Skeletal of the Presentation on AIIB and Blue Economy in Mumbai during the Peoples’ Convention on 22nd June 2018

Main features in AIIB Financing

  1. investments in regional members
  2. supports longer tenors and appropriate grace period
  3. mobilize funding through insurance, banks, funds and sovereign wealth (like the China Investment Corporation (CIC) in the case of China)
  4. funds on economic/financial considerations and on project benefits, eg. global climate, energy security, productivity improvement etc.

Public Sector:

  1. sovereign-backed financing (sovereign guarantee)
  2. loan/guarantee

Private Sector:

  1. non-sovereign-backed financing (private sector, State Owned Enterprises (SOEs), sub-sovereign and municipalities)
  2. loans and equity
  3. bonds, credit enhancement, funds etc.

—— portfolio is expected to grow steadily with increasing share of standalone projects from 27% in 2016 to 39% in 2017 and 42% in 2018 (projected)

—— share of non-sovereign-backed projects has increased from 1% in 2016 to 36% of portfolio in 2017. share of non-sovereign-backed projects is projected to account for about 30% in 2018

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Why would AIIB be interested in the Blue Economy?

  1. To appropriate (expropriate) the potential of hinterlands
  2. increasing industrialization
  3. increasing GDP
  4. increasing trade
  5. infrastructure development
  6. Energy and Minerals in order to bring about a changing landscape
  7. Container: regional collaboration and competition

AIIB wishes to change the landscape of infrastructure funding across its partner countries, laying emphasis on cross-country and cross-sectoral investments in the shipping sector — Yee Ean Pang, Director General, Investment Operations, AIIB.

He also opined that in the shipping sector there is a need for private players to step in, with 40-45 per cent of stake in partnership being offered to private players.

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Projects aligned with Sagarmala are being considered for financial assistance by the Ministry of Shipping under two main headings:

1. Budgetary Allocations from the Ministry of Shipping

    a. up to 50% of the project cost in the form of budgetary grant

    b. Projects having high social impact but low/no Internal Rate of Return (IRR) may be provided funding, in convergence with schemes of other central line ministries. IRR is a metric used in capital budgeting to estimate the profitability of potential investments. It is a discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. NPV is the difference between the present value of cash inflows and present value of cash outflows over a period of time. IRR is sometimes referred to as “economic rate of return” or “discounted cash flow rate of return.” The use of “internal” refers to the omission of external factors, such as the cost of capital or inflation, from the calculation.

2. Funding in the form of equity by Sagarmala Development Co. Ltd.

    a. SDCL to provide 49% equity funding to residual projects

    b. monitoring is to be jointly done by SDCL and implementing agency at the SPV level

    c.  project proponent to bear operation and maintenance costs of the project

     i. importantly, expenses incurred for project development to be treated as part of SDCL’s equity contribution

     ii. preferences to be given to projects where land is being contributed by the project proponent

What are the main financing issues?

  1. Role of MDBs and BDBs for promotion of shipping sector in the country
  2. provision of long-term low-cost loans to shipping companies for procurement of vessels
  3. PPPs (coastal employment zones, port connectivity projects), EPCs, ECBs (port expansion and new port development), FDI in Make in India 2.0 of which shipping is a major sector identified, and conventional bank financing for port modernization and port connectivity

the major constraining factors, however, are:

  1. uncertainty in the shipping sector, cyclical business nature
  2. immature financial markets

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The Plantation Labour Act, 1951. Random Musings.

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The Plantation Labour Act, 1951 provides for the welfare of plantation labour and regulates the conditions of work in plantations. According to the Act, the term ‘plantation’ means “any plantation to which this Act, whether wholly or in part, applies and includes offices, hospitals, dispensaries, schools, and any other premises used for any purpose connected with such plantation, but does not include any factory on the premises to which the provisions of the Factories Act, 1948 apply.”

The Act applies to any land used as plantations which measures 5 hectares or more in which 15 or more persons are working. However, the State Governments are free to declare any plantation land less than 5 hectares or less than 15 persons to be covered by the Act.

The Act provides that no adult worker and adolescent or child shall be employed for more than 48 hours and 27 hours respectively a week, and every worker is entitled for a day of rest in every period of 7 days. In every plantation covered under the Act, medical facilities for the workers and their families are to be made readily available. Also, it provides for setting up of canteens, creches, recreational facilities, suitable accommodation and educational facilities for the benefit of plantation workers in and around the work places in the plantation estate. Its amendment in 1981 provided for compulsory registration of plantations. 

The Act is administered by the Ministry of Labour through its Industrial Relations Division. The Division is concerned with improving the institutional framework for dispute settlement and amending labour laws relating to industrial relations. It works in close co-ordination with the Central Industrial Relations Machinery (CIRM) in an effort to ensure that the country gets a stable, dignified and efficient workforce, free from exploitation and capable of generating higher levels of output. The CIRM, which is an attached office of the Ministry of Labour, is also known as the Chief Labour Commissioner (Central) [CLC(C)] Organisation. The CIRM is headed by the Chief Labour Commissioner (Central).

In the case of the tea plantations, the responsibility for welfare measures has been given to their management. The Government of India imposed this responsibility on them through the Plantation Labour Act of 1951 (PLA). The Government of Assam gave it a concrete shape in the Assam Plantation Labour Rules, 1956. This act provided for certain welfare measures for the workers and imposed restrictions on the working hours. They are to be 54 (per week) for adults and 44 (per week) for non-adults. The employers are also to attend to the health aspect, provide adequate drinking water, latrines and urinals separately for men and women for every 50 acres of land under cultivation, proper maintenance of the drinking water and sanitation system. The employer is also to provide a garden hospital for the estates with more than 500 workers or have a lien of 15 beds for every 1,000 workers in a neighbouring hospital within a distance of five kilometres. The gardens are also to have a group hospital in a sub area considered central for the people and provide transport to the patients. Along with the canteen facility a well furnished lighted and ventilated crèche for children below 2 is to be provided in gardens with more than 50 women workers. An open playground is to be provided for children above 2. The workers are to be provided with recreational facilities such as community radio and TV sets and indoor games. 

Specific to the PLA is the clause on educational facilities. If the number of children in the 6-12 age group exceeds 25 the employer should provide and maintain at least a primary school for imparting primary education to them. The school should have facilities such as a building in accordance with the guidelines and standard plans of the Education Department. If the garden does not maintain a school because a public school is situated within a mile from the garden then the employer is to pay a cess or tax for the children’s primary education. 

The tea plantation workers are still paid wages below the minimum wage of agricultural workers. An industry, which is highly capitalistic in character, owing to the colonial times when British private businesses with the extended involvement of British capital expanded the industry from the vantage point of international marketing and financial activities, and still continuing in formats no different in kind post-independence, bifurcates the wages partly in cash and partly in kind. Even if there has been a numerical increase in wages post-independence for the plantation workers, qualitatively, this hasn’t had any substantial improvement, thanks to minute upward fluctuations in real wages. What this has amounted to is a continuation of feudal relations of production and a highly structured organization of production in its pre-marketing phases, and thus expropriating super-profits on the basis of semi-feudal, extra-economic coercion and exploitation.

The literacy rate among the tea garden workers and their families is a poor 20 per cent. Around one-third of the workforce is denied housing facilities. Every year, hundreds of people in the plantations die from water-borne diseases like gastro-enteritis and cholera. Most of the plantations have no potable drinking water facilities and drainage systems.

The majority of the workers are suffering from anaemia and tuberculosis. Malaria is rampant. There are tea gardens where at least one in every family is suffering from tuberculosis. And the children and women are the worst affected. The infant mortality rate is very high, far above the state and national averages. 

The ethnicity of the tea workforce is probably one reason why nobody cares. a significant percentage of the tea plantation workers of Assam and West Bengal are tribals, fourth generation immigrants of indentured migrants from the Central and South-Central Indian tribal heartland. In Assam, they do not enjoy any special status, as their brethren elsewhere do. They are merely referred to as the tea labour and ex-tea labour community. The children cannot avail of any reservation facility in educational institutions, the youth do not enjoy any opportunity in the employment circuit. Most of the time, education begins and ends with lower primary schools housed within the gardens themselves. In other words, being coerced into plantation labour at the cost of continuing education is nothing uncommon. After getting sucked into the plantation, this young labour force, due to lack of skilled exposure and an almost complete absence of alternative employment opportunity only add credence to the epitome of modern-day bonded labour: forced and unfree in nature. With the institution of labour laws and the PLA in the tea plantation industry, it is the women who have been the prime target of deprivation and exploitation. They have been subjected to long working hours and heavy workload. Even the pregnant women are not spared from activities like deep hoeing. The majority of the temporary workers, today, are women. For them, social welfare benefits under PLA including maternity and medical benefits do not exist.

The tea plantation industry is amongst the largest organized industry in India, where the workers are unionized. In West Bengal, there are up north of 30 unions, whereas in Assam, the mantle of workers’ representation over the last five decades has been invested  with the Assam Cha Mazdoor Sangh (ACMS). ACMS happens to be the only registered union, even though some others have central trade unions affiliations.  Despite strong unionization, the issue of PLA implementation is weak with not a single plantation boasting of total implementation. One major implication of such a lack is reflected in the dominion of tea industry associations, which maneuver wage agreements. With hardly any promotional avenues opening up for a large majority of unskilled workers, these across ages and experiences receive same wages and are classified as daily wage workers. The last few decades of wage agreements show that the tea employers have not conceded any major demand of the trade unions. The tea associations have also not agreed to the CPI-linked variable Dearness Allowance. Nearly 40 per cent of the workers in the tea plantations of West Bengal and Assam are temporary and casual workers with growing numbers ruling them out of the ambit of PLA. That the tea industry is reaping all the benefits without investing a unit currency on a large section of its workforce is a direct consequent of the above fact. 

The agreements in West Bengal are tripartite in that the union, tea industry association and the government work out the agreement, whereas bipartite in Assam where the government is not a party. The long-term understanding with the Indian National Trade Union Congress (INTUC) affiliated ACMS has given the Assam employers a clear domination and stranglehold over the industry. Officially, there is no labour unrest, industrial relations remain generally peaceful and ACMS, understandably, ‘co-operates with the industry’. In West Bengal, however, any demand by the workers and the unions, termed unfair by the industry, is either flatly rejected, or is repeatedly discussed by the tea industry in a series of consultations, a delaying tactic mainly, until the unions are fed up and ask the government to intervene. Even then, there is a lot of resentment amongst the workers, but the very threat to their survival forces them to keep quiet and accept the verdict. For a tea plantation worker, whose forefathers were indentured immigrants, and were born and brought up inside the tea gardens, dismissal means not only the loss of livelihood but a threat to their general existence. It is therefore very evident that even with complete unionization, positive interventions on behalf of the workers are confined to the micro-scale and any extrapolation to the macro-scale doesn’t really help beat seclusion and isolation. But, what is really ironic is that these unions have remained workers’ only link to the outside world, albeit in a manner that hasn’t concretely contributed to their cause. 

The trade unions in the tea industry are operating under the same hierarchical and organizational setup master-minded and practiced by the planters right from the colonial days. Beyond a point, logic says that they will never be able to confront the tea industry to struggle for the betterment and uplift of the tea workers. The trade unions have thus miles to go, starting foremost with the politics of architecture: to revamp organizational change and hierarchies in favour of workers to be able to survive and discharge responsibilities towards the tea plantation workers.

Serge Galam’s Sociophysics: A Physicist’s Modeling of Psycho-political Phenomena

The Trump phenomenon is argued to depart from current populist rise in Europe. According to a model of opinion dynamics from sociophysics the machinery of Trump’s amazing success obeys well-defined counter-intuitive rules. Therefore, his success was in principle predictable from the start. The model uses local majority rule arguments and obeys a threshold dynamics. The associated tipping points are found to depend on the leading collective beliefs, cognitive biases and prejudices of the social group which undertakes the public debate. And here comes the open sesame of the Trump campaign, which develops along two successive steps. During a first moment, Trump’s statement produces a majority of voters against him. But at the same time, according to the model the shocking character of the statement modifies the prejudice balance. In case the prejudice is present even being frozen among voters, the tipping point is lowered at Trump’s benefit. Nevertheless, although the tipping point has been lowered by the activation of frozen prejudices it is instrumental to preserve enough support from openly prejudiced people to be above the threshold.

Serge Galam – Sociophysics A Physicist’s Modeling of Psycho-political Phenomena

 

Infrastructure and Asian Infrastructure and Investment Bank. Some Scattered Thoughts.

What is Infrastructure?

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Infrastructure, though definitionally an elusive term, encompasses an economic standpoint consisting of large capital intensive natural monopolies. The term attains it heterogeneity by including physical structures of various types used by many industries as inputs to the production of goods and services. By this, it has come to mean either social, or economic infrastructure, wherein, in the former, are schools, hospitals etc, while in the latter are energy, water, transport, and digital communications, often considered essential ingredients in the success of the modern economy. Conceptually, infrastructure may affect aggregate output in two main ways: (i) directly, considering the sector contribution to GDP formation and as an additional input in the production process of other sectors; and (ii) indirectly, raising total factor productivity by reducing transaction and other costs thus allowing a more efficient use of conventional productive inputs. Infrastructure can be considered as a complementary factor for economic growth. How big is the contribution of infrastructure to aggregate economic performance? The answer is critical for many policy decisions – for example, to gauge the growth effects of fiscal interventions in the form of public investment changes, or to assess if public infrastructure investments can be self-financing.

Let us ponder on this a bit and begin with the question. Why is infrastructure even important? Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. In addition, the quality and extensiveness of infrastructure networks significantly impact economic growth and affect income inequalities and poverty in a variety of ways. A well-developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services. Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs. Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive communications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate and decisions are made by economic actors taking into account all available relevant information. There is an existing correlation between infrastructure and economic activity through which the economic effects originate in the construction phase and rise during the usage phase. The construction phase is associated with the short-term effects and are a consequence of the decisions in the public sector that could affect macroeconomic variables: GDP, employment, public deficit, inflation, among others. The public investment expands the aggregate demand, yielding a boost to the employment, production and income. The macroeconomic effects at a medium and long term, associated with the utilization phase are related to the increase of productivity in the private sector and its effects over the territory. Both influence significantly in the competitiveness degree of the economy. In conclusion, investing in infrastructure constitutes one of the main mechanisms to increase income, employment, productivity and consequently, the competitiveness of an economy. Is this so? Well, thats what the economics textbook teaches us, and thus governments all over the world turn to infrastructure development as a lubricant to maintain current economic output at best and it can also be the basis for better industry which contributes to better economic output. Governments, thus necessitate realignment of countries’ infrastructure in tune with the changing nature of global political economy. Infrastructure security and stability concerns the quantity of spare capacity (or security of supply). Instead of acting on the efficiency frontier, infrastructure projects must operate with spare capacity to contribute to economic growth through ensuring reliable service provisions. Spare capacity is a necessary condition for a properly functioning system. To assure the level of spare capacity in the absence of storage and demand, the system needs to have excess supply. However, no rational profit-seeker will deliberately create conditions of excess supply, since it would produce a marginal cost lower than the average cost, and to circumnavigate this market failure, governments are invested with the responsibility of creating incentives ensuring securities of supply. This is seeding the substitutability of economics with financialization. 

So far, so good, but then, so what? This is where social analysts need to be incisive in unearthing facts from fiction and this faction is what constitutes the critique of development, a critique that is engineered against a foci on GDP-led growth model. This is to be done by asking uncomfortable questions to policy-makers, such as: What is the most efficient way to finance infrastructure spending? What are optimal infrastructure pricing, maintenance and investment policies? What have proven to be the respective strengths and weaknesses of the public and private sectors in infrastructure provision and management, and what shapes those strengths and weaknesses? What are the distributional consequences of infrastructure policies? How do political forces impact the efficiency of public sector provision? What framework deals best with monopoly providers of infrastructure? For developing countries, which have hitherto been plagued by weaker legal systems making regulation and enforcement more complicated, the fiscally weak position leads to higher borrowing costs. A most natural outcome is a systemic increase in financial speculation driven by deregulation transforming into financial assets. Contrary to common sense and what civil society assumes, financial markets are going deeper and deeper into the real economy as a response to the financial crisis, so that speculative capital is structurally being intertwined with productive capital changing the whole dynamics of infrastructure investment. The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. 

Role of Development Banks and AIIB

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Where do development banks fit into the schema as regards infrastructure investment? This question is a useful gamble in order to tackle AIIB, the new kid on the bloc. As the world struggles to find funds to meet the Sustainable Development Goals (SDGs), development banks could be instrumental in narrowing the gap. So, goes the logic promulgated by these banks. They can help to crowd-in the private sector and anchor private-public sector partnerships, particularly for infrastructure financing. However, misusing development banks can lead to fiscal risks and credit market distortions. To avoid these potential pitfalls, development banks need a well-defined mandate, operate without political influence, focus on addressing significant market failures, concentrate on areas where the private sector is not present, monitor and evaluate interventions and adjust as necessary to ensure impact, and, finally, be transparent and accountable. All of these are the ideals, which more often than not go the other way. China-led Asian Infrastructure Investment Bank (AIIB), despite having no track record still enjoys the highest ratings on par with the World Bank. This has fueled debates ranging from adding much-needed capital augmenting infrastructure to leniency in observing high standards of governance, and possibly ignoring environmental and societal impacts.

The AIIB was officially launched in Beijing on January 16th, 2016, with 57 founding members, including 37 in Asia and 20 non-regional countries. Being the largest shareholder of the AIIB, China has an initial subscription of $29.78 billion in authorized capital stock in the AIIB out of a total of $100 billion, and made a grant contribution of another $50 million to the AIIB Project Preparation Special Fund on January 16th, 2017. India is the second-largest shareholder, contributing $8.4 billion. Russia is the third-largest shareholder, contributing $6.5 billion, and Germany is the largest non-regional shareholder (also the fourth largest shareholder), contributing $4.5 billion. While being open to the participation of non-regional members, the AIIB is committed to and prioritizes the ownership of Asian members. This is reflected in the capital structure requirement and the requirements for the composition of Board of Governors in the AIIB’s Article of Agreement (AOA), which requires no less than 75 percent of the total subscribed capital stock to be held by regional members unless otherwise agreed by the Board of Governors by a Super Majority vote. The AOA also requires that 9 out of the AIIB’s 12 members be elected by the Governors representing regional members, and 3 representing non-regional members. The prioritization of Asian-members’ ownership of the AIIB does not necessarily mean that the AIIB’s investment is restricted only to Asia. According to its AOA, the AIIB aims to “improve infrastructure connectivity in Asia,” and it will invest in Asia and beyond as long as the investment is “concerned with economic development of the region.” The bank currently has 64 member states while another 20 are prospective members for a total of 84 approved members. 

The AIIB’s EU/OECD members potentially could have some positive influence over the institutional building and standard setting of the young institution. The European Commission has recognized that an EU presence in China-driven institutions would contribute to the adoption of best practices and fair, global standards. Adherence to such standards will be promoted by the AIIB entering into partnership with existing Multilateral Development Banks. It has also been argued that joining the AIIB would give the European countries access to the decision-making process within the AIIB, and may even allow the European countries to play a role in shaping the AIIB’s organizational structure. As an example of EU/OECD members’ activism in monitoring the AIIB’s funds allocation, both Denmark and the UK, who are AIIB’s OECD members, proposed that contributions to the AIIB would qualify as official development aid (ODA). After a thorough review of AIIB’s AOA, mandate, work plan and other available materials, the OECD’s Secretariat of the Development Assistance Committee (DAC) recommended including AIIB on the List under the category of “Regional development banks,” which means the OECD would recognize the AIIB as one of the ODA-eligible international organizations. Once approved, the Secretariat of DAC will be able to “monitor the future recipient breakdown of the AIIB’s borrowers through AIIB’s future Creditor Reporting System and thereby confirm that the actual share of funds going to countries on the DAC List of ODA Recipients is over 90%.” That is to say, if approved, there would be additional external monitor to make sure that the funds channeled through the AIIB to recipient countries are used properly. 

The AIIB’s initial total capital is $100 billion, equivalent to about 61 percent of the ADB’s initial total capital, 43 percent of the World Bank’s, 30 percent of the European Investment Bank’s (EIB), and more than twice of the European Bank for Reconstruction and Development’s (EBRD). Of this $100 billion initial capital, 20 percent is to be largely paid-in by 2019 and fully paid-in by 2024, and the remaining 80 percent is in callable capital. It needs to be noted that according to the AOA, payments for paid-in capital are due in five installments, with the exception of members designated as less developed countries, who may pay in ten installments. As of any moment, the snapshot of AIIB’s financial sheet includes total assets, members’ equities and liabilities, the last of which has negligible debt at the current stage since the AIIB has not issued any debenture or borrowed money from outside. However, to reduce the funding costs and to gain access to wider source of capital, the AIIB cannot rely solely on equity and has to issue debenture and take some leverage, particularly given that the AIIB intends to be a for-profit institution. In February 2017, the AIIB signed an International Swaps and Derivatives Association (ISDA) Master Agreement with the International Finance Corporation (IFC), which would facilitate local currency bond issuance in client countries. Moreover, AIIB intends to actively originate and lead transactions that mobilize private capital and make it a trusted partner for all parties involved in the transactions that the Bank leads. In the long term, the AIIB aims to be the repository of know-how and best practices in infrastructure finance. 

It is widely perceived that the AIIB is a tool of Chinese foreign policy, and that it is a vehicle for the implementation of the Belt and Road (One Belt, One Road) Initiative. During a meeting with global executives in June 2016, the AIIB President Jin Liqun clarified China’s position, saying the AIIB “was not created exclusively for this initiative,” and that the AIIB would “finance infrastructure projects in all emerging market economies even though they don’t belong to the Belt and Road Initiative.” It is worth pointing out that despite the efforts on trying to put some distance between the AIIB and the Belt and Road Initiative, there is still a broad perception that these two are closely related. Moreover, China has differentiated AIIB projects from its other foreign assistance projects by co-financing its initial projects with the preexisting MDBs. Co-financing, combined with European membership, will make it more likely this institution largely conforms to the international standards” and potentially will steer the AIIB away from becoming solely a tool of Chinese foreign policy. This supports China’s stated intention to complement existing MDBs rather than compete with them. It also means that the AIIB can depend on its partners, if they would allow so, for expertise on a wide range of policy and procedural issues as it develops its lending portfolio.

Although AIIB has attracted a great number of developing and developed countries to join as members and it has co-financed several projects with other MDBs, there is no guarantee for any easy success in the future. There are several formidable challenges for the young multilateral institution down the road. Not all the infrastructure investment needs in Asia is immediately bankable and ready for investors’ money. Capital, regardless it’s sovereign or private, will not flow in to any project without any proper preparation. Although Asia faces a huge infrastructure financing gap, there is a shortage of ‘shovel-ready’ bankable projects owing to the capacity limitations. The young AIIB lacks the talent and expertise to create investor-ready bankable projects, despite that it has created a Project Preparation Special Fund thanks to $50 million by China. The AIIB aims to raise money in global capital markets to invest in the improvement of trans-regional connectivity. However, infrastructure projects are not naturally attractive investment due to huge uncertainties throughout the entire life cycle as well as unjustified risk-profit balance. Getting a top-notch credit rating is just a start. The AIIB has to find innovative ways to improve the risk-adjusted profitability of its projects. This issue itself has been a big challenge for many MDBs who engage in infrastructure financing for a long time. It is uncertain if the AIIB could outperform the other much more matured MDBs to find a solution to tackle the profitability problem in infrastructure financing. The highest rating it has received from ratings agencies could pose a challenge in itself. The high rating not only endorses the bank’s high capital adequacy and robust liquidity position, but also validates the strong political will of AIIB’s members and the bank’s governance frameworks. A good rating will help the AIIB issue bonds at favorable rate and utilize capital markets to reduce its funding costs. This certainly will contribute to AIIB’s efforts to define itself as a for-profit infrastructure investment bank. However, there is no guarantee that the rating will hold forever. Many factors may impact the rating in the future, including but not limited to AIIB’s self-capital ratio, liquidity, management, yieldability, risk management ability, and its autonomy and independency from China’s influence. 

BASEL III: The Deflationary Symbiotic Alliance Between Governments and Banking Sector. Thought of the Day 139.0

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The Bank for International Settlements (BIS) is steering the banks to deal with government debt, since the governments have been running large deficits to deal with the catastrophe of BASEL 2-inspired mortgaged-backed securities collapse. The deficits are ranged anywhere between 3 to 7 per cent of the GDP, and in cases even higher. These deficits were being used to create a floor under growth by stimulating the economy and bailing out financial institutions that got carried away by the wholesale funding of real estate. And this is precisely what BASEL 2 promulgated, i.e. encouraging financial institutions to hold mortgage-backed securities for investments.

In comes the BASEL 3 rules that implore than banks must be in compliance with these regulations. But, who gets to decide these regulations? Actually, banks do, since they then come on board for discussions with the governments, and such negotiations are catered to bail banks out with government deficits in order to oil the engine of economic growth. The logic here underlines the fact that governments can continue to find a godown of sorts for their deficits, while the banks can buy government debt without any capital commitment and make a good spread without the risk, thus serving the interests of the both parties involved mutually. Moreover, for the government, the process is political, as no government would find it acceptable to be objective in its viewership of letting a bubble deflate, because any process of deleveraging would cause the banks to offset their lending orgy, which is detrimental to the engineered economic growth. Importantly, without these deficits, the financial system could go down the deflationary spiral, which might turn out to be a difficult proposition to recover if there isn’t any complicity in rhyme and reason accorded to this particular dysfunctional and symbiotic relationship. So, whats the implication of all this? The more government debt banks hold, the less overall capital they need. And who says so? BASEL 3.

But, the mesh just seems to be building up here. In the same way that banks engineered counterfeit AAA-backed securities that were in fact an improbable financial hoax, how can countries that have government debt/GDP ratio to the tune of 90 – 120 per cent get a Standard&Poor’s ratings of a double-A? They have these ratings because they belong to a apical club that gives their members exclusive rights to a high rating even if they are irresponsible with their issuing of debts. Well, is that this simple? Yes and no. Yes, as is above, and no is merely clothing itself in a bit of an economic jargon, in that these are the countries where the government debt can be held without any capital against it. In other words, if a debt cannot be held, it cannot be issued, and that is the reason why countries are striving for issuing debts that have a zero weighting.

Let us take snippets across gradations of BASEL 1, 2 and 3. In BASEL 1, the unintended consequences were that banks were all buying equity in cross-owned companies. When the unwinding happened, equity just fell apart, since any beginning of a financial crisis is tailored to smash bank equities to begin with. Thats the first wound to rationality. In BASEL 2, banks were told to hold as much AAA-rated paper as they wanted with no capital against it. What happened if these ratings were downgraded? It would trigger a tsunami cutting through pension and insurance schemes to begin with forcing them to sell their papers and pile up huge losses meant to absorbed by capital, which doesn’t exist against these papers. So whatever gets sold is politically cushioned and buffered for by the governments, for the risks cannot be afforded to get any more denser as that explosion would sound the catastrophic death knell for the economy. BASEL 3 doesn’t really help, even if it mandated to hold a concentrated portfolio of government debt without any capital against it, for absorption of losses in case of a crisis hitting would have to exhumed through government bail-outs in scenarios where government debts are a century plus. So, are the banks in-stability, or given to more instability via BASEL 3?  The incentives to ever more hold government securities increase bank exposure to sovereign bonds, adding to existing exposure of government securities via repurchase transactions, investments and trading inventories. A ratings downgrade results in a fall in value of bonds triggering losses. Banks would then face calls for additional collateral, which would drain liquidity, and which would then require additional capital as way of compensation. where would this capital come in from, if not for the governments to source it? One way out would be recapitalization through government debt. On the other hand, the markets are required to hedge against the large holdings of government securities and so short stocks, currencies and insurance companies are all made to stare in the face of volatility that rips through them, of which the net resultant is falling liquidity. So, this vicious cycle would continue to cycle its way through any downgrades. And thats why the deflationary symbiotic alliance between the governments and banking sector isn’t anything more than high-fatigue tolerance….

Demonetization – One Year Of A Rudderless Cacophony (A Booklet of Compilation of Blog Posts)

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On the midnight of 8/11/16, in a single pronouncement, the Prime Minister of India made higher denominations of Rs. 500 and Rs. 1000 illegal tender under the pretense of curbing black money, arresting tax evasion, stopping funding of terrorist activities and counterfeiting of currency. Those who had these notes were given a time frame of less than 2 months to deposit them and withdraw new denominations in different slabs of limits set by the RBI. The Indian economy, which is predominantly cash based and the Indian people, a great section of who are financially excluded, existing solely on hard currency, would somehow have to manage through this ‘temporary crisis’ for the greater good of the nation. This was the call of the Prime Minister to undergo ‘temporary hardships’ to root out the ills of the Indian Economy.

And so what happened? The country panicked and people rushed to banks to deposit their cash savings, exchange high denominations and lines formed. Long lines, winding unending lines full of people waiting to deposit and get new notes. People died in those lines, many patients could not get timely medical help, many social functions – marriages and burials got drowned in questions of “why cant you suffer a little for the country, when soldiers are giving their blood in the borders to protect you”. But what about people who never had a bank account? Or those too far away from a branch or ATM to withdraw or exchange? Or those whose earnings were so marginal that they could not spare losing a day’s work waiting in lines? Or women who had painstakingly collected money for emergency over many years? What about those crores of rupees that was saved through co-operative banking system, still far away from the mainstream banking operations – but was safeguarding the money of crores of people in many states? Modi’s solution for those suffering was clearly evident on the morning of the 9th, plastered on almost every major newspaper “abhi ATM nahin, Paytm Karo.”…..

Demonetization – One Year Of A Rudderless Cacophony