Well let us attempt an answer first…then decide whether the question is stupid….

The full repayment of principal and interest is guaranteed by the government, so there is no way how you will get less than what you paid for. So in a way it is safe.

However if you have a 8% bond maturing in 20 years…and you have bought it at Rs. 100 and redeem it at Rs. 100, and inflation in that period has been 8% p.a. YOUR REAL RETURNS ARE NEGATIVE (negative because of the post tax yield that you got!). Thus government securities will more or less give you a ZERO return, but it will surely repay the money that you had lent fully!

With foreign lenders there are 2 games that government can play…

1. Print as many notes as you can – inflation will ensure that the rates that the country is benefiting by the excessive printing. For those old enough to remember, the Yen was at 330 to the Dollar! Now it is 75 and falling. I think we will live to see a day when a Japanese says ‘here is a Yen, gimme a dollar’. The Japs may feel good, but what they are getting back is 20% of what they had lent. Risk? Totally.

2. Keep exchange rates under artificial control: again this will mean you will lose all the money that you have lent!

India has a lot of reserves – and too much of it is in US Dollars. We like to say ‘Our exports are….in US Dollars’. Remember if Ben Bernanke prints like there is no tomorrow…it may not be a far day when the dollar rupee rate may be Rs. 30 to the dollar. Currently all governments are printing notes – so that we can continue to ‘sell’ to US.

Well, let us continue to say ‘Government Securities are safe’ but at least not cheat our own selves….

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Which is the highest rated debt paper in the world?

Well it is AAA.

However a country does not get its debt paper rated.

When I ask my class ‘why does a country not get its debt rated?’ I normally get a wrong answer….well not normally it is always!

Let us see why sovereign debt is not rated.

For a minute let us assume there are 2 entities. One is a company making automobiles, and one is the government. Both have excellent balance sheets and very good Profit and Loss account. Both Company A and Government B are rated AAA.

The only income for Company A is selling of cars. The only income for Government B is charging an entertainment tax on movies.

Suddenly people stop buying cars from company A and people stop watching movies!

Revenues of Company A and Government B drop to say, zero, or dramatically low. What happens to the ratings? Obviously Ratings will crash for both.

Company A starts making other products, downsizing, etc. – and will become a good company in 5 years. Till then the rating suffers…However, Government B finds out that the people are buying DVDs to watch movies, so overnight it brings a tax on DVDs!

The government has a plethora sources of revenue – tax on agricultural produce (when the economy is agrarian), then when it finds that people have shifted to manufacturing, Excise duty. Then when it finds that services are the biggest source of GDP, it levies service tax! Then there is profession tax, income tax, road tax….etc. etc.

What happens if you do not pay? Well it has a collection mechanism, the police and last it can jail the offender. Thus a government has many sources of revenue, a mechanism to enforce it, and a ability to track the businesses! In a worst case scenario it can print notes too. Hence we say ‘sovereign’ cannot default.

Then how come Greece is defaulting?

Simple the government of Greece is a joke as far as revenues vs. income is concerned. Greece’s tax collection is very inefficient, so increasing rates does not help. The people are used to working 45 hr weeks (Chinese and Indian labour work 18 hour days!). Growth is not happening. Tourism is not enough to raise revenues. The way people work in the Greece government is pathetic. Tax leakage is huge. The people will not accept cuts in anything…..

So it is inevitable that the ‘developed’ world will have to pay for their ‘lifestyles’…which they are not willing to.

In fact they are trying to see if they can buy a Jaguar and pay the emi of a Nano. Tough luck guys….you can choose what to buy, but the shopkeeper decides the price. Tough luck.

Remember the Emperor has not clothes story? It requires a small boy with guts to tell the Emperor that he is Naked? Who will tell this to the Greeks? Tell them, Guys you are Naked, and the Rest of the World does not owe you a living!

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In 2002-4 the Rupee started strengthening. This was because of the amount of foreign currency that came into India for being invested. This put a lot of pressure on the Rupee – and the strengthening hurt the exporters (remember the great software industry which did not tell you that it was profitable because the Rupee was weakening, now started crying when the Rupee was strengthening, shame shame Infosys!!).

So RBI had to buy the dollars an print an equivalent Indian currency.

This was pulled out of the system by bonds, floated under the MSS. These bonds helped the government in its borrowing program and helped the bank generate liquidity for the purpose. Banks buy these bonds if the interest rates are attractive, if they think interest rates will go up in the future, then they will not buy these bonds.

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a. Debt market b. Money Market c. Capital Market and d. Forex market

Each of them are of course interlinked – and the whole world markets are linked in some form or the other.

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Good job, Surabhi..but I got only the last part of the program…and so will not comment anything about the program content!

However, here are some of my thoughts on debt…

Today it is very easy to live beyond ones’ means. If you take any magazine you will find about 15 advertisements – of this about 14 will extol you to live beyond your means. If you can afford a Ford Ikon, they will urge you to buy a Honda City. If you can buy a Honda City, they will push you to an Octavia.

If you tell a real estate broker you are looking for a house for 6 million, be prepared to shell out 9 million!

All of this is easy – because there is a huge push to make you think in EMI language – not full price language! Sir a Merc is available for “only” Rs. 54,000 p.m. as EMI!

What are the indicators that you are living a little beyond your means? They are as follows:

a. Your cheques are bouncing! This is perhaps the worst indicator that you are issuing “rubber” cheques…so this is not a good idea.

b. Your credit score (currently in India you do not have a copy of this) is falling and the people who have lent or wanting to lend to you are hesitant about default and are increasing the interest rate. Speaking of credit scores CIBIL is the place everybody likes to go to…but there are others and they are FREE. At Cibil you pay some charges.

c. You are saving less than 15% of your salary! This is SCARY, very scary there is little elbow room, beware!

d. You are charging everything to your credit card and are paying only a part of the amount! I hope you noticed Hdfc bank has raised the interest charges to 3.25% p.m. Translate it to a per annum basis and you will not be far away from a number which is half a century!!

e. You have 4 credit cards and you are borrowing from one card to pay the other 3!

f. More than 30% of your earnings are going towards EMI payments – and these are all long term commitments

g. You have no emergency fund, losing your job is one of the nightmares you go through regularly, one small repair like having to replace your car tyres can create hell for you!

h. you are happy visiting your parents for 10 day vacations because you can save some living expenses

i. if you will touch your parents’ kitty for your purchase of car, bike or your marriage expenses

if you have any of the above mentioned problems, you need to set your financial house in order. TODAY.

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When a 38 year old says…’My wife is tired of working…and she is quitting her job. She is getting Rs. 32 lakhs as Provident fund, …etc. should I use this amount to pay down my (our) housing loan of Rs. 44 lakhs..my answer is NO. Capital NO.

Let us take this case. Mr. U is earning about Rs. 55 lakhs CTC and has about Rs. 3 crores in mutual funds, equities, investment real estate…etc. His wife is giving up her job from a position of good comfort – there is no need for her to earn, but he is earning well and will continue to earn well.

The long term rates on all his SIPs are in the region of 12-28% p.a. and his home loan is a flat rate of 8% per annum. A lot of his money is in the higher end of the 12-28% range – the 12% return is in Templeton India Pension Plan. His Hdfc top 200, Hdfc Equity, Prudence, Discovery, Dynamic…are all giving him screaming returns.

Such a person who has about one year’s take home salary as home loans can continue to pay the EMI..at least till the tax advantages in repaying a loan (and interest) is available. More, far more important than that the amount of loan is miniscule compared to his networth and his ability to earn. Very clearly if your portfolio is growing at a rate greater than the rate at which you are paying interest…why argue?

Also leverage with so much of discipline is all right – in fact the bank which gave him the loan – is chasing him with a bigger loan

So different strokes for different people…

repay all the loans NOW….for some overleveraged, under earning joker…

just hold on to all your loans – for somebody who has a very low leverage…

that is what personal finance is all about, correct?

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Similarly once upon a time Crisil had rated Lloyds Finance, Apple Finance and Sundaram Finance – briefly I think Cholamandalam also (not sure) as the AAA companies in the financial service sector apart from Hdfc, Icici, and such other biggies.

To us in the markets this was a joke because Lloyds and Apple would throw money at distributors – per application, contest, etc. At this stage you normally tell people who want to listen – ‘please stay away’. EVEN TODAY they have one product rated so high -but it is not Crisil, and no further comments please.

All this is funny because when you are watching the game – and the scorecard is lying you can only be amused. Then suddenly Apple, Lloyds and a few others got re-rated from AAA to Junk pretty fast – 6 months if I am not wrong, surely less than a year! Tata Finance did not get AAA -but every Amar, Akbar, Anthony and Soli was willing to invest in Tata Finance.

That much for rating agencies. Now banks which do not wish to keep transactions on their books, go to a company have its bonds rated, take it to the market, and then sell it off. The question is ‘Will the Rating stay till I sell the bonds’ – say 90 days? L O L.

A bank should do its own appraisal – there would be more committment.

What should be done with rating agencies? Let them just shut down. R I P. Amen.

see what Morgan Housel has to say about these agencies in the US …somewhat similar thoughts

http://www.fool.com/investing/general/2010/05/21/put-the-rating-agencies-out-of-their-misery-before.aspx?source=ihpsitth0000003

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One important part of debt management, albeit at the fag end is the management of debt beyond a particular level. If you have debt of say Rs. 2 crores, and the rate of interest is 10%, your interest outflow is Rs. 20 lakhs. Now if your income is Rs. 25 lakhs, there will perhaps be no cash to pay the interest. More importantly no incentive to – and the more ‘sensible’ option would be to default.

Is it a moral thing to do? Well…who said money is all about morals..read what solution is being suggested here

http://johntreed.com/default.html

or look at the Americans celebrating bankruptcy. It has grown 5 fold in the 30 years since 1980….

http://www.abiworld.org/AM/AMTemplate.cfm?Section=Home&TEMPLATE=/CM/ContentDisplay.cfm&CONTENTID=60229

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Investing and money management is a lot like eating. So is losing debt like dieting? maybe…maybe not. Is getting out of debt a little like going to a gym? Well maybe…maybe not.

However getting out of debt is also a slow process. You first need to analyse what got you there first. You were not born obese or born in debt. If you did get into debt, it was slowly. You bought yourself an item far beyond your monthly “can i afford it” . Instead of saying “I will save for it” you decided to buy it. Then it was a night out at a disco. You thought it will cost you (and your partner) Rs. 8k for the night out, but it just cost a lil more – 12k went to the card. Then you got a raise. So the car changed from a Santro to a Lancer. Never mind it gives only 4km to a litre – the fuel went to the card. Suddenly on a 6L ctc you were paying 20k rent, car emi, 2 nights out , the latest Nokia was too good to be missed. Hey bingo you now had a debt of 82k!

How to come out of it? Well many of the kids I meet these days just raid BANK PAPA and tell themselves they will never do this. NO that is not a solution. First stop the bad habits – buy what you can afford to pay cash. Carry cash rather than card – for many people it hurts to see cash go – signing is much easier. Then start leaving the credit card at home. If possible shift to a zero transfer charge, new card. Start repaying at least 2-3 times what the card company says is “MINIMUM AMT TO BE PAID”. In case you get a bonus, commission, gift, etc. do a lumpsum payment. If you are not so disciplined, cut up the card and throw it away.

Once you have controlled the spending habits, cut up the card, and made the payments make sure you stick to the new found habits.

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What is a repo transaction? Every MBA student knows the word ‘Repo’ – however if you drill down and ask for its full form or what it means…you are in trouble!

So here is what an MBA student (Finance major) can say when confronted with the question – What is a repo transaction?

RE PO stands for repurchase option or a repurchase agreement. It is a transaction in which one party sells securities to another with a condition that it will be bought back on a specified date at a particular price. It is typically like a secured transaction – however it is recorded as a buy and a sell – not like a borrowing transaction. The rate of interest that is built into the transaction is called the ‘Repo rate’. Since it is a collateralised borrowing (or lending) REPO RATE is normally less than the reverse repo rate. Repo auctions of RBI is meant to reduce excess liquidity in the system.

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