Euro crisis/Greece crisis/PIIGS

The Euro crisis and its origins in the Greece crisis:
First of all, Greece is important in one aspect...it is part of what is called PIIGS.

PIIGS is a term denoting the 5 European countries Portugal, Italy, Ireland, Greece and Spain. And they are in the news for the financial problems they are facing.

The reasons for the Greece crisis are: years of unrestrained spending, cheap lending and failure to implement financial reforms...which left Greece badly exposed when the global economic downturn struck:

• Greece's national debt is 113% of its GDP (around $419 Billion)
• Greece's deficit (how much more it spends that it takes/earns in) is 12.7% (which is of course bad news)

The quick version:
Initially, Greece was a fast-growing economy and then, it joined the Eurozone and started using the common currency of Euro. At this stage, due to its previous currency's high value when compared to Euro, Greece got a lot of cheap loans and large inflows of capital. This amounted to overspending & over-borrowing and not earning enough back. Eventually, Greece started defaulting on its debts obtained earlier. And since it was part of the Eurozone, it could not devalue its currency (this needs the agreement of all the countries in the Eurozone) to pay back the loans. And then it ran up a huge budget deficit, which in simpler words, means, the Government expenditure was greater than its tax receipts/income.

To make matters worse, the Greece Government borrowed more and more money until banks were either not ready to lend anymore or would only lend at a high interest rate.

Why Greece couldn't handle it?

• Initially, Greece was an independent country, but it decided to join the Eurozone and started using the common currency i.e Euro
• After becoming part of the Eurozone and using the Euro as currency, Greece could no longer print its own currency. Hence, Greece could not create money on its own like the US or the UK Government can
• The Euro value is determined by the major economies of the Eurozone (Germany, France, etc..)... where Greece is a small part
• A major source of the Government's income is the various taxes levied in that country
• When the global economic crisis struck, the tax revenues shrunk. The Greece Government needed more money now
• The Greek Government had already borrowed heavily from IMF, the German and French banks
• The option to devalue the Euro (which can solve its problems) faced stiff opposition from the major Euro-economies,especially Germany
• Devaluing the Euro might solve the Greek problems to some extent, but at the same time, it would also negatively affect the other Euro countries
• The Greek Government tried to pay the loans using the borrowed money (IMF, German/French banks), but has been unable to ..and the loans are still there today

What the Greek Government can and is doing...

• Reduced Government spending
• Hike in taxes on fuel, tobacco and alcohol
• Increase in retirement age by 2 years (which reduces the pension-payment problem and increases the number of working citizens)
• New tax-evasion regulations (to check tax evasions and bring in more revenue)

It is a similar problem with the other countries from PIIGS, but the epicenter and the place where it all started was Greece.

Currency-devaluation VS. appreciation/depreciation

In a "freely" and "managed" floating currency regime, a loss in currency value is conventionally called a "depreciation", whereas an increase of currency's international value will be called "appreciation". If the dollar rises from 10,000 yen to 12,000 yen, then it has shown an appreciation of 20%. Symmetrically, the yen has undergone a 8.3% depreciation. (taken online)

But central banks can also declare a fixed exchange rate, offering to supply or buy any quantity of domestic or foreign currencies at that rate. In this case, one talks of a "fixed exchange rate".

Under the latter regime, a loss of value, usually forced by market or a purposeful policy action, is called a "devaluation", whereas an increase of international value is a "revaluation". One can call it a purposeful Governmental intervention for economic reasons.

In other words currency depreciation/appreciation is controlled by the international currency rates based on the international stock market indicators; and currency devaluation is controlled by the central banks (RBI in India's case) which forces exchange rates, that subsequently devalues the currency.

Rupee appreciation/depreciation

The Indian economy is among the fastest growing economies in the World. The appreciation of the Rupee against the Dollar would be a giant sign of India's economic prosperity.
So what is this appreciation/depreciation of Rupee against the dollar? I explain below with 2 examples:

Appreciation of Rupee and depreciation of Dollar:
::IMPORT::
Say a barrel of crude oil costs $100
Initially, 1 US$ = Rs.48/- (Import of 1 barrel of crude oil costs Rs.4800/-)
Now, 1 US$ = Rs.40/- (Import of 1 barrel of crude oil costs Rs.4000/-)

Possible gains because of Rupee appreciation against the Dollar is that, we get oil at a reduced rate (Rs.800/- saved).... we need to pay less for Petrol now :).

::EXPORT::
Say, a BPO company charges $100 for a service

• Initially, 1 US$ = Rs.48/- (Profit earned by company for export of that service earns it Rs.4800/-)
• Now, 1 US$ = Rs.40/- (Profit earned by same company for export of same service earns it Rs.4000/-)

There would be an obvious loss, Rs.800 in our example.

Things to consider:
WRT the 2nd example, considering the increasing competition nowadays, the concerned companies cannot raise their price of service, Because, by doing so, they would risk losing the customer to a lower-priced company. For eg: Consider a Garments export company which is suffering losses as explained in the 2nd example. Now, garments company survive on large & dedicated orders. If they try and cover their "losses" by charging their customers more, it will probably result in cancellation of orders.

Other companies which might suffer problems if the Rupee appreciates are:

• IT companies who export software solutions
• Outsourced companies
• Automative companies etc

In layman terms, if Rupee appreciates, IMPORTS would be cheaper (more savings) and EXPORTS would be costlier (or less profits).

Foreign Exchange Reserve

Foreign Exchange Reserve, denotes the deposits of a foreign exchange currency held by a Central bank; this practice became popular after the decline of the Gold standard (imposed by the British rule).

Components like foreign investment flows, external commercial borrowings, NRI deposits and change in valuation have been the major contributors to Foreign Exchange reserves in India

• The Peoples Republic of China is #1 in terms of FER at 2,648 Billion USD
• It is followed by Japan ($1041 B), Eurozone ($753B), Russia ($482B), Republic of China i.e Taiwan ($383B), Saudi Arabia ($410B)
• India has a FER of $299B

Main purpose of having a Foreign Exchange Reserve:

• International settlement of debts
• Payments between debts

Possible disadvantages:

• Nations holding large amounts of foreign currency incur losses in purchasing power if the exchange value of that currency decreases
• Resultantly, holding depreciating currency in the Reserve will do no good as income through the interest is very meagre

How to increase Reserves? Through increased "export" of food grains, industrial goods, etc..

Implications of increasing Reserves:

• Exports are higher than imports, so the country need not get more money (taxes) from people for import of goods
• Subsequently, taxes will become less (people will of course be happy, an indirect advantage)
• This will also attract more foreign companies and investors, leading to job growth

Foreign Exchange/ FOREX/Foreign Exchange Market

Foreign Exchange and related information

In the simplest of words, Foreign Exchange deals with the conversion of one country's currency into that of another. A country's currency is valued according to factors of supply and demand or it can be pegged to another country's currency/a basket of currencies or it can be fixed by that country's Government itself.

Pegging, is a method of stabilizing a country's currency by fixing its exchange rate to that of another country...it is mostly pegged to that of United States of America (US Dollar). However, most countries float their currencies freely against those of other countries, which keeps them in constant fluctuation (which kind of explains why the exchange rate for a Dollar or Pound keeps changing everyday).

Floating is a system where the currency is set by the Foreign Exchange Market (FOREX), through Supply and Demand for that particular currency, relative other currencies. The floating exchange rates change freely and are determined by trading in the Forex market. If a currency value moves in any one direction at a rapid and sustained rate, Central banks intervene by buying and selling its own currency reserves in the Forex market, in order to stabilize the local currency.

Forex is the largest and most liquid market in the World, with an average traded value that exceed $1.9 Trillion per day including all currencies.It is also the largest market in the World, in terms of the total cash value traded. Any person, firm or country may participate in this market.

There is no central marketplace for currency exchange. The trade is conducted over counters.

Forex market is open 24 hous a days, 5 days a week and currencies are traded worldwide among major financial centers of:

• London
• New York
• Tokyo
• Zurich
• Frankfurt
• Hong Kong
• Singapore
• Paris
• Sydney

Some basic examples of the need for FOREX (as to why there would be demand for a particular currency):

1. A tourist visits a country, he/she must pay for the goods and services using the currency of that host country. So, he/she must exchange the currency of the home country for that of the host country
2. When a foreign company seeks to do business with a company in a specific country, it will again, have to pay for the local company in the local currency
3. An investor from one country may need to invest in another, in the latter's local currency

Some terms you might want to know:
Spot Trading:
It is the buying of one currency with a different currency for immediate delivery (Cash) rather than for a later day

Currency intervention:
It is the action of one or more Governments, Central banks or speculators that increases or reduces the value of a particular currency against another currency

Bank for International Settlement:
It administers the transactions of monies (multiple currencies mind you). Its main goal is to promote information-sharing and to be a Key center for economic research. It is essentially like a Central bank for other Central banks and it does not provide financial services to individuals or corporations. It is located in Basel, Switzerland.

Currency Pair:
In Forex, there is simultaneous buying of one currency and selling of another. They together constitute the currency pair.

Currency pair is of the format:    Base currency/Quote currency

Example: If I ask you, "How much of Quote currency is needed to purchase 1 unit of Base currency?"
You should answer on the lines:

USD/EUR = 1.5
Hence, I would need 1.5 Euros to get 1 USD (US Dollar)

or, EUR/USD = 0.667
Hence, I would need 0.667 USD to get 1 Euro

RR - RRR - CSR - SLR

Important bank rates in India:

The 4 most important bank rates in India, as decided by the Reserve Bank of India (RBI) are:

• Repo Rate (RR)
• Reverse-Repo Rate (RRR)
• Cash Reserve Ratio (CSR)
• Statutory Liquidity Ratio (SLR)

The above rates are decided by the RBI, in order to regular the cash flow in our country. In times of inflation, these rates are very helpful to bring the economy back on track. Sometimes, the rates are also increased/decreased so as to give a boost to a particular industry in the country if needed.

Repo Rate (RR):
The rate of interest at which the RBI gives loans to other banks is called the Repo Rate (RR).

To explain it further...when we are in need of money, we approach banks, who lend us money at an interest rate. In a similar scenario, when banks are in need of cash (for something legal of course), they approach the RBI, which lends them money at an interest rate. This interest rate is called the Repo Rate

• Lower Repo Rates => banks can get money cheaper
• Higher Repo Rates => banks can get money of course, but at a higher rate (expensive i.e)

RBI also takes approved Bank securities as a collateral/security and lends money to banks

Reverse Repo Rate (RRR):
The rate of interest at which RBI "borrows" money from banks is called the Reverse Repo Rate (RRR).

Wouldn't we be happy to lend our money to others and earn the interest for the same?? Similarly, banks are allowed to do the same. However, banks lend their money (deposits of the public of course) to a safe customer i.e RBI for a very good interest rate!!

• Higher Reverse Repo Rate => more interest for banks, hence banks transfer more funds to the RBI (implies more liquid cash is moved out of the system)
• Lower Reverse Repo Rate => lesser interest for banks, hence they don't transer that much funds now :)

RBI also sells Govt. Bonds to banks with the committment of buying them back at a future date

Cash Reserve Ratio (CRR):
It is the amount of money per customer, that every bank in India has to deposit with the RBI
i.e Every time a customer deposits cash to a bank, the latter has to deposit a portion of that cash at the RBI. Eg: Say the CRR is 10%, and I deposit Rs.1000/- to a bank. The bank has to deposit 10% of Rs.1000/- (Rs.100) to the RBI. The remaining Rs.900/- can be used by the bank to give out loans and earn a profit.

Main purpose behind the CRR:

1. The CRR can influence the credit conditions in our country (WRT liquidity). i.e
• If CRR is higher => lesser amount of liquid cash in circulation in the country
• If CRR is lower => increased amount of liquid cash in circulation in the country
2. To satisfy withdrawal demands
3. To Protect the depositors' money to a certain extent (very important I would say :))

If RBI reduces CRR, then banks would have more surplus cash, which they would lend out to the public and create a positive infuence on the economy.

Statuatory Liquidity Ratio (SLR):
We now know that a portion of a bank customer's deposits has to be deposited with the RBI as cash.

Additionally, banks are also required by RBI to maintain a minimum % of their deposits at the end of every business day, in the form of gold, cash, Governement bonds or other such approved securities, which is known as Statutory Liquidiy Ratio (SLR).

The maximum limit for SLR is 40%

In times of high growth, an increase in the SLR parameter reduces the lendable resources of banks, and hence pushes up the interest rates.

PPP - FDI - FII

Purchasing Power Parity (PPP):

• With increasing globalization, there is a need to measure and compare standards of living between countries, production of goods & services and their prices, showcase standard of living for foreign investors, traders, potential immigrants, etc..
• To compare money's value, exchange rate can be very useful. But it ignores the domestic economic sectors where prices are not fixed
• Purchasing Power Parity or PPP converts the local currency into a common currency and then compares the buying power of different countries (now it is on a common scale)
• PPP is a method of measuring the effective purchasing power of different countries' currencies over the same type of goods & services
• While comparing PPP of different countries, a standard single currency should be taken. Eg: US dollar; which gives an idea of what could be bought in that country

Foreign Direct Investment (FDI) and Foreign Institutional Investor (FII):

FDI and FII are both related to investments in a foreign country. Eg: US companies investing in the India, Indian companies investing in Singapore or China

Comparative points between FDI and FII:

1. FII is an investment made by an investor in the markets of a foreign nation whereas FDI is an investment by a parent company in a foreign country
2. FII is also known as 'hot money', as investors have the liberty to sell or take it back with them. A FII can enter and withdraw from the stock market easily whereas FDI cannot enter and exit that easily
3. On a comparitive scale, FDI is the more beneficial kind of foreign investment among the two
4. FII investment flows into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise whereas FDI only targets a specific enterprise, with an aim to increase the enterprise's capacity/productivity/management control. The capital flow is translated into additional production
5. Last but not least, FII are short-term investments whereas FDI are long-term investments

Book recommendations

------ Reserved for book recommendations ------

Here I would recommending some books...for particular institutes such as IIFT, the candidate has to mention the  2 recent books that he/she has read. In most cases, it need not be a management-related book at all. It all depends on how well one can explain what he/she has learnt from the book for application in real-life.

You can either try reading the below books or use my reviews (click the books)..the choice is yours!!!

--- "Reviews" work in progress ---

  

SIBM-Pune GDPI-2

Symbiosis Institute of Business Management (SIBM), Pune GDPI Experiences (2/2):

I started with the normal registration, got compliments from two lady volunteers "nice saree" 
we were shown a Times of India ad ..

In our group of 10 (i was the last one), 4 were absent, so we were only 6 people .. so things seemed easier ...
mine was the K group, and our process began with the PI part ... but when 4 of us were done with the pi, and we were done with the sandwiches and aloo chop, we were called for the GE process .. and last two people's PI got deferred ... 

Group Exercise:
We entered the GE room .. and there we met the same Army person mentioned about earlier ... he asked us how's the weather, and campus and blah blah ... 
back to business ... started off with a case study ...


It was about a minor girl Anita taking a right turn in a heavy traffic and leading to chain of accidents ... with Akash, Arvind and Sheela as the additional characters .. question: who is to be blamed, blah blah ... the discussion was fine , nothing very great about it .. 

Then the army uncle gave us the feedbacks, then we took a 2 min break.. when we returned, it was time for GD ... 


Group Discussion:
the army uncle was a great guy, asked us what kind of topic would we like to discuss, 5 out of 6 said abstract .. he was like "great!!" .. and gave us the topic "Black is black and white is white" ... had a nice discussion .. in the end, we even got to summarize the topic (courtesy : Malini  )


Personal Interview:I enter the room , and there i see 2 ladies in the panel ... 

P1 was one with short hair, and always bore a look "what's she doing here?"
P2 seemed to be a better one 

P1: hello malini, how r u doing ??
Me: m doing fine.
P1: so how u feel about the campus?? (even the army uncle had asked the same ques ... uff )
me: it's beautiful ma'm .
P1: so malini, pick out a chit and talk about it for 2 mins (Extempore)
I pick up the chit, and kept staring at it for god knows how long. The topic was something about success and mental attitude and mental ability
me: and i supposed to speak ?
P2: u can start when u feel like (looking at the annexure )
me: ok mam, m ready .. (and then gave some funda .. not even sure if it lasted for a single minute)
P2: ok .. so malini u r with infosys .
me: i was with infosys for 7 months.
P2: so why did u leave it ?
me: gave my reason n all..
P1: so tell me about ur autobiography .
me: told them whatever was written 
P1: why SIBM-P ?
me: gave some toota foota answer (and the entire time P1 had this expression as if i was speaking elvish)
P1: is SIBM-P famous in Jharkhand ? (What d crap ?? )
me : yeah, may be.. (and here goes my terrific blunder) actually for my mba preps had joined ims coaching, so many people over there had applied for it.
P1: so u want to say it's famous in Jharkhand.
me: may be.
P2: So u want to take Chris Gardener and Amir Khan for the trip.
me: yes.
P1: who is your fav actress?
me: none as such
P1: no actually, most of the girls say Kareen Kapoor. (Huh ??? )
P1: why do u have such low marks in 12th?
me: was preparing for engg at the same time, and both the courses are a bit diff, so couldn't manage well.
P1: but u will have to manage a lot of things during MBA as well, how will u do that?
me: ma'm that was a long time back, and i had a different level of maturity and responsibility at that time, now i have come a long way. now that i'm more capable, i will put in my best effort to whatever task m given.
(Now read this)
P1: has this answer been suggested to u by ur coaching institute ??? (WTF !!!)
me: why would they tell me this? this has been my experience, and only i can justify it well.
P1: but m just asking u, have they told u about this question ?
me: (straight looking into her eyes) NO.
P1: it's fine, i was just trying to get the thought process. u don't need to get "defensive" about it . (Bye bye Sibm-P)
P2: tell me something about ur family.
me: told them blah blah .. and in the end, said " so i belong to a humble family of 4
P1: how humble? how would u score on a scale of 10?
me: 7
P1: which being the most humble?
me: 10.
P1: which field u r interested in ?
me: marketing 
P1: but u know it's going to be difficult for a girl
me: yeah, some of my people have told me, that it includes a lot travelling , and even my parents are keen on me doing HR, but marketing is something which I'm really interested in.

Verdict: Converted

SCMHRD GDPI-1

Symbiosis Centre for Management and Human Resource Development (SCMHRD), Pune GDPI Experience:

I entered the the admission hall.. the registration was going on.. I sat there for quite a while, trying to decipher what was going on, and then my name was called out .. I was the first person in my group (of 5) .. seriously, why do i always get positioned at the extreme positions?? in sibm-b and p, i was the last on in the group, this time i was the first .. any ways ...

Essay Writing:
I was given a topic somewhat like "for success in academic and professional fields, _______ (don't remember the word, was the synonym of "creativity") is more important than knowledge" ...
wrote okay .. like people can get knowledge, but how can one utilize it in an unconventional way makes him stand out in the crowd .. bahut funde maare .. gave example of Aamir Khan ( now i think, Christopher Nolan could have been a better example) ... but not very satisfied with my essay part ... 

Group Discussion:
we were given a case study, about a softare company in a dilemma who is supposed to fire one of it's 4 employees ... had a good discussion .. and then finally came to a conclusion ... my first choice was not the unlucky person to be fired, a logical decision was reached upon though .. umm.. not that bad, I guess.

Group Interview:
it was about a lady working in a banking sector, with a jobless husband, struggling with the finance probs ... and luckily, this time also we all came to a conclusion .. so overall group experience, in my opinion, was not that bad.

Personal Interview:
I had to wait really long for my turn, in fact even my panel was changed .. anyways, i entered the interview area, and the first thing i noticed was the absolute silence over there ... i tried to walk as slow as possible, to avoid the "tak-tak" noise of my heels .. i entered the cabin, and there were two persons : a lady, with a pleasant smile (P1) and a man, kinda serious, but not a tough one in looks (P2)

p1: hello malini, how r u doing (smile) ?
me: i'm doing good mam.
p1: so where r u from ?
me: jamshedpur.
p1: u r with infosys, right? does infosys has a centre in jamshedpur.
me: no mam, i was with infosys.
p1: oh yes, u have left it. so, after leaving infosys, what have u been doing?
me: i came back to jamshedpur, n started preparing for mba. after having done with all the written tests, i got into part time teaching. 
p1: where?
me: (bingo ) and then my story.
p1: so why did u leave infosys?
me: during my tenure i realized i was more keen on doing mba. so having thought over this, and having discussed it with my parents and friends, i decided to leave it .
(p2 all silent ... just watching )
p1: is there anything u didn't like about infosys.
me: no mam. in fact, infosys taught me a lot many things, made me more endurable. but at certain point of life, u realize that u want to do something else. so did i. i thought that it's better to do something which u actually want to do, rather than dragging yourself. so i left my job after 7 months, got into preparations, tried my best, and thats why i'm giving an interview here right now .
p2 : are u always this soft-spoken, or u r trying to be that way just coz u r here in front of us .
me: sir, to be honest, the environment over here is very quite, that's why i prefer to talk slow. or else, i'm a very fun loving person, and my friends really do enjoy my company, so do they say .
p1: so malini, u told us about your job and your teaching. tell me, what else really excites you.
me: dancing . it always gives a rush of excitement, especially when i'm performing on the stage. 
p1: any particular dance form u like?
me: my style is typically free style dancing. i also love to watch dance shows like DID and So you think you can dance. my fav is contemporary, but i don't know much about it. but i guess if i ever get a chance, will surely learn it .
p2: so, do u sing?
me: i used to sing. actually, i'm a trained classical singer . when i was in std. 10, i had completed my 4th year. but after that had to discontinue it because of my +2 studies.
p1: u r a computer science student.
me: no mam, electronics and tele-comm.
p1: what if u don't get admission in mba? have u thought of any other option?
me: right now, m just not thinking of any other option. my prime focus right now is getting an mba degree, and will try my best to get that .
p2: which field u r interested in ?
me: marketing.
p2: which other calls u have? 
me : IIM-k and I.. 
p2: which is your fav technical subject?
me: to be honest, there's no fav technical subject for me. i was fine studying them, but if u don't mind i'd like to mention that i enjoy doing maths.
p2: which area in maths u like the most? as in algebra, geometry..
me: sir, geometry. at times i often came across really tricky one, but even then i really like solving them (itna bhagwaan jane kyun boli  )
p2: what's pythagoras theorm ?
me: gave them the formula.
p2: but what is l?
me: drew a diagram , explained the entire thing.
p2: what is h?
me: it's the hypotenuse, and we denote it using h.
p2: u comfortable with trignometry?
me: have been quite a long time since i pratised it, but still can give it a shot .
p2: what's sin 90, cos 90, tan 90 (was a rapid fire)?
me: gave the answers.
p2: can u draw the quadrant?
me: (i tried drawing it, but had forgotten .. mumbled a bit, even p2 tried to help me out.. in the process he even asked me the value of sin 180 .. i said 0 .. and told him about the formula sin(A+B)= sin A.cosB + cos A. sin B )
p2: (asking p1) u want to ask some technical ques ?
p1: just nodded her head, kinda no .
p2: what's a transistor .
me: told him .
p2: what's ________ (seriously i hadn't heard the term before, so can't recall i now as well )
me: sir i don't know.
p2: they haven't taught u this (that really wasn't rude ) ?
me: sir i just can't recall it right now.

p2: (again to p1) u want to ask anything ?
p1: (asking me) u want to ask anything ?
me: mam i can't think of anything right now.
p1: ok then.
p2: all the best for ur IIM calls 
me : thank you sir. thank u madam.



Verdict: Converted