Thursday, September 15, 2011

Greece crisis in Laymanomics

Had a discussion for long-ish stretch of time at home last evening on Greece and why this crisis is upon Europe (and by, extension the rest of the world). Just thought I would put it on the blog as well.

It all began with the start of the Euro project. When the single currency was launched, all countries could borrow in Euro terms, though the rate each country borrows at depends on that country's financial state. However, when the Euro was launched, the rates of almost all countries were within a small band. This really helped Greece, Portugal etc as they could now borrow at very low rates. This benefit was added on as one of the Euro project's success stories.

For a parallel, think of a group such as Tata. TCS can borrow whatever money it needs at less than 6% interest rate (TCS has cash reserves running into 100's of millions), whereas if Tatas started a new venture called Tata oil financing, they would be able to borrow only at rates of 10% or so. If the banks got a 'Tata' guarantee, then the loans to TCS and Tata Oil financing would be at closer levels. The Euro project gave all countries a Euro guarantee (Only it did not, we will see that)

Now, we all know what debt at low interest rates can do to people, imagine what it can do to countries. For second house and big car, read increased pensions and pet going-nowhere projects. Government spending increased and fiscal health deteriorated. Come 2008-crisis and everything froze for a little while. Anything freezes, the riskier assets are the first to clog up.

For our India parallel, imagine a bank run on ICICI. ICICI will do whatever to calm the markets, but one of the first things it will do internally is to say that stop lending to companies like Tata Oil.

Now, no country can run without debt-financing and even temporary freeze-ups can hurt perfectly well-run businesses and countries. So, the system did whatever it could to unclog stuff. Big blanket guarantees were promised. Huge recapitalization was done

In India RBI comes out and says depositors are protected, no matter what.

But suspicion that some countries are not that well-managed never went away and everyone started looking closer and closer at risk premia. Spreads started expanding. No longer would German debt and Greece debt be at the same cost. It was a stupid idea anyway and now with things looking sticky, markets had to revisit this.

ICICI and co told Tata group that group guarantees are well and fine, but will TCS shareholders cough up $500m if Tata Oil collapsed? Because they wont, we want to get paid 10% interest rates anyway. For good measure, we want to add a penalty clause that will increase the interest rates to 12% in case of missed/delayed payments.

When interest rates go up and EMI creeps up, families struggle to pay mortgages. Countries are no different. As it is the recession had hurt revenues, now with interest costs increasing finances started looking ugly.

Tata Oil had one rig failure and with interest rate reaching 12% things became tricky to handle. Interest payments went high and margins got squeezed

Greece got a soft loan from rest of Europe/ECB (read Germany). This was at a low interest rate, made plainly to help tide things along. This was for a short-term only, with the idea that once things recovered, Greece would be able to hold its own. In return, the Euro countries forced down a plan to improve Greece's fiscal state. Severe austerity measures were imposed. An already contracting economy's troubles were exacerbated.

ICICI realized that deliberately squeezing Tata Oil was going to help nobody, struck a deal with Tata Group, relaxed interest rate to 7% for 2 years, with an added guarantee from Tata Group (TCS shareholders were not spoken to even now). ICICI clamped down on top management pay, had an ICICI guy installed on the board of Tata Oil and slashed marketing budget. A company struggling for revenues had its marketing budget slashed - one can imagine what happens

Greece's recovery plan was based on three assumptions - 1) the austerity measures would be sufficient (some doubted this) 2) the austerity measures would be implemented well and accepted well (many doubted this) and 3) global economy would recover well (nobody really believed this)

ICICI got a promise from Tata group and assumed that Tata Oil would retain its best employees. Good employees have a knack of running away from a sinking ship and sharp clients are good enough to sense fleeing employees.

We are where we are. None of the three assumptions have held good. The world now wants blanket guarantees from Germany, a huge bazooka to bail out Greece and Greece to become good citizens and reform. Good luck with that. If this does not turn out well, the markets will go after Portugal and Ireland, we are told. If Germany wont bail out Greece, why should they bother with Portugal or Ireland.

Taking our parallel further, if TCS wont bailout Tata Oil, why should the bankers lend to Tata Real estate on group guarantee? Why indeed?

The most critical parallel here is the fact that as much as TCS is part of the Tata group, TCS is also listed. And the TCS shareholders have to have a say in any further guarantee-ing. Being part of the group was all well and good when this started. But 90% of TCS revenues come from outside, and everyone can sense that the group tag is a liability. Importantly, TCS shareholders can ask Tata group to take a hike.

Replace Tata group with Euro, TCS with German citizens and Tata Oil with Greece and our parallel becomes complete.

I am firmly with TCS shareholders on this. The German citizens should ask Greece to take a hike. This bail-out-or-we-will-all-be-in-bigger-trouble trick worked for the banks in 2008, Germany should not fall for it again.

Sunday, September 11, 2011

Ich bin ein Berliner

John F Kennedy made this phrase famous nearly 50 years ago in his dramatic speech in West Germany. I have a sneaky suspicion that those of us not holding the belief that the profligate are entitled to help from the afflient will be echoing similar sentiments in the weeks to come.

If, over the next few weeks, the Germans indeed refuse to be blackmailed into bailing out the Greeks, I think at least few people around the world should show their support for the Germans. For sure, the self-righteous, good Samaritans will pile on the Germans and insist that it is the Germans' duty to help out a neighbour; while economists will point out that Germany will be shooting itself in the foot if the Euro project collapses.

The economists have hinted that Germany has gained the most from the single currency and must therefore save the Euro. Even German ministers have said this .

Germany has been accused of dithering (many times over) and have been accused of increasing debt burden of other countries. In a round-about fashion, the Economist has even accused the Germans of being part of the problem-creators -

"None of this is to say that Germany is the main cause of the euro’s crisis. As much or more blame lies with those that spent irresponsibly, failed to reform in good times and were blind to property bubbles."

Huh. How does that work?

But all this chatter overlooks some basic facts. Germany has contributed the most Euros for the Euro project. It is the biggest donor country, it is the country that has chipped in the most for bail-outs. The Germans work harder, work longer hours, retire later than some of the Euro citizens they have been bailing out. And it is considered deplorable if Merkel considers what ordinary Germans think about the bailout. Pish tosh. If I were German I would be participating in all protest marches against giving money away. German efficiency, German pragmatism and German faith in the all-for-one Euro project have been exploited enough. Fiscal union is just another way of saying Germany will pay for pet projects of governments across the Euro.

Thanks to messrs Sergey Brin and Larry Page, I can write that I will offer "Internet-support" for any move from the Germans to not support everyone else. I know it is not worth much, but I just thought I will say this any way.

Ich bin ein Berliner

Thursday, September 1, 2011

Chennai's education system

Never the most vibrant of cities, Chennai still had a lot going for it - Marina beach, Carnatic season, Kollywood. But beyond all these, Chennai also had a sense of identity, a sense of being distinct. One of the underpinnings of this was the city's rich academic culture, and this played a huge role in maintaining that confidence and pride. Chennai has always placed a huge importance on academia and in excellence of any kind, and it is no surprise that benchmark for many 12-15 year olds were the 20-somethings who had a standing because they had done a BE or an MBBS in a good college.

And this is why it is important for the city that the educational institutions stay healthy and competitive. And this is why the City is going down the drain. I am not going to sit on the fence on this one, nor am I going to mince words or be politically correct. Political correctness be damned. If I can shout from a suitable rooftop, I would - The city's educational system is slowly going kaput. It just isn't working. And the funny thing is that most people in the city don't know this.

Good teachers are disappearing, students are clueless, and the general levels of application are abysmally low. Have no illusions, Chennai has fallen so far below the other big cities that we will soon lose sight of them.

The statistical evidence is strong. Chennai has come near the bottom in assessment tests conducted by agencies. In JEE, Chennai did not have a single student in the top 100 apparently, there was a similar poor performance in AIEEE. In AIEEE, a state rank of 3000-odd would have translated to an All India rank of more than 1.5 lakh. CAT, IAS, NLS, we have become poor across the board.

As a former analyst who made his living as a number-cruncher, I retain a healthy scepticism of presented data and am more comfortable with anecdotal evidence that I can trust. As someone currently employed in the education sector, I regularly interact with a lot of teachers. The anecdotal evidence is, if anything, even more depressing.

Teachers across the city are lamenting how student-quality has fallen. A teacher from PSBB told me - You guys worried about clearing JEE. With these kids, I am more worried about them getting decent marks in board exams. Teacher from SBOA: 1997 was the last decent batch that I saw (this in 2010). Even accounting for nostalgia playing a role in rose-tinting the past, it is very clear that standards have fallen dramatically over the past decade or so.

I handle different batches of students. I see three key distressing signs.

1. No clue about fundamentals: I am a bore when it comes to learning from first principles and I can be very pedantic when it comes to very basic things. Even accounting for this, I was shocked when the kids showed zero awareness (plus zero curiosity, which is somehow even more painful to take) of basic concepts. For instance, I have asked several batches of students why d/dx (sin x) was cos x. And not one of them could relate it to anything fundamental. 95% of students in Chennai are taught that d/dx (sin x) is cos x as if d/dx where a black box. They have no idea why this d/dx thing works or what it is supposed to mean logically. To them, it is just something that gives out results that they need to remember. Teaching calculus like this must be the most pointless exercise ever. It is far better to not know anything about calculus

2. Learning fatigue: The ability of students to take in concepts from very basics is p*ss poor. Most good students tire in 20 or so minutes.The average ones have attention spans comparable to 2-year olds. The students can take in formulae (plenty of that), the 'memory' component of their brain is fully functional. Someone has just tampered with the component called "application". Tell students the formula for finding the number of factors for 2^3 * 3^5 * 5^4, they will solve questions all day. After 30 minutes of practice, ask them for number of even factors of the 2^3 * 3^5 * 5^4 and they will stare at you as if you asked them to recite from the Gita. In their defence, if you gave them a formula for counting even factors, they would be happy to practice that as well. But the "application" component of the brain as gone AWOL. This leads to a fetish for shortcuts and more formulae - both distress signals.

3. Lack of ambition: When I was in school (1997) , we guys would want to participate in any contest at an all-India level just to see where we stood vis-a-vis students from Mumbai, Bangalore etc. The number of times I hear "JEE is an All-India exam and so too tough", "We should not look at AIEEE all India rank", "The competition in CAT is mad. We should not have to put up with this" is absurd.

The students positively quake in their boots at the very mention of competition at an All-India level. If this timidity brought with it some humility that would be half a victory. But for some reason, the city has been infested with this slugfest celebrating mediocrity. When the whole world is trying to imitate the competitive setting from India and China, there is our own Chennai that is running away from competition at a rapid clip. The heart bleeds.

Parents have lost the ability to say - "Roll with it. You were born in this country. This intensity will build character. Apply yourself and the fundamentals for a bright future can be built". We are becoming a city of wimps. Parents are mollycoddling their kids endlessly. We guys used to bicycle 7+ kms one way six days a week to attend coaching classes for JEE. Our parents felt bad about this, but not once did they make it sound like a big deal. I think overwhelming majority of parents these days are not willing to tell their kids to push themselves harder. Where are the tiger moms of Chennai?

Somebody had to say we are not that good these days. I am happy to be that guy. I realize that I have used to pretty provocative language. Please don't take offence to that and miss the point. The city is a horror show as far as education is concerned. The earlier we realize this, the better.

Will outline my hypotheses for the reasons for this in the next post. And suggestions for improving things in the subsequent post.