Readings: Emerging economies, Monoline (muni-bond) insurers, Short selling in India
- Economist.com: Emerging economies - Dizzy in Boomtown
The riskiest economies, all with current-account deficits and relatively high consumer-price inflation, are India, Turkey and Hungary. Those with current-account deficits are vulnerable to a sudden outflow of capital if global investors become more risk averse. Economies where inflation and credit growth are already high and budget deficits large, such as India, have less room to ease monetary or fiscal policy if the economy weakens.
We are the very last; of course, our stock markets don’t think so!
. . . muni-bond insurers such as Ambac Financial Group Inc., CIFG Guaranty and Financial Guaranty Insurance Co. in recent years also have become backers of debt instruments holding now troubled mortgage securities. Because of that exposure, the insurers are under pressure from rating services to raise capital to cover potential losses on those securities or face downgrades. Ambac’s shares, for example, have fallen 48% in the past three months.
Ratings downgrades may have a direct negative impact on the muni debt they also insure, potentially even triggering forced selling by some investors.
Also see this Bloomberg article: MBIA, Ambac Downgrades May Cost Market $200 Billion
- Business Standard: SEBI to allow shorting, stock lending by MFs
Securities and Exchange Board of India (Sebi) has amended rules governing mutual funds to allow domestic fund houses to engage in short-selling of securities and stock lending & borrowing.
The new rules, which will come into effect after Sebi announces detailed framework on the new capital market instruments, however, prohibit mutual funds from naked short selling - meaning the fund houses can buy and sell securities only on the basis of deliveries.
A Sebi notification dated October 31, which was put on its website this evening, also brought exchange traded funds (ETFs) in the ambit of reduced expenses and investment and advisory fees stipulated by the regulator recently. Sebi said the total expenses of the scheme, including the investment and advisory fees for an index fund scheme, should not exceed 1.5% of the weekly average net assets. This is a major revision from the existing 2.25%.
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