more expensive and harder to mount the country’s first bailout package.

The mistaken downgrade by S&P of France’s banking industry system will reinforce the EU’s determination to regulate agencies more closely, Barnier said last week.

The draft law, part of a broad regulatory push prompted by the financial crisis, will propose a temporary “blackout” on sovereign debt ratings in exceptional circumstances.

The “blackouts” element has proved divisive, and Barnier was due to meet with fellow European commissioners at 1200 GMT to thrash out its scope in the draft law as member states like Britain mount a last - minute effort to scrap the provision.

EU states and the European Parliament, which is meeting in Strasbourg this week, will have the final say on the measure, with some changes likely.


Parliament on Tuesday voted by 507 to 25 in favour of an EU law that restrict “naked” or uncovered selling of shares and sovereign debt. This refers to when a seller has made no prior arrangements to borrow the security.

EU states have already given the nod to the law, which was jointly agreed with parliament and is due to take effect within a year.

It also bans naked sovereign credit default swaps (CDS), where there is no ownership of the underlying government debt the CDS contract “insures” against default.

Policymakers want to crack down on what they see as speculation by hedge funds and others betting on falls in euro zone bond prices.

“The parliament has successfully fought for very strict conditions for short-selling to contain destructive speculation. The new transparency rules will help stabilise financial markets,” Markus Ferber, a German member of parliament’s centre-right party, said.

The draft law on ratings agencies, the EU’s third measure to regulate the industry since the financial crisis began in 2007, will avoid trying to create an EU answer to the US dominance of the sector.

Instead, it will seek to inject more competition by requiring users of ratings, such as companies and banks, to “rotate” or switch agencies on a regular basis so that some of the 10 or so smaller agencies registered in Europe, such as Euler Hermes​, can pick up more business.

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Tuesday, November 15, 2011 by ESG-Network ·


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