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Back From Holiday, With Notes…


Bangalore was fantastically refreshing, with mentionably better weather. Much  has happened in the last few days, so I’ll use this post to link-comment.

Europe was downgraded (WSJ) by S&P – France is no longer AAA, and Italy is BBB-, just above junk. Portugal is junk. Step back and think about this a bit: The US is no longer AAA, and their stock market, their bonds and their currency have only gone up. Nobody cares about what rating agencies think. The point they should have been downgraded was two years ago. Right now, the rating fellows are just saying “oh, ok, we also agree that there is a problem”.

The rating change in itself is not such a big deal. It would be if – and I say if – funds and banks were forced to buy only the top AAA rated assets, or if the assets became AA then they were forced to put up more collateral. The ECB is happy to accept anything as collateral if it has ink on it, so Portugal being junk means nothing – the ECB will still lend against Portuguese bonds. Funds that are forced to buy only AAA (like pension funds) will simply modify their mandate if so required, like they did when the US lost AAA. For the markets, this should not be a trigger.

The issue with Greece is more worrying (WSJ). Greece has a lot of bonds out there, and much of them are owned by the “private sector”. They were talking to the pvt. sector bondholders to voluntarily take a hit on the bonds so that Greece can pay back less than the face value, or restructure the debt with a longer maturity and a lower coupon interest rate. (They have a 14.6 billion euro payment on March 20) While the initial hit was supposed to be 50% – a verbal yes had been given by everyone then – it’s turned out that Greece is substantially deeper doo-doo than anyone thought, so they are looking for a near-70% hit for the bondholders. This is not acceptable “voluntarily” to the private sector. Big deal, you think, so it will be involuntary – they have to take that much because that’s all Greece has.

Not so fast. If the hit is involuntary, it triggers credit default swaps, which have been sold as credit insurance (bond holders who buy CDS get paid out 100 cents on the euro, instead of a “voluntary” haircut). CDS sellers are institutions that will be hurt REALLY badly if the CDS is triggers, and are levered entities like banks. Interestingly, as hedge funds buy up the outstanding bonds and then CDS, they are lesser likely to agree to a voluntary hit; the negotiations get even more complicated. To sort this out by March 20, there will need to be significant arm twisting.

In India, the Air India rescue effort required banks to convert 11,000 cr. of working cap to long term loans, and make 7,000 cr. into CRPS (Cumulative Redeemable Preference Shares), and provision around 10,000 cr. While RBI has blessed the SBI-Caps created restructuring proposal, this has scared off banks who feel that a) SBI (the bank) gets a better deal and b) The provisioning will kill their rating abroad. At nearly 2% of total bank capital, and the other big restructuring issues still to come – Kingfisher, GTL and so on – the AI deal will shine some light into how comfortable the banking system is with losses.

RBI has issued guidelines on compensation at banks; they’ve asked for “variable” pay limited to 70% fixed pay, clawback and malus in case bank performance deteriorates and so on.

Google, what were you thinking?  In a blog, Stefan Magdalinski, the CEO of Mocality, a business database in Kenya, unravels attempts by Google Kenya in association with Google India to steal business addresses off their database, including a sting operation that redirected requests from Google owned IPs to their own call center. (Google has apologized, but WTF)

I’m quoted in an article with Mahesh Murthy in a Business Standard piece on “Is Online Retail the next bubble waiting to pop?” This needs a detailed follow up, because it lost my entire chirpy twist that “bubbles are good, why are we complaining?”.

You want a long term gold chart? Zerohedge provides Goldman charts for gold from 1265 in Great Britain Pounds, properly adjusted.

Suze Orman recommends a “debit” card that charges $3 per month, and falsely claims it helps your credit score in the US. I don’t know enough of US products, but honestly, Indian cards are saintly in comparison!

John Mauldin: The End Of Europe?

Mark Cuban’s 12 Rules For Startups.

Schlep blindness by Paul Graham. This deserves a post with context. And I’m guilty.

What are you reading?


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