Sunday, June 28, 2015

The Euro Crisis

The Euro Crisis – What Will and Should Happen

There is great concern over what will happen in the Eurozone and the repercussions worldwide. These concerns stem in part from a general fear over what will happen. Below, I try to allay some of these fears by tracing out the most likely outcome. I also say what I would like to see happen.
Setting the Stage
The Eurozone is a monetary union of 17 countries using the Euro (€) their currency. By agreeing to use a single currency, the member countries ceded control over monetary policy to the European Central Bank (ECB). This means one monetary policy for all countries, weak and strong. It also means that when their governments run deficits, they don’t have their own central banks to buy the debt.
The crisis started with a growing sense that the governments of certain members would have difficulty paying their bills. First it was Greece, but concern over Ireland, Portugal, Spain and Italy soon followed (for more on this, see my earlier article). Thing have deteriorated: according to the IMF: “Banks in Greece, Ireland and Portugal have significantly increased their government debt exposure during 2010. Shunned by financial markets and faced with deposit withdrawals, they survive only because the ECB meets in full their demands for liquidity against collateral of rapidly declining quality.
Greece and Ireland have also agreed to austerity measures imposed by the ECB and the IMF in return for which they get low-interest money. The austerity programs are quite severe, and with unemployment already high in both countries, (Greece 16.6%, Ireland 14.4%), there is real question whether political pressures will force austerity program compromises.
There are economically strong and weak countries in the Eurozone. The strong countries (Germany and The Netherlands) are not happy with what is going on. In particular, they don’t like to see the ECB buying the debt of the weak Euro countries.
But most interesting and troubling, what started as a set of countries “living beyond their means” has now become an international banking crisis: for reasons described in my last article, banks foolishly bought large amounts of the weak Euro countries’ debt. So defaults on the debt could lead to a number of bank insolvencies Sound familiar? Mortgages, sovereign debt, does it really matter what the risky instrument is?
Key Conflicts
Commercial banks in both the strong and weak Eurozone countries stand to lose a lot if Greece or any other Euro nation defaults on its debt. And the ECB is behaving more like a for-profit company than a central bank because it is also fretting about losing asset value if Greece defaults. And Germany is bothered by the large amount of weak company debt being bought by the ECB.
Prediction 1
Most outside observers believe Greece has no option other than to default (see earlier article). I agree. Sooner or later, Greece will default. How much of a default? 25%, 50%, or what? No prediction.
I hope Greece announces that at least for the next 5 years, it will stop making any debt payments, interest or principal. To provide perspective on what this would mean, the IMF estimates that amortization payments on the Greek government debt in 2011 will be approximately €100 billion. The government’s total revenues are about the same.
Prediction 2
Such an announcement will cause an immediate panic. The market for the debt of other Euro “weak sisters” will take a hit.
Many are worried about what impact this will have on banks. Table 1 records bank claims on government. It indicates how much government debt banks of different countries are holding broken down by debtor nation. For example, the table shows that Germany is holding €14 billion of Greek government debt, €117 billion of Irish debt, etc.
Table 1. – Bank Exposure to Government Debt, 2011 (in bil. €)
Source Bank of International Settlements, Quarterly Report, Table 9E
But how big and how serious are these numbers for the banks? In Table 2, I address this question. The first row in that Table is the total external position of banks – read bank exposure) in billions of Euros. The columns below that are bank exposures by country as reflected in Table 1 as a percent of total foreign exposure. Some of the numbers are quite high – France, Germany, and Spain. The bottom reflects the extreme – complete contagion….
Table 2. – Bank Exposure to Government Debt of Selected Countries, 2011
Source: Op. cit. and Table 2A, same source.
It is notable that Italy, UK, and US exposure is very low.
Prediction 3
Given such large exposures, the European banks can be expected to do all they can to keep the Greek default to a very low level.
I pick up on my letter to President Papoulias from an earlier piece: “Let the banks, including the ECB, hang by their heels for a few years.  And if they want to boot Greece out of the Eurozone, fine, let them. You can still use the Euro (or the US dollar if you want) as your currency. The President might ask “we still needFINANCING, who will provide it?” My response: “You just eliminated government debt payments of approximately €100 billion annually. That includes a €16 billion interest payment. Without this burden, your bond rating will shoot up. There will be plenty of private finance available. You are a member of the IMF. Tell them you still need financing and are prepared to work for it under a modified austerity program.”

Tuesday, June 2, 2015

Pre-Shipment Credit

Pre-Shipment Credit

Pre Shipment credit is issued by a financial institution when the seller wants the payment of the goods before shipment. The main objectives behind
pre-shipment credit or pre export finance are to enable exporter to:
Procure raw materials.
Carry out manufacturing process.
Provide a secure warehouse for goods and raw materials.
Process and pack the goods.
Ship the goods to the buyers.

Meet other financial cost of the business.
Types of Pre Shipment credit Packing Credit Advance against cheques/draft etc. representing Advance Payments.

Packing Credit
This facility is provided to an exporter who satisfies the following criteria

A ten digit importer exporter code number allotted by DGFT.
Exporter should not be in the caution list of RBI. If the goods to be exported are not under OGL (Open General License), the exporter should have the required license /quota permit to export the goods.
Packing credit facility can be provided to an exporter on production of the following evidences to the bank:
Formal application for release the packing credit with undertaking to the effect that the exporter would be ship the goods within stipulated due date and submit
the relevant shipping documents to the banks within prescribed time limit.
Firm order or irrevocable L/C or original cable / fax / telex message exchange between the exporter and the

License issued by DGFT if the goods to be exported fall under the restricted or canalized category. If the item falls under quota system, proper quota allotment proof needs to be submitted.
The confirmed order received from the overseas buyer should reveal the information about the full name and address of the overseas buyer, description quantity and value of goods (FOB or CIF), destination port and the last date of payment.

Advance against Cheque/Drafts received as advance payment
Where exporters receive direct payments from abroad by means of cheques/drafts etc. the bank may grant export credit at concessional rate to the exporters of goods track record, till the time of
realization of the proceeds of the cheques or draft etc. The Banks however, must satisfy themselves that the proceeds are against an export order.

Monday, June 1, 2015


LIBOR stands for London Interbank Offered Rate. The world's most widely used benchmark for short term bank borrowing rates.
LIBOR is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another. LIBOR comes in 7
maturities (from overnight to 12 months) and in 5 different currencies. The official LIBOR interest rates are announced
once per working day at around 11:45 a.m. In the past, the BBA/ICE published LIBOR rates for 5 more currencies
(Swedish krona, Danish krone, Canadian dollar, Australian dollar and New Zealand dollar) and 8 more maturities (2
weeks, 4, 5, 7, 8, 9, 10 and 11 months).
LIBOR is watched closely by both professionals and private individuals because the LIBOR interest rate is used as a base rate (benchmark) by banks and other financial institutions. Rises and falls in the LIBOR interest rates can therefore have consequences for the interest rates on all sorts of banking products such as savings accounts, mortgages and loans.
This site shows you the current and historic rates for all LIBOR interest rates. The interest rates on this site are
updated daily at around 6.00 p.m. (CET) so that you always have access to current, almost real-time LIBOR information. The table below shows a summary of the current rates for all LIBOR interest rates. If you click on the
links you will be able to view extensive current and historic information for the maturity concerned. The tabs allow you
to view the LIBOR interest rates for other currencies. At the bottom of the page you will find links to other pages with LIBOR information.