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Fin-o-Menal is the Fortnightly Financial News Letter of VGSoM which is published by Finte`est, the Finance Club.
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Editors
Rahul Ravi Mouli Ghatak
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Editors Note
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Fin-0-Menal
Volume 2, Issue 5
with a Government debt six times the amount of Greece. It so has happened that the Euro zone countries have lent out enormous sums to each other to pull fellow nations out of debt as illustrated in figure shown above. The fear is that if they don't help Greece out, other PIGS countries could default on their debt as well. The 2011 debt crisis now looks more likely to be a banking crisis with major European banks being severely undercapitalized. The stock prices of large European banks like Socit Gnrale, Credit Agricole, and BNP Paribas have tumbled by as much as 50 percent in September. For the first time, the ECB has considered taking the help of other central banks like the Fed Reserve to pour dollars (not Euros) into the stumbling European banks, as dollar is still the stronger currency. In a crisis that called for fiscal and monetary stimulus, European Governments have raised taxes and strategized on monetary contraction which has neither driven growth nor reduced deficits. THE IMPENDING DANGER FOR ITALY The question on the minds of many is will Italy be next on the list? Italy's debt is even more colossal, standing at approximately 1,800 billion euro (Italy National Debt 115% of GDP), the fourth highest public debt in the world after the US, Japan and Germany and has been projected at 122.4% for next year. Importantly, Standard & Poor's (S&P) downgraded Italy's credit rating outlook from stable to negative (by one notch to A) a few weeks ago (a move some describe as hitting the start button on the default stopwatch !). A Greek default, with the nation having a public debt of 330 billion euro, has already caused a lot of unrest in the international markets. With Italy's public debt being almost six times that of Greece, an Italian default, would be extremely difficult to address with a bailout plan and could possibly have catastrophic consequences on the world economy. Many have considered Germanys backing of Italy as the root cause to the crisis. Italian growth, 0.8 percent in the second quarter, is less than the Euro region average for the past decade. Italys sovereign debt is rather being taken as a toxic asset in the panic driven market and no one is ready to buy their bonds which makes the largest bond-market in Europe. Mario Draghi, the head of the Bank of Italy said on Oct. 12 that Italy's austerity plan won't be sufficient. He believes that interest rates on the country's debt could rise and create a spiral that may end up being ungovernable.
He promised constitutional and judicial reforms along with tax cuts to boost the economy. In all probability, the ECB needs to back Italy the way the Fed Reserve backs the U.S. WHATS THE RESCUE PLAN? Its imperative that the affected banks recover and default of sovereign states is averted to avoid another global economic crisis. Many economists have considered bank recapitalization to be the way out and German political figures are pushing for nationalization of banks hit by the crisis instead of bailing them out. Policymakers backed by Germany are now considering a haircut of 50% for Greece instead of the original 21% figure which the French still want to go with. The knock-on impact on Irish or Portuguese debt is to be avoided and the European Banking Authority is proposing that Euro area banks raise their capital ratios to around 9% or 10% of their risk-weighted assets. Some economists have advocated retaining the Euro for all external payments, but issue non-convertible local currency which can be used for domestic financial transactions. This would sharply increase the government holdings of Euros, resulting in a scarcity of Euros in the private sector hence devalue the local currency and boost competitiveness. Minting of money and escaping debt via inflation is difficult as the ECB would not approve of that. Raising taxes and cutting consumption hasnt benefitted and instead can lead to Keynes' paradox of thrift which is declining economic output and rising debt as a share of GDP. An option suggested is for Bondholders to exchange existing bonds for GDP linked bonds, which offer payouts pegged to future economic growth. In effect, these instruments turn creditors into shareholders in a country's economy, entitling them to a portion of its future profits while temporarily reducing its debt burden. Reducing bank bonds and converting those into equity would both avert a government takeover of banks and also prevent socialization of bank losses from causing a sovereign debt crisis. Most importantly economic and fiscal stimuli are necessary to bring growth into the Euro zone. Its imperative that Europe responds well to the debacle and the policymakers find out a plausible solution to the crisis as danger and uncertainty is looming at large over the global financial market. The recent Occupy Wall Street Protest represent growing public angst over government failure to take decisive stand on implementing tougher regulation on financial market. The world awaits a move which would thwart the chances of another global economic crisis. (Contributed by Sauvik Seal, MBA, 1st year)
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Quote Un-Quote "I'd rather be in the arena trying than not doing what I can to help," - General Electric Co. Chief Executive Jeff Immelt while urging empathy for the Occupy Wall Street protest.
Q u i c k Q u o t e : " Capital as such is not evil; it is its wrong use that is evil. Capital in some form or other will always be needed - Mahatma Gandhi
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(Continued) The first known Islamic equity fund, ironically, did not emerge from the Gulf or even from the Middle East.It was the Amana Income Fund, established in June 1986 by members of the North American Islamic Trust (NAIT), an organization based in Indiana which oversees the funding of mosques in America among other things. The fund is still in existence today and has been one of the better performing Islamic funds. Saturna Capital Corp., a small asset management company based in Washington, manages the Amana Income Fund as well as the Amana Growth Fund. Other Early Islamic Funds are: Dana Al-Aiman - Mara Unit Trust, Malaysia Tabung Amanah Bakti - Tabung Amanah Bakti, Malaysia Mendaki Growth Fund - Mendaki Holdings Pte. Ltd., Singapore Pure Specialist Fund - Futuregrowth Unit Trust Mgmt., South Africa Al Rajhi Local Share Fund - Al Rajhi Banking & Investment, Saudi Arabia Al-Ahli US Trading Equity - National Commercial Bank, Saudi ArabiaFund How big is this market? The Islamic Equity Fund has grown from just $800 million in total assets in 1996 to over $6.3 billion in 2005. Thats an annual growth rate of over 60 percent during the same period. The biggest boost to fund managers and the industry at large came when Dow Jones and FTSE launched their Islamic indices in 1999. By 2000, the industry reached its first peak. Currently, there are nearly 300 Islamic banks and financial financial institutions all over the world with assets predicted to reach nearly $1 trillion by 2013. The Islamic Funds available today offer an increasingly wide range of investment styles and objectives. Many major U.S and European fund managers are active in the field, including AXA, Brown Brothers Herriman, Citibank, Deutsche
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Bank, HSBC, Merrill Lynch, Permal, Pictet & Cie, UBS and Wellington Management. This rapid growth is expected to continue as new players enter the market and new products are developed. Advantages of Islamic Equity Funds These funds have obvious advantages to Muslims, who can invest their money safely in the knowledge that the fund will not compromise any of their religious beliefs. Many funds have been around for a long time and have a good track record of generating healthy returns for their investors.It can be argued that, over the long term, IEFs will tend to perform better than conventional funds, since the former avoid investing in heavily leveraged companies. Issues/Concerns regarding Islamic Equity Funds The restricted ability of IEFs to invest in certain market sectors limits opportunities and may increase the risk of losses during economic downturns.Since Islamic principles preclude the use of interest-paying instruments, the IEFs do not maximize current income because reserves remain in cash.Most of the funds target high net-worth individuals and corporate institutions, rather than the small investor. Minimum investments range from US$50,000 to as high as US$1 million. Recent Developments Putting Australia on the path to join the booming Islamic finance, a Muslim wealth manager is planning to establish the countrys first Shariah-compliant equity fund. The Crescent Australian Equity Fund (CAEF) is aimed at allowing Australians to tap into the $1.4 billion Islamic investment market. It is believed that there is a lot of pent-up demand for Islamic investment opportunities and the Shariah compliant fund will help to put Australia on the right path to get a share of the booming Islamic banking. (Contributed by Sohini Banerjee, MBA, 1st year)
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