Wednesday, May 16, 2012

News and views

Rupee closed at a record low yesterday and opened weaker today. RBI continues to mix administrative steps with intervention to control the pace of rupee depreciation.  Reportedly, one of the senior officials from RBI said that RBI can't manage exchange rate, the external situation and liquidity at the same time.  It is what you call the phenomenon of  'impossible trinity' and RBI's intervention in foreign exchange market is only a temporary reprieve. Widening trade deficit and diminishing foreign exchange reserves limit RBI's ability to intervene effectively. Deepening debt and political crisis in euro zone is pushing the dollar up, risky assets down and rupee under more pressure. 

Euro continues to be under pressure due to rising bond yields, European banks' increasing vulnerability to growing loan delinquencies, and political impasse in Greece. Euro is likely to remain under pressure with potential Grexit (exit of Greece from EU). This would dampen the investor sentiment and all asset classes and markets considered risky, would be further dumped.

Another financial disaster stares at us -  JP Morgan Chase's CEO said their losses on the synthetic credit portfolio had reached $2 billion so far this quarter and could grow further.  The investment bank's shares lost more than 10% since the bad news hit the market.  So what caused this?  In CEO Dimon's (convoluted) words "the synthetic credit portfolio was a strategy to hedge the firm's overall credit exposure, which is our largest risk overall in this stressed credit environment.  We are reducing that hedge.  But in hindsight, the new strategy was flawed, complex, poorly reviewed, poorly executed and poorly monitored.  The portfolio has proven riskier, more volatile and less effective as an economic hedge than we thought".  So was this a hedge or a speculation and the have they come out clean with all the basic facts?  More importantly, are there still big banks there which are ticking time bombs for US (and global) economy?

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