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Contents

Who is to blame for this mess?


Why Germany is as much cause of crisis as Greece An ugly day ahead for Sensex: Blame it on Greece So you think the euro crisis is over? Think again Greece govt is sinking, taking your money down with it Kiss the year-end rally goodbye as Greek plan injects uncertainty till 2012 04 06 07 10 13

The referendum: What will the people of Greece decide?


If Greeks say @#$%&!^$#@ to austerity, the eurozone is over Why bankers, brokers and bet hedgers dont like democracy 16 19

What the experts said

Saving eurozone: Devalue the euro, slash rates to zero, says Roubini 23 High rates can destabilise capital flows. Stiglitz explains why 25

The long negotiation

Welcome aboard the slow train to Eurogeddon Saving Europe: EU, banks reach deal to lower Greek debt

28 31

Indias part more growth than assistance


India has few coins to throw in the Euro-Greek bowl Why India is the only game in town

36 38

Chapter 1

Who is to blame for this mess?

Why Germany is as much cause of crisis as Greece


R Jagannathan Nov 2, 2011

Global economics has a strange binary logic of heroes and villains. We worship the countries with
riches and surpluses, and disdain those with excess borrowings and budget deficits. We eulogise countries with strong, macho currencies, and despise those with weak, wimpish ones. The truth, however, lies somewhere in between. Surpluses and deficits are actually mirror images of each other. Just as you cannot borrow without someone to lend to you, it takes two (or more) to lend and borrow. If you borrow unwisely and ruin yourself, it is only because there is someone who is lending unwisely and pretends he is god. Lets illustrate this with an example: If the Swiss franc is appreciating and the euro falling, does it mean Switzerland is doing something right and the eurozone something wrong? Actually, it means both are doing something wrong. The Swiss have to do something to depreciate their currency, and the eurozone something to strengthen the euro. If Europe has to tighten its belt, the Swiss must loosen them. If both dont work at it jointly, the outcome can only be skewed. The Greek arrow that has been shot at the heart of the eurozones rescue package will destroy the half-false story that the Americans and the European PIIGS (Portugal, Ireland, Italy, Greece and Spain) are the villains in the current global economic crisis because they have been living beyond their means while the Germans and Chinese are saints because they are virtuous savers and investors. The markets are tumbling all over because Greek Prime Minister George Papandreou has announced that he will hold a referendum to endorse the extreme austerity package proposed by the stingy Germans to throw them a rescue line. The referendum will effectively kill the package, for two reasons. By the time it is held it will be a couple of months. Europe cannot wait for so long to get its house in order. Moreover, the chances are the Greeks will reject unending austerity. This is why the markets look at the referendum with horror. Attempts are now being made to paint Greece as the villain, but the truth is the Germans are greater villains. They seem to have learnt nothing from their own travails between the two world wars and are now doing enormous damage.

Between the two world wars, Germany was overburdened with World War I reparations, and hyperinflation. Despite this, Germany wants to burden Greece with the kind of austerity that it itself revolted against. The unemployment and hyperinflation of the 1930s gave rise to Hitler. Does Germany want a new form of intolerance to rise in Greece and the other PIIGS? Germanys second sin is that it is trying to think in narrow nationalistic terms (we have to protect our banks, our markets) instead of manfully shouldering its wider responsibilities to the eurozone. After all, it is the biggest beneficiary of the euro project. If you dont believe this, one set of figures should explain why: even as total unemployment in the eurozone crosses double-digits (its over 16 percent in Greece and over 21 percent in Spain), Germanys unemployment has fallen below 6 percent. So who has gained most from the euro? If we accept that Germany is the prime beneficiary of the euro (over half its exports go to the eurozone), it has to carry the can for rescuing the currency and the zone, not Greece or the rest of the PIIGS. Normal human logic says the strong must protect the weak not the other way around. But Germany has unfairly put the burden on the hapless Greeks and is now facing the prospect of a disorderly default or Greek crashout from the eurozone. The same applies to China (and Japan, to a lesser extent) the worlds biggest holders of surplus dollars. If the US has been living beyond its means, it is because China has been lending it money and this is well known. And China lent it money because it wanted to export more. It did over the last two decades (1990-2010) what the Japanese did in the 30 years before that during (19601990). It has salted away $3.2 trillion dollars in foreign exchange surpluses, and it is time to spend it. The solution to the worlds problem lies equally between austerity by the over-borrowers and overspenders and spending by the worlds over-savers and exporters. The burden of adjustment cannot be borne just by the weaker economies. As Ambrose Evans-Pritchard writes in The Telegraph: The Greek referendum has left officials in Paris, Berlin and Brussels speechless with ragebut at least the Greeks are stripping away the selfserving claims of the creditor-states that their rescue loan packages are to save Greece. They are nothing of the sort. Greece has been subjected to the greatest fiscal squeeze ever attempted in a modern industrial state without any offsetting monetary stimulus or devaluation Ditto for China. The US economy (or, for that matter, the European or Indian economies) cannot move towards better budgetary and external balances without an appreciation of the Chinese yuan and compensating Chinese investment in eurozone bonds and the US and Indian economies. It also has to buy more from the world. Ditto for the Japanese. The trillions of dollars they have salted away will turn to dust if they are not invested in deficit nations including India, which imports twice as much as it exports to China. The key to solving the global economic crises lies with Germany, China and Japan sharing the bulk of the pains of adjustment. If they dont, Germany and China the two big exporters to the eurozone and the world should be seen as the new axis of economic evil. Both helped create the US and eurozone crises by lending unwise money to their importers (the US and the rest of the eurozone), and thus helped create the crisis. It is their job to solve it.

An ugly day ahead for Sensex: Blame it on Greece


Venky Vembu Nov 2, 2011

Another brutal day coming up for the Sensex, and its all about faraway Greece.
Heres what happened overnight. The Greek prime minister is standing firmly by his bombshell announcement calling for a referendum on the eurozone deal of last week, which will impose severe austerity measures on Greece to tackle its sky-high debt. The news has the potential to accelerate the break-up of the eurozone if Greeks vote against the deal and the country is forced to default. Stock market Thats still a lot of ifs, but the consequences of such an event would be catastrophic for the monetary union and for global financial markets. Germany and France are in overdrive trying to avert such an outcome, but so far the Greek prime minister is unyielding, and claims the whole Cabinet backs the measure. On the other hand, the Greek ruling party is facing a revolt within its ranks, which could bring down the government. That could just about avert a referendum, but bring in political uncertainty, which is just as bad. So, any way you look at it, Greece is on a slippery slope to an inevitable default. That prospect unnerved stock markets in Europe and Wall Street overnight. And this morning, its dragging down indices across the board in Asia. As at 7.30 am, its a sea of red from Japan to Australia to Seoul to Hong Kong to ShanghaiNifty futures are also down in early trades, and although curiously theyre bouncing back from a low, theyre still under water. So, strap up for a rough and volatile day of trade. Listen to the podcast

So you think the euro crisis is over? Think again


Venky Vembu Oct 27, 2011
kills for his promotion, playfully lays down the new crisis management strategy at work.

In a scene in the thriller flick Shock to the System, Michael Caine, playing the ad executive who

Whoa, lets not all panic, he says, bantering with a few colleagues. You, you and you panic the rest stay calm. Over the past three years, the eurozone and the US have likewise taken it in turns to deliver shocks to the global economic system and spread panic around the world. Over the past few weeks, in the run-up to this mornings dramatic announcement in Brussels of a deal to save the world, it was the turn of the European economies to set off alarm bells that were heard all the way from Brussels to Bombay. No commentary on even the Indian stock market was complete without a ritualistic invocation of the crisis in Europe. On a good day, when there seemed the promise of something like a deal (even if it wouldnt have amounted to much), Mumbai joined the relief rally that was set off around the world. And on days when the entire European monetary union, which had been stuck together with bubble gum and tied up with strings, threatened to fall apart, Mumbai got the blues as well. Which is why in recent weeks, US leaders from Barack Obama to Tim Geithner were wagging their fingers from across the pond and urging European leaders to act to avert a catastrophe. Heck, even Prime Minister Manmohan Singh, whose own command over the Indian economy is in doubt, found his voice and piped up to ask Europe and other advanced economies to prevent a slide into recession. Only in America But barely a few months earlier, at the height of the debt ceiling showdown in Washington, it was perverse politicking in the US that set off panic attacks and fears of a meltdown of the global financial markets. At that time, European leaders, watching from afar, shook their heads and muttered

under their breath: Only in America After this mornings deal in Brussels, the markets and analysts have been quick to proclaim the end of the eurozone crisis. Stocks in Asian markets are up, and so are index futures on Wall Street. (A few commentators have seemingly invoked the Michael Caine theory of Serial Panic Attacks to note that with European problems out of the way, it may be time to start worrying about the US debt crisis, particularly since Washington is no nearer to addressing its long-term debt burden.) Yet, for all the short-term euphoria of markets today, Europes debt crisis is far from resolved. Much of the good cheer seems to spring from three critical details of the deal, which are based on flawed premises. The first relates to the provision that private holders of Greek bonds (mostly European banks) will take a 50 percent haircut as the price for their folly and therefore lower Greeces unsustainable debt burden and avert the risk of a Greek default, which in turn would have dragged down the entire eurozone. The numbers mirage As commentators have been quick to point out out, that 50 percent number is something of a mirage. The actual writedown , if one factors in all the missing pieces, is only about 28 percent and that includes cuts for pension funds, which in turn will pass on the pain to pensioners, setting off another round of social unrest. Secondly, a 50 percent haircut for creditors would, in the estimation of analysts, be considered a credit event which is code for default, which would have the effect of triggering those dreaded credit default swap contracts. In the absence of adequate safety nets, it would trigger concerns on financial stability and potentially set off bank runs (since even Greek financial institutions and banks, which hold Greek bonds, would have to take the losses) and perhaps enhance the scope for contagion. A third pillar of todays deal is on very shaky ground. This relates to the provision that the European bailout fund the ESFS would be leveraged up by invoking insurance tools and acquire sufficient firepower (of over 1 trillion euro) to buy bonds in the primary and secondary markets and to recapitalise banks. But the precise nature of the leveraging mechanism is a little opaque: the text of the agreement speaks of maximising the funding arrangements of the EFSF with a combination of resources from private and public financial institutions and investors, which can be arranged through Special Purpose Vehicles. What isnt immediately clear is where the funds for the Special Purpose Vehicle will come from: those details must await a meeting of the Eurozone finance ministers in November. The general assumption is that the funds will come from the IMF and from sovereign wealth funds and from emerging economies. French President Nicholas Sarkozy is working the hotline to Beijing today, counting on cash-rich China to pitch in. But, as weve noted earlier on Firstpost, China has thus far been unwilling to loosen its pursestrings. The notion that a middle-income country, which has enormous debt problems of its own, should bail out rich and developed economies isnt an easy sell in China, particularly in a year leading up to a leadership change. Considering the dollar trap that China finds itself in, investing in euro bonds would be tantamount to throwing good money after bad. The only count on which such a proposal fits in with Chinas own needs is that it would serve Chinas mercantilist mission of

keeping its currency undervalued relative to the euro, which is one of its biggest export markets. The big story Lastly, todays deal only serves to calm frayed nerves for the moment: it does not address the underlying structural issues that peripheral countries including Italy and Spain face. No one has any idea how these economies will grow sustainably. Nor is it clear that they will summon up the political will to even implement these difficult austerity decisions they have committed themselves to. Put all these together, and todays blockbuster deal looks a lot less like a bazooka than it appears at first glance. Sure, theres enough in it to get markets to rally in the short term, but it could be just a matter of months before they revert to panic mode and deliver yet more shocks to the system.

Greece govt is sinking, taking your money down with it


Reuters Nov 2, 2011

Athens: The Greek government faced possible collapse on Tuesday as ruling party lawmakers

demanded Prime Minister George Papandreou resign for throwing the nations euro membership into jeopardy with a shock call for a referendum.

Caught unawares by his high-stakes gamble, the leaders of France and Germany summoned Papandreou to crisis talks in Cannes on Wednesday to push for a quick implementation of Greeces new bailout deal ahead of a summit of the G20 major world economies. The euro and global stocks were pummelled on financial markets after the Greek move threw into question the survival of crucial efforts to contain the euro zones sovereign debt crisis. (More here on what the referendum means for the larger eurozones destiny; and more here on why your investments in equity markets could be affected for the rest of the year.) Six senior members of Greeces ruling PASOK socialists, angered by his decision to call a plebiscite on the 130 billion euro rescue package agreed only last week, said Papandreou should make way for a politically legitimate administration. Papandreou chaired a cabinet meeting, expanded to include more ministers after the referendum bombshell, where he was expected to fend off demands to call a snap election. A leading PASOK lawmaker quit the party, narrowing Papandreous slim majority to 152 of 300 seats, and several others called for a government of national unity followed by a snap election, which the opposition also demanded. Papandreou needs 151 votes to enact the referendum. If any of the dissenters votes against, it cannot be held. But his first hurdle is a vote of confidence on Friday. Papandreou told the cabinet he believed he would both win the vote and hold the referendum as planned. We believe the government will once again win a vote of confidence in order to proceed with its plans, government spokesman Angelos Tolkas told reporters. We will not back down on

anything we have to do to save the country. Euro zone leaders thrashed out Greeces second financial rescue since last year, in return for yet more austerity, in the hope that it would ease uncertainty surrounding the future of the 17-nation single currency. Instead, financial markets suffered another bout of turmoil on Tuesday due to the new political uncertainty and the risk that austerity-weary Greeks could reject the bailout. Opinion polls suggest most voters think it is a bad deal. The euro fell nearly three US cents and the risk premium on Italian bonds over safe-haven German Bunds hit a euro-lifetime high, raising Romes borrowing costs to levels that proved unsustainable for Ireland and Portugal. European bank shares dived on fears of a disorderly Greek default and the Athens Stock Exchange suffered its biggest daily drop since October 2008, with the general index shedding 7.7 percent. Grenade European politicians expressed incredulity and dismay at Papandreous announcement on Monday evening, which took even his own finance minister by surprise. Announcing something like this only days after the summit without consulting other euro zone members is irresponsible, Slovak Finance Minister Ivan Miklos told Reuters. Irelands European affairs minister, Lucinda Creighton, whose own country is struggling through an EU/IMF bailout programme, said last weeks European summit was meant to have dealt with the uncertainty in the euro zone. And this grenade is thrown in just a few short days later, Creighton said. Legitimately there is going to be a lot of annoyance about it. In a statement after French President Nicolas Sarkozy and German Chancellor Angela Merkel conferred by telephone, Sarkozys office said: France and Germany are determined to ensure, with their European partners, the full implementation in the quickest time frame, the decisions adopted at the summit, which are today more important than ever. The renewed uncertainty is bound to embarrass G20 host Sarkozy as he tries to coax China into throwing the euro zone a financial lifeline. It could also further undermine dwindling political support in northern Europe for aiding Greece. Dutch Prime Minister Mark Rutte told parliament in a letter that his cabinet was concerned about the risk of delay and uncertainty. Business executives in Greece expressed despair at how the country was being run and markets speculated on whether Italy will be the next euro zone country to slide into a debt crisis. I think by late evening this saga will have come to an end because he (Papandreou) will have lost the slim majority that he has in parliament, Athens Chamber of Commerce head Konstantinos Michalos told Reuters Insider television. This referendum will not happen. Im hoping and praying for a government that will join other political forces. The chairman of euro zone finance ministers, Jean-Claude Juncker, said Greece could go bankrupt

if voters rejected the bailout package. Defections Papandreou, whose party has suffered several defections as it pushes waves of austerity through parliament despite mass protests, said he needed wider political backing for the budget cuts and structural reforms demanded by international lenders. But the conservative opposition called for a snap election. Elections are a national necessity, opposition New Democracy party leader Antonis Samaras told reporters. Lawmaker Milena Apostolaki quit the PASOK parliamentary group, reducing Papandreous strength just before the vote of confidence. Another MP, Hara Kefalidou, said she also opposed the referendum but did not resign her seat. More importantly, senior PASOK lawmaker Vasso Papandreou, not related to the prime minister, asked the Greek president to work for a national unity government to ensure Athens receives the rescue funds, followed by an early election. Papandreou did not even inform Finance Minister Evangelos Venizelos he was going to announce the referendum on the latest EU aid deal, a government official told Reuters. They must be crazy this is no way to run a country, said a senior executive of one of Greeces biggest firms, speaking on condition of anonymity. Cast adrift? One senior German parliamentarian suggested the euro zone might cast Athens adrift, cutting off its aid lifeline and allowing the nation to default on its huge debts. One can only do one thing: make the preparations for the eventuality that there is a state insolvency in Greece and, if it doesnt fulfil the agreements, then the point will have been reached where the money is turned off, Rainer Bruederle, floor leader for the Free Democrats, junior partners in Merkels centre-right coalition, told German radio. On the markets, players scurried for safer investments, hammering stocks and punishing the euro.

Kiss the year-end rally goodbye as Greek plan injects uncertainty till 2012
Greeces shock decision to hold a referendum on its euro zone bail-out package sent investors
scurrying for safer investments on Tuesday, hammering stocks and punishing the euro. It scotched any immediate expectations for an end-of-year stock rally.

Reuters Nov 1, 2011

An unexpected fall in PMI data for Chinas manufacturers also hurt investor risk-taking sentiment as did Mondays failure of US trading firm MF Global Holdings Ltd due to euro zone debt exposure. European stocks were down close to 3 percent and MSCIs all-country world stock index shed 1.7 percent. Greek Prime Minister George Papandreous announcement on Monday that he will put Greeces bailout to a referendum immediately cast doubt on the euro zones plan to hand Athens 130 billion euros and arrange a 50-percent write-down on its huge debt. It raised the possibility of a disorderly default on its debt if Greeks vote against the plan. But more broadly it also threw into chaos the eurozones wider attempts to stop the debt crisis spreading to more significant economies such as Italy. Attempts to get countries such as China and Brazil to fund an enhanced euro zone rescue fund, for example, will have hit a major barrier, given that it is not clear that the euro zones grand compromise agreed last week will stand. The risk is that a no from the Greeks will completely derail the rescue efforts, one Paris-based trader said. Furthermore, the referendum details of which have not been announced is not expect until the

beginning of next year, which means uncertainty is likely to continue throughout November and December. We can kiss the year-end rally goodbye, the trader said. The FTSEurofirst 300 index of top European shares was down 2.7 percent after tumbling 2.2 percent in the previous session. Euro zone banks were hammered, with Italys UniCredit down 8 percent and Frances Credit Agricole down 11.5 percent. Earlier, Japans Nikkei closed down 1.7 percent. EURO KNOCKED On foreign exchange markets, the euro fell more than one percent versus the dollar and yen as investors cut exposure to the common currency, fearing a disorderly default. The dollar dipped slightly versus the yen, however, having pulled back from a three-month high as the impact of Japans massive intervention on Monday faded a touch. It last traded down 0.1 percent at 78.10 yen , with market players wary of further yen selling by the Japanese authorities. The Greek referendum is a real curve ball, nobody saw it coming and it injects a lot of uncertainty, said Steven Saywell, head of FX strategy at BNP Paribas. Some analysts, meanwhile, said investors would be wary of buying the dollar too aggressively given a two-day Federal Reserve meeting that concludes on Wednesday and key U.S. jobs data due on Friday. Any hints that the Fed is considering further monetary easing, or signs the economy is flagging, could drive the greenback lower. Worries about the impact of the Greek decision on other euro zone countries sent the difference between yields on Italian and Belgian 10-year bonds and those of benchmark German counterparts to lifetime highs.

Chapter 2

The referendum: What will the people of Greece decide?

If Greeks say @#$%&!^$#@ to austerity, the eurozone is over


R Jagannathan Nov 1, 2011

Heres the deal. I will forgive you half the money you owe me, if you take pay cuts, accept reduc-

tions in pensions, reduce the number of people you employ (maid, cook, driver), and generally accept a continuously declining standard of living for the next nine years. Plus, of course, you need to pay more tax. But mind you, I will put my own accountant in your house to see that you dont cheat on your promises. And after nine years, if we still think you are solvent, we may welcome you back as an equal to our club and lend you money again like old times. Deal? Your first response will probably be the unprintable @#$%&!^$#@. And this is probably what the Greeks will say when the eurozone rescue package calling for extreme austerity from them is put to the vote. Greek Prime Minister George Papandreou, shaken by months of continuous street protests and public anger at what they are being asked to swallow, sees no other way to salvage his government but to ask for a referendum. The odds are even that the Greeks will ask Europe to shove it up when asked for their opinion. This is why markets in Europe have been tanking as soon as news got around that Papandreou is planning to ask his people for their opinion on the eurozones bad idea. There is fear that the messy compromise solution that emerged from the eurozone summit last week will end up with a Greek thumbs down and a disorderly winding down of Greek debt probably through default of a partial repudiation. After that, all bets on the euro are off.

The three main elements of the eurozone package for debt-ridden Greece are a 50 percent reduction in private debts with banks and pension funds taking a haircut, a 100 billion debt reduction, in return for severe austerity measures. But at the end of it all, Greece will still have 120 percent of GDP as debt twice as much as the European Union limit. By any stretch of logic, if even nine years of pain and belt-tightening is not good enough to solve the problem, it makes more sense to default and take destiny in your own hands. The eurozone leaders will then have to decide whether to turf it out or otherwise quarantine the Greeks in some way. However, the problem isnt Greece. Theres a huge north-south divide in Europe with the Germans and the French being stronger than their Mediterranean cousins. Its the south that could fall like dominoes after Greece, with Portugal, Spain and Italy following in short order. Portugal is already under EU-IMF administration, and Spain is slashing its budgets to make ends meet. All of them are up to their necks in debt and headed the same way as Greece in terms of rising unemployment rates, rising cost of money, and falling public confidence in a recovery. While Greece is already about to go under, Portugal and Spain are tilting towards the precipice. Portugal appears to have entered a Grecian vortex and monetary trends have deteriorated sharply in Spain, says a report in The Telegraph, UK, quoting Simon Ward of Henderson Global Investors. And remember, Portugals debts are worse than Greeces: 350 percent of GDP versus Greeces 160 percent. Why is Europe is such bad shape? The answer is a lack of political will to really build huge firepower to tackle this mother of all financial crises. The latest package was simply too little, too late. The eurozone leaders have used mirrors to raise the value of the 440 billion rescue fund by leveraging it and make it look like 1 trillion, when what was required was more than $2 trillion to see that the contagion does not spread beyond Greece to Portugal and Spain. But this is exactly what has been achieved. And the reason for it is that all the leaders of the eurozone are thinking country, not continent. Germany is fighting its last war (hyperinflation between the two world wars) and reluctant to reflate. France is worried that any larger rescue package backed by further debt will mean a downgrade of its own AAA credit rating.

If the two biggest beneficiaries of the eurozone France and Germany have chickened out of bolder measures, little wonder the package is coming unstuck as the richer north forces the poorer parts of southern Europe to tighten belts and swallow bitter pills. As Ambrose Evans Pritchard writes in The Telegraph: The two halves (north and south Europe) are locked together in a broken marriage. The structural gap cannot be closed by debt-deflation in the south. It could arguably be mitigated by ECB (European Central Bank) reflation (easy money), yet the central bank has done the opposite, blighting the chances that Spain might just be able to struggle back to viability. The eurozone is in a slow-motion dance to death and disaster. It will need a miracle to rescue the common currency. But if the Greeks say screw the rescue package and austerity measures, the eurozone as it now stands will be history.

Why bankers, brokers and bet hedgers dont like democracy


Tristan Stewart-Robertson Nov 2, 2011

Never let democracy get in the way of a good economy.


Voting is, for a large number of people, a pain in the posterior, but the clashes between the represented and representers are becoming more common and disparate. The Greek prime ministers decision to throw the European Union bailout to a referendum sent the market into a tailspin because, in a country currently on perpetual strike, everyone knows the people would reject austerity, not to mention foreign control of government departments. If the Greeks are given a voice, it will spell the end of the euro and possibly the entire EU, if some are to believed. The Financial Timess Gideon Rachman wrote on Tuesday that: The Brussels authorities react to the prospect of a referendum like a vampire to garlic. Little wonder the record of the EU in referendums is dreadful. The Irish and the Danes have voted several times to reject EU treaties. Most significantly of all, the Dutch and the French voted to reject the proposed EU constitution in 2005. These votes really shook the European project. Whatever you do, dont let the people decide. The UN heritage and education agency UNESCO is already paying the price for using democratic principles. When they voted overwhelmingly to give full membership to the Palestinians, it triggered American laws forcing the withdrawal of $60 million in funding.

Electing Hamas to power in the West Bank and Gaza Strip in 2006 already cost millions in aid money for the Palestinians. The West wanted democracy in the Middle East, but the right kind. The same attitude emerged immediately after the Tunisians held their first free elections and the West immediately expressed concern over the choice of an Islamist party. Let the people decide, but with provisos. The Anna Hazare team is again threatening PM Manmohan Singh that the activist will resume his hunger strike if the government fails to pass the Lokpal Bill. The group is largely anti-corruption, but nobody elected them, in contrast to the government, similar to the many Occupy groups around the world. But all those groups claim to properly represent the people, particularly with their motto, We are the 99 percent. The American Tea Party movement doesnt accept the elected President Obama and so believes they are the true voice of the people. more or less democratic than the government representatives now? Is an unelected group

Democratic votes have been used by the majority to suppress minorities in various countries over the decades. Just last week at the gathering of Commonwealth countries, Uganda hit back at British PM David Camerons threats to withhold funding if they did not uphold rights for homosexuals. The people of Uganda are in favour of such moves, if the press and government are correct. Germans elected Nazi politicians repeatedly in the 1920s and 1930s knowing fully their anti-Semitic policies. Do majority votes justify such moves? Sometimes, democracy makes me nervous. Ballot initiatives in several US states have banned gay marriage, limited access to abortion and forbidden sharia law being introduced. All target largely minority populations how do any of us know if we might someday find a majority voting against us? Some in the digital community like to talk about power being given to the people through social media and the internet more generally. E-petitions have allowed strong and quick support for measures such as restoring the death penalty in the UK. But does a vocal e-group mean thats what the population want? None of these hesitations are reasons to scrap democracy, of course. But there is hypocrisy over

how and when democracy is applied by those on top, and a failure to recognise by campaigners on the bottom how flawed the system can be, whether through lack of education, whipped up hysteria, or growing apathy. Disillusionment with democratic institutions does not excuse people from not voting, then setting up parallel institutions on the grounds they are more democratic. Both can co-exist but there should be more dialogue, as the leaders of St Pauls Cathedral seem to have recognised in their confrontation with the Occupy London Stock Exchange protestors. Technology cannot solve any of these problems even if you brought in e-voting in Greece, the rest of the EU still doesnt want them exercising their votes. And if the ups and repeated downs of the markets have proven anything lately, its that we are at the mercy of democracy, or rather a subset of it capital democracy. Stock brokers, money lenders and bet hedgers vote with their gut to make as much money as possible, as quickly as possible. They decide as a collective majority what future the world has. And, like voters themselves, they cannot be held accountable you hold the elected to account, not the electors. You cannot vote them out of office, or suspend their voting rights. Theyve repeatedly destroyed firms and government bank balances, in the past few years especially, and now are essentially preventing the Greeks from voting. We might even call that fascism in some quarters the minority controlling the majority. So just maybe, while some countries learn to build new democracies and others reassert them, we should limit the voting rights of the bankers who would rather we didnt. Id vote for that.

Chapter 3

What the experts said

Saving eurozone: Devalue the euro, slash rates to zero, says Roubini

PTI Oct 25, 2011

cession in the next year as the eurozone crisis rattles markets, said New York University economics professor Nouriel Roubini today. Roubini said without meaningful reform by European leaders, the eurozone could start to fall apart and lead to another financial meltdown worse than in 2008.The severity of the downturn hinged on whether the Eurozone could avoid a messy break-up as Greece and other nations struggle with crippling debt. Roubini, who earned the Dr Doom moniker for predicting the last global economic crisis long before it hit, also warned China faced a hard landing and could not maintain its status as the world economys growth engine. In my view, theres a significant probability, more than 50 percent, that over the next 12 months theres going to be another recession in most advanced economies, he told a Commonwealth business forum in Perth. Whether you call it a double dip recession, a continuation of the first recession or a second recession doesnt matter, its semantic. Roubini said much depended on a meeting of European Union nations this week that will seek to thrash out a deal to avoid a full-blown Greek default and limit contagion within the eurozone. He said markets were looking for policies that would kickstart real economic growth in struggling eurozone countries, rather than financial engineering that saw wealthy EU nations take on the debt burden of poorer ones. Unless Europes leaders enacted serious changes the Eurozone could start to crumble, potentially dragging down the world economy in the same way the collapse of US investment bank Lehman

Perth: The worlds advanced economies face a more than 50 percent chance of plunging into re-

Brothers did in 2008, he said. In a situation where it becomes disorderly, with defaults by a number of countries and a resulting exit of a number of states from the eurozone and its eventual break-up, the shock that could occur could be as large, if not larger, than the fall of Lehman in 2008, Roubini said. A recession that is severe in advanced economies, the collateral damage even on emerging markets could be significant. Roubini recommended devaluing the euro to stimulate exports from the eurozone and slashing interest rates. If they were serious about restoring growth in the short-term, they would cut rates down to zero, he said.

High rates can destabilise capital flows. Stiglitz explains why


PTI Nov 1, 2011

New Delhi: Criticising the Reserve Banks tight monetary policy, Nobel prize winning economist
Joseph Stiglitz today warned that rising interest rate could result in destabilising capital flows from abroad. Raising interest rate generate flow of capital (from abroad) that could itself be destabilising. So, unfortunately they (RBI) will have to be very careful about instruments they use to fight inflationary pressure, he told reporters on the sidelines of a public lecture at Jawaharlal Nehru University. The Reserve Bank, he said, was drawing a very delicate line to deal with the problem of inflation by raising interest rates. In its bid to contain rising inflation, the central bank has raised key policy rates 13 times since March 2010. Interest rates have gone up making India attractive for foreign capital and inflation has continued to remain at near double-digit mark. It was 9.72 percent for September. Answering questions on eurozone sovereign debt crisis, Stiglitz said the European Union has not dealt with problems in Greece in a timely manner. When the euro currency was founded, most economist found it as an extremely difficult project. They have taken away interest rate and exchange rate power but did not put any mechanism in its place. They were very slow to deal with the Greek crisis and now the crisis seems to be spreading. The steps they have taken may not suffice to address the very deep problem that they face, he added. Worried over the global economy slipping into double- dip recession, the G-20 leaders at their summit at Cannes in Paris on November 3 and 4 will try to come out with some solution to deal with the sovereign debt problems in Europe.

The issues concerning destabilising capital flows and the need to impose Tobin Tax were discussed during the meeting of G-20 Finance Ministers and Central Bank Governors, but no decision could be taken because of differences of opinion among member countries. Tobin tax refers to levies on flow of cross-border capital. G-20, a grouping of rich and developing nations, has been at the forefront in resolving the global crisis which began in 2008 with the fall of Americas iconic investment banker Lehman Brothers. The second global crisis is looming large and several experts, including RBI Governor D Subbarao had emphasised that time is running out for solutions. Subbarao in his intervention at an IMF meeting in Washington in September had said, We are rapidly running out of solutions. The two big flash-points are: renewed anxiety in the US about recession, and the deepening of the sovereign crisis in the euro area.

Chapter 4

The long negotiation

Welcome aboard the slow train to Eurogeddon


Venky Vembu Oct 23, 2011

Dear passengers, welcome aboard the Eurozone Express. Were now in Brussels for a summit of

European leaders, but beyond this stop, nobody on board not the driver, not the station master, not the army of Eurocrats who claim to be in control of this 17-carriage Euro-locomotive has the faintest idea of where we are headed. However, by a process of elimination, and by a study of our route map thus far, we can deduce where were most likely going. Weve missed several wayside stops along the way such as Orderly Greek Default and Bankers Haircut and weve taken a prolonged detour into Core Contagion. And now, it appears that our final destination will be Eurozone Armageddon. A colossal crashbang, the likes of which the world hasnt seen, awaits us.

But, dear passengers, dont panic just yet. Although were nominally an express train, we are making every effort to delay our arrival at journeys end. Weve done it so far by the simple expedient of postponing the inevitable by kicking the can down the railway line with bailout after bailout of peripheral countries that were well and truly bankrupt. And since weve become quite adept at this can-kicking business, we reckon we can keep on doing it for a little longer until we reach Eurogeddon, the end of the line. God knows its been a wild ride for us as much as it has been for you. And we know the effect weve had on your nerves and on the equanimity of investors all around the world who were fol-

lowing our rollercoaster-like lurching for many months now. But do enjoy the rest of the journey, and the spectacular views of the European countryside. And do avail of the hospitality at our Last Chance Saloon, where were offering free drinks as befits the welfare state we wanted to build in a foolish burst of socialist-minded romanticism without providing funds for any of it. After all, where else in the world do workers get by on 35-hour workweeks, as they do in France? And where else but in Greece can people retire at age 53 and enjoy welfare excesses and pensions long after they are dead! And where the government resorts to the extraordinary device of using Google Earth satellite pictures to track down thousands of private swimming pools, which tax dodgers hadnt disclosed in their tax returns. Overnight, as passengers on board the Eurozone Express or as investors elsewhere whose fortunes hinge on the fate of our train you must have found it deeply distressing to overhear the very public squabble between two of our stalwart engineers on board Germany and France on where we should proceed next. Evidently the two leaders Angela Merkel and Nicholas Sarkozy couldnt agree on the precise nature of the bazooka needed in the form of strengthening the European bailout fund to avert the train wreck that many believe is inevitable. They sounded an awful lot like two engines pulling the compartments in opposite directions. The mood at the meeting of European Ministers overnight, according to media accounts, was grim the worst mood I have ever seen, a complete mess. The worry now is that even if the bailout fund is enhanced that is, Eurozone states throw good money after bad the entire 440 billion euro bailout fund would go towards keeping the Greek compartment from derailing into the abyss of insolvency and dragging other member-state railway compartments with it. It doesnt also help that Germany, which is Europes most competitive economy which has benefited enormously from the artificial European monetary union (at the cost of peripheral European Union economies), isnt willing to do as much as it uniquely can to end the crisis. That, of course, must begin with Germany acknowledging its role, economically and politically, in the genesis of the Eurozone crisis, where even to this day peripheral economies are subsidising Germanys export-driven economic growth. The policy inertia across Europe was summed up bluntly by Luxembourg Prime Minister JeanClaude Juncker, who said: We all know what to do but we dont know how to get re-elected once we have done it. So much so that economic commentators who refused to contemplate a break-up of the Eurozone are increasingly acknowledging the inevitability of a default by peripheral states. And although its Greece that draws much of the negative news, it is now more widely accepted that the problem runs much deeper. With enforced austerity measures cramping growth in the peripheral European economies, and escalating their debt burden, the incentive for countries that are in colossal debt to default is increasing by the day. And since it appears, from everything thats transpired over recent months, right up to the overnight squabble, that credits and debtor nations cannot agree on how the burden of the economic shock should be shared, Eurogeddon appears inevitable

The train will be in Brussels for four days until Wednesday, when the top European leaders meet again. Its quite literally our last chance to chart out a map for the way ahead. There are some suggestions that EU engineers are shunting and hooting about a plan to set up a single Treasury to oversee tax and spending across the entire Eurozone. Nobody believes it will work. And even those who believe it will cannot lay out the route map ahead with any certainty. Thats the grim reality that confronts us today. The only saving grace, dear passengers, is that either way, were fairly close to the end of the line. Enjoy the rest of the ride, but do brace for some rough stuff when we reach Eurogeddon. Over and out

Saving Europe: EU, banks reach deal to lower Greek debt


FP Editors Oct 26, 2011

Big news coming out of Brussels this morning. It appears that after a long night of tough negoReuters reports, citing a European Union source, that the deal will likely see a voluntary 50 percent writedown. This should effectively lower Greeces debt over the next 10 years.

tiations going well past 3 am local time eurozone leaders and banks are close to a deal on how much of a loss private bondholders should absorb on their Greek debt holdings.

Late last night, talks were suspended after the failure to reach an agreement. The eurozone summit was largely centered on agreeing a writedown or haircut with private bondholders on a voluntary basis. Eurozone states want private investors to accept the haircut in an effort to reduce Greeces debt burden by about 100 billion euros. Failure to agree on a voluntary writedown would have led to a full-scale default in Greeces debt, with a heavy knock-on impact on markets. To that extent, the summit has averted what many considered would be a eurogeddon a messy unravelling of the eurozone There are still many more milestones to cross: how Greece and other indebted eurozone countries can grow their way out of their debt mess is in doubt. Yet, for

now, the world will see this as some sort of progress. Heres our live blog of all the overnight action

10:30 pm: Greece is central to this drama. Greek PM George Papandreou says Greece is making a super-human effort to get their finances in order 9pm: The latest is that the Greek bond haircut talks have been suspended, which is not a happy portent. (Heres why.) The leaders are getting together in Brussels (watch the action live here), but it appears for now that we wont see dramatic progress. On Wall Street, the mood, which was buoyant, is now decidedly downbeat.

8 pm: Still waiting for some action out of Brussels. Meanwhile, heres economist Nouriel Roubini with his thoughts on how the eurozone can be saved: by devaluing the euro and slashing rates to zero. 7.45 pm: A check on the markets. Wall Street in a buoyant mood on expectations of at least a partial resolution of the eurozone debt crisis. Gold still above $1.700/troy ounce. 7.30 pm: Meanwhile, across the pond, the US reported buoyant new homes sales, way higher than expected. More here. 7.15 pm: Here comes trouble. Bloomberg is reporting that talks on how much losses investors in Greek bonds should bear (the so-called haircut) are deadlocked. And that a European Union official now says involuntary (that is, enforced) Greek haircuts cannot be ruled out. The euro is selling off on the news, which is exactly the kind of bad news, with negative implications for banks, that the markets didnt want to hear. And the always cheerful Marc Faber says investors should accept 90 percent Greek writedown! 7 pm: The vote is in. The German Parliament has voted to strengthen the eurozone bailout fund through leverage. The final vote: 503 in favour; 89 against; and four abstentions. The vote was largely in line with expectations. Germany had too much riding on keeping the monetary union together. The focus now shifts to the action in Brussels. Stand by for more. 6.30 pm: The German Parliament has begun voting on a leveraged ESFS - or bailout fund for indebted eurozone countries. This could take a while. In the meantime, you could acquaint yourself with all the acronyms and abbreviations of the eurozone debt crisis. Its quite an alphabet soup out there. Coming to blows in Italy 5. 45 pm: Emotions are running high all across Europe. Earlier today, MPs in the Italian Parliament came to blows (see picture here) Not sure what it was about specifically. (h/t @AlbertoNardelli) Looking to China to rescue Europe 5.30 pm: Once again, a heavily indebted Europe looks forlornly to China, with its $3 trillion in foreign exchange reserves, to bail it out. The head of the European bailout fund, Klaus Regling, is to visit China on Friday (28 October) to meet investors in EFSF-issued debt, Bloomberg reported. Although the upcoming visit and the talks with Chinese leaders were characterised as a normal round of discussion with important buyers of EFSF bonds, the intention is evident. But as weve pointed out before, that expectation is unlikely to be met. China isnt about to throw good money after bad by buying European sovereign bonds. Brazil says no

Overnight, Brazil rejected the idea that it would buy European bonds, reports Reuters Brazilian Finance Minister Guido Mantega said: I believe that European countries do not need funds from Brazil to buy bonds. Brazil is not considering it They have to find solutions to the European problems within Europe. The Reuters report quoted a high ranking official from an emerging market country as saying that India and Russia too were not interested in offering more funds to help Europe and that there was no evidence that China planned to chip in. Gold strong, dollar weak 5. 15 pm: As the world waits for word from the European summit, markets are essentially flat. Gold, however, has been on a tear since yesterday, and is trading at a one-month high, above $1,700 to a troy ounce (see chart). Analysts are reading this as a rush to a safe haven even though in recent weeks, gold has behaved unlike any safe-haven the world has know,. The US dollar is weak against most major currencies. Bye-bye, Berlusconi? (Not so fast!) 4.45 pm: Earlier in the day, there were reports (subsequently denied) that Silvio Berlusconi, the embattled Prime Minister of heavily indebted Italy, had ironed out a secret pact under which he had secured support from a coalition partner for critical pension reforms in return for which he would step down in December. According to unconfirmed reports in Italian newspapers, Berlusconi, who is under enormous pressure to fix the pensions sytem and extend retirement age, had secured critical support from Umberto Bossi, leader of the Northern League. The Prime Minister was to present the pension reform plan to the European Union at todays meeting in Brussels. According to one Italian newspaper, the secret deal was sealed with these immortal words from Berlusconi to Bossi: Dont make a fool of me in Brussels, and I promise that well go to elections in March. Whoa! Did Merkel actually say that? 4.30 pm: All eyes are on German Chancellor Angela Merkel, who faces a crucial vote in the German parliament today on the plan that she and French President Nicholas Sarkozy claim they have pieced together. In a speech to Parliament, Merkel gives a sense of exactly what is at stake. No one should take another 50 years of peace in Europe for granted, she says. Whoa! We are facing a tough test of monetary union, says Merkel. Concedes that Germany cannot prosper without a prosperous Europe. But in the same breath, Merkel says that while Germany is economically the strongest economy in Europe, it was not the centre of the world. 4.15 pm: Welcome to the live blog of the summit of European leaders to address one of the biggest concerns weighing on the minds of people around the world: a plan to save the global economy from sinking.

This is the 14th emergency summit of European leaders. And expectations running up to it were quite high. US Treasury Secretary Tim Geithner had urged European leaders to heed the worlds calls to avert the catastrophic risk of the debt crisis. Yet, there is little sense of urgency about finding a definitive resolution of the sovereign debt crisis that has Europe on edge. What makes a deal? What would constitute a satisfactory outcome? 1. Plans for an orderly writedown of Greeces debt, which would require private investors to take a 60 percent bondholder haircut 2. A confirmation from leaders that plans for recapitalisation of banks worth at least 108 billion euros ($150 billion) 3. An agreement to leverage the 440 billion European Financial Stability Facility (EFSF), the European bailout fund, so that it can acquire additional lending power of at least 1 trillion 4. A realistic timetable to deliver on these commitments. What are the odds that they will be met? Reuters reported, a short while ago, that prospects for a comprehensive deal to resolve the crisis look dim. It cites deep disagreement remaining on critical aspects of a potential agreement. Summit leaders, who had been promising a bazooka at the summit, are now lowering expectations. The initial hope was that Wednesdays summit would start with a gathering of all 27 European Union leaders, followed by the meeting of the euro zone heads of state, and that by the end of it all, there would be detailed figures on how the debt crisis will be overcome. But that hope now rests on slippery ground. Not until November Reuters reported, quoting an EU official, that the numbers had not been yet finalised, and that it still needed a lot of technical work. It now looks like a final resolution might have to wait until the first week of November, when European Union and eurozone finance ministers are to meet.

Chapter 5

Indias part more growth than assistance

India has few coins to throw in the Euro-Greek bowl


R Jagannathan Nov 3, 2011
ndia, say new reports, is willing to help the eurozone find money to emerge from its Greek tragedy. In a guarded statement, Pranab Mukherjee is quoted by Hindustan Times as saying that if the eurozone leaders make a credible assessment of the solvency issue then supplementary financing could be considered. So is India going to throw some of its own money in the bottomless Greek pit? Planning Commission Deputy Chairman Montek Singh Ahluwalia, speaking at Cannes on the sidelines of the G-20 summit, was quick to disabuse anyone of the idea that we are going to do anything of the kind. He said if any help is given, it will be done through multilateral institutions like the International Monetary Fund (IMF). We have not received any request for bilateral assistance (for Greece). We are looking at it more from a multilateral point of view. I think a lot has to be done to handle the eurozone crisis (and it) has to be done by the eurozone countries, Ahluwalia said. The message from India to Europe, thus, is a polite no, thanks, but please do ask the IMF, and we will put in a good word for you. This is, of course, the right approach, for India does not have spare cash either at home or abroad in terms of foreign exchange reserves to throw in the pot. Domestically, Pranab Mukherjee is borrowing money hand over fist in a worsening fiscal situation where 70 per cent of the budget deficit target for 2011-12 has been used up in six months. And he is borrowing Rs 53,000 crore more than budgeted and scraping the bottom of the barrel to pay his bills. Among them, Rs 65,000 crore of oil companies losses that have to be made good. Externally, of course, the situation looks more robust with foreign exchange reserves currently standing at $318 billion. Surely, this means we can toss a few coins in the Greek bowl for friendships sake? A token of regard from the worlds largest democracy to the worlds oldest?

Actually, no. Indias $318 billion in reserves is matched almost equally by an external debt of $317 billion. Even though the ability to invest our reserves in any kind of debt, including Greek debt, does not depend on our external liabilities, the point is our reserves are really external borrowings in another form. They represent money that has to be managed, but not spare cash that can be gifted away. It is money owed, not money owned, by the people of India. Moreover, India needs all the dollars it can hold, as its trade and current account deficits are worsening. At last count, Indias current account deficit (the gap between external earnings and expenses) was 3.1 percent of GDP which is unsustainable unless we have equivalent capital inflows. That hasnt been happening of late, as the fall in the rupee shows. To pay our rising import bills, we may, in future, have to draw down our reserves. The country that really has spare cash is China which had $3.2 trillion (Rs 3,200 billion) in reserves, of which external debt is only $546 billion that still leaves over $2.7 trillion in terms of a treasure chest that can be invested. But China is showing no great eagerness to lend money. Japan, with nearly $1.2 trillion in reserves, is the next best candidate for Greek munificence. India can offer sympathy and hope. Hard cash is out of the question.

Why India is the only game in town


R Jagannathan Oct 28, 2011
e are in completely uncharted territory again. The rich world is entering a period of mad, mad, mad, mad money a period of ultra cheap credit financed by ultra high government debts to finance growth and jobs. A world awash with state-powered liquidity can only lead to one of the following three, or all three, outcomes: higher general inflation, higher asset prices, and massive cross-border movements of money from low-growth to high-growth regions. This is where India ought to gain in the year (or years?) ahead. I think it will. Our markets will be on fire, and our growth story will resume but with high inflation as a corollary. Put the following facts together higher interest rates in India versus near-zero or low rates in the US, Europe and Japan, the rupee at Rs 50 to the dollar, and 7-8 percent growth rates, and the prospect of even higher growth in 2012-13 and beyond and there is only one conclusion: India is where the smart money should head. The question is not whether, but when. Heres the underlying logic of this prophecy. The US is the economy most likely to recover fast though it still has a few years of painful wealth reduction to contend with. The Americans government and people are doing two things to correct the overconsumption of the past. One is reduce debt at the consumer level which is why the American recovery has been so slow. People are beginning to reduce debts, as a Wall Street Journal report notes. Says the WSJ: Since the financial crisis erupted, millions of Americans have ditched their credit cards, accelerated mortgage payments and cut off credit lines that during the good times were used like a bottomless piggybank. Many have resorted to a practice once thought old-fashioneddelaying purchases until they have the cash.

Quoting figures from the Federal Reserve Bank of New York, the Journal says that total household debt through payment or default fell by $1.1 trillion, or 8.6 percent, from mid-2008 through the first half of 2011. Little wonder the US is not seeing an early recovery. At the government level, the Feds near-zero rate policy has unleashed an ocean of cash that will have the net result of debasing the dollars intrinsic value. This is Americas revenge against China. Americas cheap money policy will have two consequences. It will speed up the American recovery at the cost of inflation and destroy a part of the Chinese advantage and dollar surpluses through the same route. If US consumption and growth are slowing, where should investors head once the panic over the global financial meltdown ebbs? The answer is India and other emerging markets, and not China. China is hurting from US actions and how. Says Ambrose Evans-Pritchard in The Telegraph: Fed actions confronted Beijing with a Mortons Fork of ugly choices: revalue the yuan, or hang onto the mercantilist dollar peg and import a US monetary policy that is far too loose for a red-hot economy at the top of the cycle. Either choice erodes Chinas wage advantage. The Communist Party chose inflation. Lets hear what Satyajit Das, a derivatives expert and author of Traders, Guns and Money and Extreme Money says on China. Das told Bloomberg in a recent interview that the primary axiomatic law of making a bad loan is that you have to write it off. By implication he suggests that China made bad loans to the US which brought on the financial crisis, and this means it will have to write off a big chunk of its $3.2 trillion reserves, most of it in dollars. Says Das: Its unsustainable. Thats the lesson we should have learned from 2007. We instead shovelled everything under the carpet, and its going to come back to haunt us. Chinas going to have to write off its $3 trillion. This will happen primarily through the American flood of cheap money which will dent the value of the dollar and reduce Chinese wealth held primarily as dollar-assets. China is screaming blue murder about the way the US handled its recent debt crisis which finally resulted in a sovereign downgrade by S&P. It is also wary about US legislation to curb Chinese exports using yuan undervaluation as excuse. The reason why China will hit a speedbreaker stems from two incongruities. First, no economy of the size of China can ever become a permanent factory to the world without destroying the world economy itself for the simple reason that the world market is not big enough for such a huge exporter to monopolise it. A Korea can be an export tiger, a Singapore can be one, and so can a Taiwan or a Thailand. But China is too big to succeed permanently by being a persistent net exporter. Big economies like China and India have to find growth within and this is what China has avoided doing all along. With investment rates as high as 50 percent of GDP, Chinas economy is a stunted domestic consumer and the lessons of the 20th century are very, very clear on this: sooner or later the party ends. The Soviet Union in the first half of the last century, Japan after the world war, and the Asian tigers in the last four decades built their growth stories around high investment rates and low domestic consumption. They all had to change gears and slow down. The entry of the Chinese T-Rex in the exports game changed the rules of the world economy. It could go on only as long as the worlds largest consumer was willing to offer a willing market endlessly. China tried extending this dream run by lending money to the US just like a bartender

sells booze on credit to the drunkard whos run out of cash. But when the music stops, the bar ends up with bad debts. The low-consumption-high-investment-high-exports growth model is as dated as T-Rex. China now has to build a market within, and buy more from its trading partners. This means it has to become the engine of world growth by consuming more, not by producing more. This involves a massive shift of resources from investment to consumption which means higher wage inflation (how else do you consume more?), and slower jobs growth as costs and lower export growth work their way through the system. Who benefits as the Chinese growth engine sputters? According to Ernst & Young, India will grow faster than China as early as calendar 2013. Thats just about a year away. Says E&Y: India and China are expected to be relatively less impacted among the 25 rapid growth markets (RGMs) in case of a deterioration of the eurozone debt crisis. The reason: the large size of their domestic markets. But India will do better than China. E&Y pegs Indias real GDP growth rate to be the highest among all the RGMs starting in calendar year 2013, when the economy is expected to grow 9.5 percent, followed by China at 9 percent. In 2014, India is expected to grow at 9 percent and China at 8.6 percent. The eurozone crisis is another trigger for this power shift towards India. The crisis has, thus far, been wrongly played out as the story of a frugal Germany trying to foil the overspending PIIGS Portugal, Ireland, Italy, Greece, and Spain. However, the truth is somewhere else. Within the eurozone, Germany plays the exact role that China plays in the US-China context: it is a huge exporter, which lends money to the rest of the eurozone to create an export market for its goods. Germany is the eurozones biggest export economy and creditor. Just as China cant be factory to the world, Germany cant be the eurozones biggest exporter forever because someone has to pay for what it sells. This is exactly why it has no option but to bail out the PIIGS. Just as China has to write off a part of its US debts, Germany will have to do so with the PIIGS. It is Germanys reluctance to see this reality that is at the root of the eurozone crisis. The bottomline is that Germany and German banks have to bail out Europe. If they dont, Germany will be the biggest loser in the crisis. So lets ask ourselves again: If the eurozone and Germany have to slow down to deal with their internal debt crisis, who benefits? India and emerging markets. A word about Japan is also worthwhile. Everyone knows that Japan has been a no-growth story for the last two decades. The worry is that Europe is now entering its own decade of slow or no growth when it grapples with its own demographic issues of an aging population, excess welfare costs, and absence of structural reforms in the labour market which has resulted in high unemployment. But Japan will be part of the US-Europe tsunami of liquidity for its own reasons. In recent months, the yen has been strengthening against the dollar to such an extent that the Bank of Japan will periodically unleash a flood of yen to buy dollars and keep the exchange rate below 75 to the dollar. Beyond this, Japan will slow down even further as its export machine will come to a grinding halt.

The upshot: the US, Japan and Europe (not to speak of the UK and Switzerland) are collectively unleashing a flood of money that will raise inflation all around and once the panic ends will make investors move to the high growth zones of the world. India and some of the smaller emerging markets will benefit from that. The only question is when. If we dont screw up on reform, we can get most of the inflows where we want them in infrastructure, insurance, telecom, banking, and retail. If we screw up which we probably will, given the growing scale of our own money printing operations to fund social security schemes we will still benefit, but will pay the price with high inflation.

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