India: A (WTF) Downgrade

It was a bad day at the office for the Indian economy on the 9th of November, even if it was not one for the Indian cricketers at the Delhi Feroz Shah Kotla Maidan. Automobile sales plunged. Actually, that is not a bad thing actually. Check out Niranjan’s piece in MINT today (9th Nov.) on the imbalance between consumption and investment spending in India. Then you will see why one does not have to feel bad about plunging car sales in India.

Based on a Wikipedia entry, a friend sent me information that said Pakistan has the highest number of vehicles in the world running on compressed natural gas. Consequently, I would say the plunging auto sales in a country that is polluted by petrol and diesel vehicles (Is Delhi more or less polluted than Beijing?) is actually a good thing.

The day before, India’s trade deficit had widened to a 16 year record and today Moody’s downgraded the outlook for the Indian banking system from stable to negative.

That there are cyclical problems facing Indian banks is not in dispute. Government is pre-empting loan funds of the banking system and is not compensating the banks adequately. They are deprived of lending them to the private sector at higher rates of interest. Savings rates have been de-regulated. So, banks would compete and pay more for tapping people’s savings. Corporate profits are declining and hence bad debts provisioning will rise too. All this is known and India is paying the price for its transparency.

Its giant neighbour (China was never a neighbour to India throughout history and this is another topic for another occasion or it is better left to the likes of Acorn) to the North has an entirely State dominated banking system and an economy with even greater financial repression. It systematically under-counts and under-reports its bad debts. Those who dare to raise their voice are forced to withdraw their reports (E&Y in 2006).

Banks have large exposure to local governments who are dependent on land banks sales for their revenues. Banks have exposure to developers who want the prices of land banks to decline. Their apartment prices are dropping and transactions are plunging. So, we have no idea of the true health of Chinese banks or, for that matter, the whole economy. We will never have one.

Yet, on November 8th, Moody’s reaffirmed its ‘stable’ outlook for Chinese banks.

TGS would like to remind readers of a salient comment made by James Kynge in his column in FT on October 9th. We had blogged on it here. We reproduce his key sentence:

The pertinent question today is not whether China can once again guide the global economy away from the rocks but whether Beijing retains decisive control over its own economic levers. [Full article here]

The price India has paid for its relative transparency on its problems is a negative outlook. The more opaque it is, the higher the rating. That is why these agencies gave AAA ratings to CDOs, CDO-squared and to CDOs on CDOs.

One of my friends reminded me over the weekend that Italy’s troubles started after Moody’s decided to place Italy’s debt rating on review for possible downgrade. It was on June 17th. At that time, the 10-year Italian sovereign yield was 4.8%. Now, as I type this, it is 7.28%. In trying to anticipate contagion, Moody’s precipitated a contagion.

Let us now remind ourselves the role played by American financial institutions in helping European sovereigns hide their debt. Accessories to a crime are equally guilty. Interestingly, in this article in FT, Bernanke mentions an investigation into the role of Goldman Sachs in helping camouflaging its debt. This article is dated February 25, 2010! What happened to that investigation?

Whereas they did not follow the S&P on the downgrade of the US debt and they have retained the ‘stable’ rating for China banks, after expressing grave doubts on Chinese local government bad debt estimates.

What is going on here?

This post originally appeared at The Gold Standard and is reproduced with permission.

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