It's Hungary's turn now after Greece, Spain and Portugal to default on the debts.

Hungary government talks about crisis.

I was surprised that there was no thread on this community dedicated to the Europe crisis.

After the great pullback last week, was hoping for a good rally in the coming weeks. How do you guys think would markets -Indian markets in particular- react to this news?

I even doubt that Hungary will be the last bad news. The entire Eurozone could be a in a big mess!

Monday will have at three bad news to price in: Hungary and any other Euro-flop that is uncovered over the weekend, the poor US jobs data (and Dow below 10K), and our own 25% public float.

I hope the Indian government learns something from the Eurozone crisis.

India's public debt is very high too.

According to Wikipedia, the public debt to GDP ratio of the distressed Euro economies are:

Greece: 113.40 %
Iceland: 95.10 %
Hungary: 78.00 %
Portugal: 75.20 %
Spain: 50.00 %

India's public debt to GDP ratio is already at 59.60 %.

The only good part about it is that most of India's public debt is locally held (in Indian currency) and thus can be repaid by printing money in the worst case.

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One more interesting point

The debt of PIIGS is financed by

- France
- Germany

So if PIIGS go down so does they take along their financiers.

But this might be the case with every country not only India.

Even we have seen past days USA was doing the same to overcome of recession.

No.

US is an exceptional case.

The US dollar is accepted everywhere. The US government has always borrowed in US dollar and thus (as a last resort) can print money to repay its debt.

However, many countries have a significant part of their debt in US dollar or euro.

When a county borrows in a particular currency, it has to repay the debt in the same currency.

If Indian government borrows in US dollars, it can't tell the lenders to accept Indian rupee instead of the US dollar.

If at the time of debt repayment, the Indian government doesn't have enough forex reserves, it has to default.

That's the primary reason why many European countries are having debt problems. A large part of their debt is in euros, but these countries aren't allowed to print euros.

(Obviously, printing money leads to inflation, but compared to a sovereign debt default, inflation is the lesser evil).

If the Eurozone countries don't have enough euro revenues, they will start defaulting on their debt.

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Actually, the Eurozone has a big structural flaw. The counties in the Eurozone have a common central bank, but their treasuries are separate.

The currency is controlled by ECB, but the individual countries control their own finances.

The finances of many countries are in a mess, but these countries can neither print more money nor devalue their currency because they have no direct control over the central bank.

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I am having some doubt about this debt problem.

Almost all of the country is having debt. If somebody is having debt then somebody has given loan. Who is giving money to these countries and from where did they get that money?

If we sum all of the debt and is it equal to the amount to be received by the lender? .

Government debt is held by individuals, institutions, corporates, banks, other governments etc.

Take the case of an Indian individual investor.

He may have investments in RBI bonds, provident fund, postal savings, bank deposits etc.

All these are forms of debt to the government.

(A significant part of bank deposits goes to the RBI in the form of CRR, SLR etc).

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Well ultimate truth is the Euro currency is heading for 1:1 and both will meet at 50 Rs.

The day is not far when you will see

1 USD = 1 EUR
1 USD = 50 Rs
1 EUR = 50 Rs

This is where Fibonacci projected target lies!

I think both of these currencies will have to be devalued to become competitive or else these countries are likely to default.

Further reading on the report of 1929 crash history, it concludes that gold and the silver will become the ultimate currency since nobody will have faith in these 2 currencies.

The high debt level, the high unemployment rate and the tension on the Gaza Strip and the North Korea - South Korea situation may lead to World War 3.

Because as per the technical analysis the history repeats itself. This recession has come every 75 years in the history.

The history of what? Please give details or a link.

I believe he is talking about Kondratieff cycle that occurs once every 60-75 years in the western civilization.

A Google on Kondratieff will give you ample information.

http://en.wikipedia.org/wiki/Kondratiev_wave

Portugal joins the club of bankrupt economies getting bailouts:

Portugal Seeks EU Bailout, Joining Greece, Ireland - Bloomberg

EU Bailouts Fail To Keep European Sovereign Debt Markets Afloat | Elliott Wave International

Is Spain next ? I think they will join the club soon.

Portugal's debt is now "junk".

Moody's has downgraded Portugal credit rating to "junk" status and thinks that Portugal will need a second bailout too.

Portugal Rating Cut on Possible Greek Follow - Bloomberg

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Italy's sovereign debt has been downgraded by S&P.

Italy is the 7th largest economy in the world and 3rd largest economy in the Eurozone (behind Germany and France).

(The six biggest economies are US, China, Japan, Germany, France and UK).

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Greece's one year bond yield is more than 100% (last I checked it crossed 135% and come down a bit) which is a pure joke.

German public, as they are known to living within their means, will not have longest patience with their government's attempt to rescue these economies at their cost. It is already a wide spread feeling among the Germans that Greeks have to change their lifestyle, of living on borrowed money, to come out of this hole which does not seem to be happening.

On one side, a weak Euro is something Germany will not mind as it is better for their trade but at the same time they have to work towards strengthening it. These contradictions make my head spin

Will write a detailed post sometime later on my reading of situation in Europe.

I think IMF can come up with the positive for rescue debt countries in Europe.

But long term effect will still remain a concern.

Market will be volatile through out this year.

There is no clear cut solution so far for the Euro Zone.

This bubble will not burst easily.

In my opinion, there is no solution for the Euro Zone except to break it up.

If done in an orderly manner, things could normalize in 2-3 years.

If not, everything will implode.

The PIIGS make up a third of Euro Zone's GDP. The proportion of debt issued by them is even higher.

This debt is well distributed among European banks. If things get out of control, it will all end up in a big mess.

I think the best solution is to let the weakest economies exit one by one and then try to stabilize the Euro Zone.

Soros: US is already in double-dip recession - CNBC -

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Hi folks,

As we see that bad debts remains to be a major concern for the US and EUROZONE as well.

Could the current turmoil be viewed as invitation to the commodity bubble in the near term, similar to the one that happened in 90's era and popularly known as dot com bubble?

The dot com bubble was the height of all bubbles.

In a commodity bubble, there is at least something of real value underlying it (copper, crude , ...)

In the dot com bubble there was absolutely nothing of value. People created some xyz.com site and venture capitalists came flocking to invest in them without even considering how the company would actually make money.

I remember an interesting anecdote published in an investing magazine at that time (was it Dalal Street Journal?)

The share price of a small company in Maharashtra started zooming up. The rise was so steep that even the company management was puzzled. The name of the company was some XYZ Softwear. It manufactured undergarments. People crazed by the dot com hype thought it was a software company and were bidding up the price.

Not sure if it is a true story but interesting nevertheless.

Euro zone economy is more than $16 Trillion which makes it the largest in the world and problems with it are sure going to reverberate across the wonderfully interwoven global financial village. Not only commodities but stocks, real estate and investments across the board will take a hit.

How much of it will be permanent and long lasting (particularly for India stocks) remains to be seen.

I agree with you up to a great extent that if commodity bubble happens there must be some real value underlying it, but in case that happens what would be the repercussions on our economy in particular?

Having said that maximum of our crude is imported how you see the long term impacts of it both good and bad on us?

I don't think that we will have a commodity bubble this time.

Whenever price of a commodity rises too fast, producers increase production to take advantage of the higher price.

The problem with commodities is that they can't be stored for a long time.

(Precious metals are an exception).

In the absence of real demand, increased supply brings down price sooner or later.

That's what happened with crude oil in 2008.

Speculators did bid up oil to nearly $150, but there was no real increase in demand. Speculators were not in a position to take delivery of and store large quantities of crude oil. As speculators unwound their positions, crude oil collapsed to less than $50 a barrel.

We may see a small spike if US resumes quantitative easing, but I don't think speculators will repeat the mistake that they made in 2008 with crude oil.

In the long-term, I expect prices of commodities to rise steadily, but that's not because I expect speculative activity in commodities, but because I expect governments around the world to pump more and more money into their respective economies.

Increased money supply will increase cost of production of commodities.

In other words, the increase in prices will happen because of supply-side pressures and not speculative demand.

e.g. Workers of Coal India want a significant hike in their salaries and bonuses.

If these hikes happen, Coal India may ask for a higher price for its coal. .

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Y.V. Reddy explains the European crisis as 3 different issues:

1. First is the fiscal/debt crisis in the PIIGS group, which is the core issue.

2. Second is the financial crisis of the banks holding debts issued by the PIIGS group.

3. Third is basic structural flaw that exists in Eurozone, which has single monetary authority, but different fiscal authorities.

Greece's fiscal mess, all thanks to Goldman Sachs: YV Reddy - CNBC-TV18 -

The first problem has no real solution except debt write-offs.

The second problem is comparatively easier to tackle as governments in non-PIIGS nations can recapitalize their respective banks.

The third problem is again tricky. Unless it is solved Europe will keep facing such crisis every few years. The only solution is to either create a fiscal union or break-up the monetary union. Creating a fiscal union is going to be very very tough. No country will be willing to accept the financial burden of other countries.

In my opinion, the monetary union will break eventually.

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Alchemist, what would be the effect of such an event on the Indian economy in general and the stock markets in particular?

The greater probability is that it will be a partial breakup in which 2 or 3 of the weakest countries are asked to leave the monetary union.

A partial breakup will be a short to medium term negative.

There is no real exit plan in the Eurozone. A complete breakup looks unlikely at this moment, but if it happens it will be worse than 2008 crisis.

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Yes this could be very much possible but in order to avoid the same situation next time the EU countries must have to check their profligate lifestyles.

Now as per what you said their could be partial breakup in short to medium term, then won't the same would lead to the slump in IT sales and ultimately leading to the fall in stock prices of companies working in IT space of our country in particular?

Indian IT firms will be impacted, but I don't expect any major impact.

In 2008-2009, US economy was in turmoil and actually shrunk. However, there was no significant impact on existing businesses of Indian IT firms.

This time the crisis is in Europe and US is relatively stable. As most Indian firms get more business from US than from Europe, I except the impact to be less severe this time compared to 2008-2009.

Also, the majority revenues of bigger Indian IT firms come from non-discretionary spending of companies and that portion of revenues is likely to remain stable.

Infy no longer a leader in margins

Also, the PIIGS group doesn't outsource much to India. I can't think of any IT company that gets significant portion of its revenues from the PIIGS nations.

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Okay, and thanks for the nice explanation,but it would be of great help if you could explain me the term non-discretionary spending?

Spending that can be avoided is "discretionary spending" and spending that can't be avoided is "non-discretionary spending".

e.g. For a bank, costs of running an internet banking platform are "non-discretionary" costs. The internet banking platform can't be discontinued. Costs of marketing on the internet are "discretionary" costs and can be brought down to as low as 0.

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okay now we could assume there won't be the bigger impacts even if PIIGS get out of the EU which is most likely to happen.

The 2007-2008 crisis came all of a sudden and most US based companies were not prepared for it. As a result they had to maintain "Business as usual" on their IT side. This benefited Indian IT companies as business continued without much impact.

The current problem is brewing slowly and every tom, dick and harry is discussing. I have no doubt that important customers of Indian IT companies now have plans in place to reduce IT spending to bare minimum if a new economic crisis emerges.

We should note that Indian IT companies are not involved in cutting-edge work. Our primary benefits over other countries such as China, Indonesia, Vietnam, Argentina, Chile are:

1. Large Educational base and ability to scale up operations quickly
2. Command of English Language

In terms of crisis, customers will not be expanding so advantage (1) will become meaningless.

Command of English language is something that is desired but not necessary. In times of crisis, business can steadily flow out from India to other countries.

Our main USP was cost advantage and we are steadily loosing even that.

I am pessimistic about long-term (5 year+) prospects of Indian IT companies even without any crisis.

Hi Sudhash,

I won't deny with what all you said but how could you say that we are gradually losing our biggest USP, the cost advantage which you are talking about?

And 5 years down the line you are predicting the bleak outlook for the Indian IT companies, do not you think it is an overstatement?

There is no easy answer to that question.

Economies in the Eurozone are all intermingled. Thus, it is impossible that the non-PIIGS countries in the Eurozone will come out of this crisis unscathed.

I am not sure how exposed US banks and companies are to Eurozone, but US economy will also be impacted if the crises in the Eurozone worsens.

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The crisis in Europe in actually a blessing in disguise for the US.

Euro was once considered to be USD's rival currency.

The instability in Europe has weakened Euro's position and once again the Dollar is the only "global currency" in the world.

If Greece defaults, investors will shun Euro-denominated assets and divert their money to USD-denominated assets.

This will allow US to borrow more money at near-zero rates and as a result US's Ponzi scheme will survive for a few more years.

US has big advantage over the Eurozone. US can print money to repay debt.

No doubt Eurozone can print Euros too. For Eurozone, printing money is easy, but distribution of that money is a big issue.

Tomorrow, the ECB can easily create 500 billion Euros, but then the key issue will be the distribution of that money among the Eurozone members.

Will ECB buy Greek debt or Italian debt or give cash to France to recapitalize its banks?

Every country will want a big share of that money and the issue of distribution of that money will lead to another political mess.

US can print and pump money into its banks/economy in whatever manner it wants to. Eurozone does not have that luxury.

The only option left for the Eurozone is defaults.

As I said earlier, majority of the spending that the companies are doing is non-discretionary and cannot be avoided.

Also, US government and US consumer may be facing a debt crises, but US corporates currently have very strong balance sheets. The companies have been conserving cash since 2008 and are now sitting on big cash reserves.

That is one reason why the US economy and jobs market is not recovering.

US companies have already reduced spending to a bare minimum.

In a way, their cash-hoarding is justified. Companies are not investing because they don't expect any increase in demand.

Well, there are two factors that determine the cost advantage that one country has over another:

1. Actual costs.
2. Currency.

Costs in India are definitely rising very fast. In fact, I think costs in India are rising faster than in any other major economy in Asia.

However, that's not the end of story.

For exporters, rising costs can be negated by a falling currency. If INR continues to weaken in future too, Indian IT companies won't really be affected by rising costs.

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These figures can give us an idea about how US economy is linked to the Eurozone.

Crisis in Europe: Why you should be worried - Yahoo! Finance

The biggest risk comes from the Eurozone exposure of US Banks. If there are major defaults in the Eurozone, US banks may also need to recapitalize.

In my opinion, loans given to UK are relatively safe.

Loss of business and reduction in value of investments will hit the US economy, but these are unlikely to create a "crisis".

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I work in a large IT company and my assessment is that at least 20% of the business can be cut overnight without affecting customer business. So while it is true that majority of the work will continue, the minority cut possible can still significantly affect the company's fortune. I guess most large Indian IT companies are in a similar position.

That is only half the story. The currency effect help to maintain costs as seen by customers in dollar terms to remain relatively stable.

The other side of the story:

1. Visa rejections: It is no secret that ability of Indian IT companies to deliver depends on being able to send people to the US. L1 visa rejections have reached over 80%. Even for H1B, rejections have increased dramatically. Earlier companies used to file visas without a real project. Now this practice has been largely scrapped.

2. US IT salaries: Entry level IT salaries in the US have reduced. The high unemployment means people in US are ready to work for lower salaries instead of being fired. The relative cost advantage of Indian IT companies is therefore reduced even if cost appear stable in Dollar terms.

3. Increased Competition from other nations: As of today, Indian IT companies do not have any USP. Business can easily flow to other countries over a period of next 5 years.

In general I am pessimistic of the Indian IT industry in the next 5+ years.

I am strongly pessimistic about stock prices of Indian IT companies. The P/E assigned are way out of sync with actual growth prospects.

Hi Sudhash,

Now that 3 issues which you are talking about are something which should be seriously taken into the consideration otherwise it could possibly pose threats much bigger than we could assume.

But what could be the way out in your view?

I agree that there are serious visa issues and it will only get worse from here. The west has to protect its jobs. .

I also agree with your 20% figure. In fact for many companies the figure is much higher.

However, I don't think Indian IT workforce is easy to replace.

Salaries and costs in US are still around 3 times that in India.

Costs in Philippines and Vietnam are still 25%-30% more than India and it will take 3-5 years of high inflation, before costs in India become same as those in Philippines or Vietnam.

Argentina and Indonesia are even more expensive.

Besides that, India's English-speaking population is much greater than the English-speaking population in those countries.

Philippines' BPO loss will be India's gain: WNS CEO - The Times of India

I am an IT services provider too. My revenues are independent of the country in which I operate.

I was considering moving to a country with lower costs, but I couldn't find any except China.

In the industry which I operate in (SEO and web marketing), 80% of the low-level labor work in done by Indians. No other country is able to match India's low costs. Members on webmaster forums are always complaining why there are so many Indians in this industry. .

I would love to hire people who can work at lesser rates compared to Indians, but there are none available. Once in a while I get freelancers from Philippines - that's it.

In this list, India's cost of living is the lowest.

Cost of Living Index By Country

Nothing can be done except waging a currency war like China has done.

However, if Indian government continues to perform as it has done in the last 2-3 years, India won't need to wage a currency war. The rupee would continue to fall on its own. .

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The European leaders have found a temporary solution to the debt crisis.

Greece's private bondholders have agreed to a 50% debt write-down. It is being called "voluntary", but they had no other choice.

Even after this write-down, Greece's debt remains at very high levels and is expected to touch 120% of its GDP by 2020. (Earlier estimates were 170%-180% of the GDP).

European Financial Stability Facility (EFSF) will now be allowed to use leverage and it has the mandate to use up to $1.4 trillion.

Euro deal leaves much to do on rescue fund, Greek debt - Business - World business - msnbc.com

However, I feel that after the step-motherly treatment that private investors have been given in case of Greece's bonds, they will be skeptical about investing further in bonds of other PIIGS nations.

If private investors shun bonds of PIIGS, governments in the Eurozone will have to continuously finance the deficits of PIIGS.

Economies around the world are becoming more and more dependent on money pumping by their respective governments. That's a factor to worry about in the long-term.

Anyway, for today, let's just enjoy the rally. .

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