Economy17 Mar 2008 07:46 pm
The global financial melt down and its impact
This is an open thread to discuss the impact of the global meltdown that is taking place amid the world financial market. In a gloabalised world, Bangladesh will also face the consequence of the credit crunch. How is it affecting you ?
March 18th, 2008 at 4:00 am
Alan Greenspan, ex US Fed Reserve Chairman, who caused stock market to slide if he sneezed, said “this could be the most wrenching recession since WWII”.
Some economists have used the word “depression” - like 1929!
In one word - “SCARY” !!
March 18th, 2008 at 6:28 am
Readings
EJ Dionne tears into the free-marketeers.
As for Greenspan, he is the unrepentant a*****e who is primarily responsible for this godawful cluster****. This article from Jerome Guillet, one of the best finance/economics writers on the internet, explains why. Why Congress hasn’t hauled him up for a hearing already is beyond me.
March 18th, 2008 at 8:08 am
I used to work for Bear Stearns. I saw the current crisis coming from a while and left for greener pastures well before the current mess broke.
As gloomy as the financial industry looks, not everything’s bad though: I’ve found myself at a less stressful job, which now leaves me with time on hand to do the things I really want to do: charity and non-profit work. I started locally in the US, but I’m thinking of branching out to something that benefits Bangladesh. I’m on the lookout for good ideas; if anyone has one, feel free to tell me.
March 18th, 2008 at 8:19 am
Impacts on Bangladesh.
1. Interest rates are going to rise in the global market, and credit spreads are going to widen. Which means that the government (ie taxpayers) will have to pay more for the past debt. This will mean less money for other expenditure such as health or education.
2. Government will find it harder to borrow. If you think that debt-financed government expenditure is bad (because government really wastes most of its expenditure anyway or government borrowing crowds out private borrowing) then this might not seem like a problem. But if government is likely to spend more than its tax revenue anyway, then we have a problem. In such a situation, government just prints money. And this means lots and lots of paper money chasing too few goods, and hyperinflation. This is why Latin American countries used to have 5,000% inflation in the 1980s.
Now, the call for government expenditure beyond its revenue is likely to increase. Even if there weren’t any pre-election political considerations, in an environment of 40 taka kg rice, calls for subsidy will be hard to avoid. So the government will have to make some very hard trade offs in the coming months.
3. Private sector will also find it hard to borrow. And this will mean investment will slow, with follow ons to employment and household income. Again, this will only increase the calls for subsidy, and make policy choices difficult for the government.
4. Exports will suffer, especially if Europe enters a recession (no one is forecasting an European recession, but then, if your models forecast a recession it probably means you’re in one).
5. Remittances will suffer, even without a global recession. This is because most NRBs will have to pay higher interest payments in their house/credit card/personal loans, and it will mean less money to send home.
6. Depends on the severity of the budget squeeze, the long term growth prospects could suffer. If the govt ended up choosing rice subsidies and army golf courses over education and health, then it will be hard to achieve a 8% growth rate when the recession is over.
7. On the ‘brighter’ side, if the recession were to be truly global, price of oil and other commodities would tumble, and the follow on effect would be felt in the food market.
March 18th, 2008 at 8:49 am
When I told my old man about my decision to take an economics major, he said ‘great, half the time you’ll predict something that won’t come true, and then you’ll spend rest of your time explaining with the benefit of hindsight why it didn’t come true, and people will still pay you a lot of money’. The lot of money bit hasn’t come true, but the rest has.
Mustofi, your link doesn’t seem to work, so this may be a misdirected comment. One criticism often made of Greenspan is ‘he cut interest rates too much after 2001 recession, and so a lot of people could borrow beyond their means, and that’s why we’re in this mess’. Joe Stiglitz has made this argument, for example.
I think this argument is unfair on Greenspan on two counts.
1. It’s all fine with the benefit of hindsight that to say that the rates were cut too much after 2001. But that wasn’t so obvious at that time. At that time, US employment-to-population ratio plummetted, as did the asset prices. After 1/11, it looked like US was about to enter a Japan-style deflation. At that time, Greenspan had little choice but to cut rates drastically. And at that time, no serious mainstream economist questioned it.
2. Greenspan’s support for the Bush tax cuts have come under a lot of criticism. And rightly so. Those tax cuts didn’t help the recovery because they were geared towards the rich, who tend to save their tax cuts. If tax cuts were more targetted towards the poor, then perhaps interest rates could have stayed a bit higher. this is a reasonable argument. but do we seriously think that Greenspan’s testimony was what resulted in the Bush tax cuts?
3. Another reason why the rates stayed so low for so long was because of the Asian central banks’ desire to buy US treasury bonds. How is this Greenspan’s fault?
4. Most importantly, why were the private banks lending to people with bad credit ratings in the first place? That I can afford to borrow at 1% rate so I’ll seek a lot of money in loan is straightforward. But surely a lot of responsibility lies with the bank that lends me a lot of money even though I have no job or collateral. To ask Greenspan or any regulator to regulate the banks when they themselves lend to risky people is to ask the regulator to do too much.
The truth is, markets are prone to panics and significant mispricing. This is because there is no way we can price risk accurately. The task of the macro policy maker is to make sure that when we do end up with one of these corrections, we don’t go from recession to depression. Greenspan avoided a depression in 2001, and hopefully Bernanke will do so in 2008.
Bernanke’s problem is that he is simultaneously dealing with recession and inflation, so while we may avoid a repeat of the 1930s, we’ll probably get another bout of 1970s style stagflation.
March 18th, 2008 at 9:42 am
The downturn in US economy is likely to be a prolonged one. I am also at the heart of where things are happening. The mood is swinging from gloom and doom to panick. People are not used to this environment. Jokes are on about finding a cave and stocking up on canned food items.
Robert Reich’s piece on NYT and his blog points to the much deeper root cause for economic problem below: http://robertreich.blogspot.com/2008/03/are-we-heading-for-another-great_5588.html
In times like these, there is a flight to quality as people are not willing to take risk. So I see foreign investment drying up in Bangladesh. Unlike other down times, however, the emerging economies such as that of India may be more insular than before.So Tata may still keep its investment proposal on board. Securing credit will be tough. So will be interesting to see if the recent financing deal of Billion plus dollars credit for GMG and Biman airlines in bangladesh actually goes through.
March 18th, 2008 at 9:44 am
Ant,
The “Greenspan was helpless” argument would find more takers if it weren’t for the fact that there were plenty of regulators and even Fed officials who were fully aware of the threat that predatory lending posed to the health of the economy. They even tried to do something about the rapid growth of subprime loans, but were thwarted at every turn.
Not least among these was the recently-disgraced Eliot Spitzer. This op-ed by Spitz in the WaPo last month opened a lot of eyes.
http://www.washingtonpost.com/wp-dyn/content/article/2008/02/13/AR2008021302783_pf.html
Greenspan managed to preside over not one but TWO asset bubbles in quick succession. Even the Economist magazine, not exactly a cheerleader of economic regulation, warned against these bubbles as they were happening. Ultimately both bubbles crashed and then burned a lot of people.
Surely that must tell us something?
P.S. This is Jerome’s diary. He’s definitely worth a bookmark for all folks interested in these issues.
http://jerome-a-paris.dailykos.com/
March 18th, 2008 at 10:21 am
Another good piece on why this bail out will not work
http://robertreich.blogspot.com/2008/03/why-feds-bailout-wont-work-part-2.html
“The speculative bubble that began to grow in 2003 when Alan Greenspan and company cut short-term interest rates to 1 percent and made money so cheap that every lender pushed money into the hands of any borrower who could stand up straight triggered all this. Housing prices have to drop another 10 percent, and big banks have to write off another $200 billion in worthless assets, if we have a prayer of getting through it – bailouts or not.”
March 18th, 2008 at 1:12 pm
The other economics blogger on dKos who regularly hits it out of the park is bonddad. Read his latest - An Empire of Debt — Collapsing Under Its Own Weight
bonddad.dailykos.com
March 18th, 2008 at 7:22 pm
Asif S #6 - Biman’s Boeing deal needs SERIOUS discussion, is there true justification for another ‘white elephant’ project in BD? I think not - when there are other crying areas of priority - power, motorways, universities, police, hospitals, mechanised agri, etc.
If, like Emirates Biman could show any sign of profitability, optimaization etc, then maybe. But to “hope” things will get better, like Biman chief said - and then to make such a gigantic purchase for Biman makes risky decision!!
(GMG maybe OK thats private org), but Biman is hardly a symbol of efficiency. This HUGE decision should wait till ‘functional’ parliament starts (hope), and should not have started without a NATIONAL DEBATE, and during interim govt.
Example - why not lease aircraft initially, and later buy? etc.
I recommend that this deal be scrapped - until economic justification is made by some independant body, and economy resumes to normal.
March 19th, 2008 at 4:28 am
Mustofi,
There are two distinct criticisms of Greenspan’s policies. It’s important that they be kept separate and not conflated (as is frequently done in places like DailyKos or RoberReich. One of this criticism is rejected by pretty much all macroeconomic practitioners and most theorists. The other one has more merit in theory, but even then the practicability is debatable.
First criticism is that Greenspan presided over asset price bubbles. You’ll be hard pressed to find many macro practitioners who will take this argument seriously (the Economist is a first rate news magazine, but folks who write for it are seldom practitioners). Strictly speaking, popping bubbles were not his job. His job was (and Bernanke’s job is) to keep the economy growing as fast as it can without generating inflation - full employment subject to price stability. He had one instrument - interest rate - to achieve this task. If we wanted him to pop the bubble, then either we’d have to give him a different instrument, or ask him to forget about the real economy.
And the risk to the real economy in 2001-02 required rapid interest rate cut, not worrying about housing bubble or mispriced risk.
As this New York Review of Book article says:
“Looking back today, we know that the economy did recover fully from the 2001 recession. The fears of deflation, with prices falling throughout the economy and monetary policy thereby rendered impotent as it was during the depression of the 1930s and in Japan in the 1990s, were not realized in the United States. It is all too easy, therefore, to say in retrospect that the Federal Reserve’s actions—reducing the overnight interest rate all the way to 1 percent (in 2003) and then raising it only gradually (by mid-2005 it was still only 3 percent)—were excessively expansionary. As of 2003 the recovery was hardly firm, and crippling deflation was a real possibility. And by mid-2005, apart from housing, there was no other sign of excessive economic strength, or resurgent inflation, or a “bubble” in asset prices; nor has there been since then. It is simply not possible to make monetary policy one market at a time.”
http://www.nybooks.com/articles/21153
As for why Greenspan didn’t pop the dot com bubble - well, let’s fully understand what we’re talking about there. Popping that bubble would have meant Fed deliberately raising interest rates so high that a recession ensured some time prior to April 2000 (when the tech bubble burst). When would have been a good time to do this? In 1996, when the ‘irrational exuberance speech’ was made? A recession in 1996-97 would have meant the American unemployment rate wouldn’t have fallen beyond 6%, and perhaps 10 million American wouldn’t have found employment that they otherwise did. By any welfare calculation, not popping the dot com bubble was the right policy choice. And when the bubble burst, slashing interest rates to as low as possible to avoid deflation and stimulate the economy was also the right policy choice.
The other criticism, that Greenspan didn’t take enough regulatory actions against predatory lending etc is perhaps more valid. The article I linked to above makes this point. But please note that this is a separate argument from the ‘Greenspan created the mess because of cheap money’ one.
Now, regulating the finance sector is a very difficult task. And the polemicists at DailyKos (or their Republican equivalents) often, willfully or otherwise, gloss over these nuances. Please see the next comment where I post an article by Financial Times’ Martin Wolf. Wolf is perhaps the best economist journalist in the world. He should be regularly read by anyone interested in this stuff.
March 19th, 2008 at 4:31 am
Why it is so hard to keep the financial sector caged
By Martin Wolf
Published: February 5 2008 20:06 | Last updated: February 5 2008 20:06
When will the next financial crisis come? We do not know. Yet of one thing we can be sure: unless we learn from this crisis, another one will put the world economy back on to the rocks in the not too distant future.
EDITOR’S CHOICE
Economists’ forum - Nov-16
Every week, 50 of the world’s most influential economists discuss Martin Wolf’s articles on FT.com
The FT has published a number of contributions on the lessons: Charles Goodhart of the London School of Economics and Avinash Persaud of Intelligence Capital offered “a proposal for how to avoid the next crash” (January 31); Francisco González of BBVA discussed “What banks can learn from this credit crisis” (February 4); and Daniel Heller of the Swiss National Bank argued for three ways to reform bank bonuses (February 4). The substance of Mr Heller’s argument was similar to a contribution of my own (“Regulators should intervene in bankers’ pay”, January 15), but without the regulatory coercion.
The big question, indeed, is whether lessons must be embedded in regulation. Optimistic opponents of regulation argue that the banks have learnt their lesson and will behave more responsibly in future. Pessimistic opponents fear that legislators might create a Sarbanes- Oxley squared. The Act passed by the US Congress in 2002, after Enron and other scandals, was bad enough, they say. The banks might now suffer something worse.
“Dream on” is my reply to the optimists. To the pessimists, I respond: yes, the danger of over-regulation is real, but so is that of doing nothing at all.
Two points shine out about the financial system over the past three decades: its ability to generate crises, and the mismatch between public risk and private reward.
It is true, on the first point, that none of the financial crises of this period has gravely damaged the world economy, although some have devastated individual economies. But it is probably just a matter of time. What would be happening now if US inflation were out of control or foreign official support for the US dollar were withdrawn? A deep and prolonged US recession would be probable, with devastating economic and political consequences.
It also true, on the second point, that the banking sector is the recipient of massive explicit and implicit public subsidies: it is largely guaranteed against liquidity risk; many of its liabilities seem to be contingent claims on the state; and central banks create an upward- sloping yield curve whenever banks are decapitalised, thereby offering a direct transfer to any institution able to borrow at the low rate and lend at the higher one.
In addition, banking institutions suffer from massive agency problems – between clients and institutions, shareholders and management and management and other staff. All this is also exacerbated by the difficulty of monitoring the quality of transactions until long after the event.
Consider, for example, the process that brought subprime loans to investors in special investment vehicles (SIVs). In between the ultimate borrowers and the risk-takers were loan-originators, designers and packagers of securitised assets, ratings agencies, sales staff, managers of banks and SIVs and managers of pension – and other – funds. Given the number of agents and the wealth of information asymmetries, it is astounding how little went wrong.
Yet big risks have indeed been run. The US itself looks almost like a giant hedge fund. The profits of financial companies jumped from below 5 per cent of total corporate profits, after tax, in 1982 to 41 per cent in 2007, even though their share of corporate value added only rose from 8 to 16 per cent. Banking profit margins have been strong, until recently. Now, at long last, earnings per share and valuations have collapsed.
Yet can anything effective be done to contain the risk-taking this implies? To answer this, we must distinguish “micro-prudential” controls over institutions from “macro-prudential controls” over the entire system.
On the former, the consensus of regulators seems to be that we need tweaks to the existing system. This could include: greater attention to liquidity management, alongside the focus on capital requirements in Basel II; more stress-testing of “value at risk” models; greater transparency throughout the businesses; and greater independence of ratings agencies from issuers.
I would argue, however, that none of this will make a sufficient difference. Regulators must also pay attention to the incentives – particularly the structure of pay – within the businesses. I would argue, in addition, that regulators would have to take a tougher approach than most did in the past cycle.
The bigger point still, however, concerns macro-prudential regulation. As William White of the Bank for International Settlement has noted, banks almost always get into trouble together.* The most recent cycle of mad lending, followed by panic and revulsion, is a paradigmatic example.
One response would be to raise capital requirements counter-cyclically, in response to the growth of credit, as Profs Goodhart and Persaud suggested. They also suggest a variable maximum loan-to-value ratio for mortgages. Mr White adds the need for tighter monetary policy.
These are all reasonable ideas. Yet, as Mr White also notes, the strength of the pressures against taking “away the punchbowl just as the party gets going”, in former Fed chairman William McChesney Martin’s famous phrase, is formidable. In addition to bureaucratic inertia, such action is subject both to unavoidable uncertainty about the dangers of current trends and to resistance from private interests. Furthermore, regulators are in constant danger of losing sight of the systemic wood for the institutional trees. I would add to all this the simple fact that freedom of US monetary policy is constrained by the monetary and exchange-rate policies of others, notably of China.
In the end, we are left with a dilemma. On the one hand, we have a banking sector that has a demonstrated capacity to generate huge crises because of the incentives to take on under-appreciated risks. On the other hand, we lack the will and even the capacity to regulate it.
Yet we have no obvious alternative but to try to do so. A financial sector that generates vast rewards for insiders and repeated crises for hundreds of millions of innocent bystanders is, I would argue, politically unacceptable in the long run. Those who want market-led globalisation to prosper will recognise that this is its Achilles heel. Effective action must be taken now, before a still bigger global crisis arrives.
March 19th, 2008 at 9:44 am
Asif, spot on about the flight to quality problem.
How will India and China cope is a major unknown. The pundits are divided. One lot says that these countries have large enough middle class that they can pull through without selling their goods and services to the US. Others don’t buy the decoupling idea - they say that Europe and Japan went into recession everytime US did since World War II, why should this one be any different? And if all the developed countries tanked, then will India and China pull through?
Regardless, this is why we need to take economic integration with India seriously. Hopefully Tata’s offer will be still on. We should also actively seek access to the Indian market in exchange for Chittagong port and/or transit rights.
Of course these decisions should be taken by elected governments - it’s not just narrow economic issue, complicated and emotive questions like identity are involved and this bhodroloke government is not the right one to decide these matters.
KGazi, absolutely agree with you about Biman. See this piece by Tacit:
http://sotacit.wordpress.com/2008/03/18/butenis-bitches-deliver-boeing-payback/
Corruption, my friend, comes in many shapes and forms. If an AL or BNP government did this, it wouldn’t be a lonely blogger reporting it. If this happened before 1/11, you’d have the entire national print and electronic media crying foul.
March 19th, 2008 at 2:15 pm
From today’s Lex:
“As Greenspan put it at his final Fed conference in August 2005: “The determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them”. This has been a largely asset-based expansion. The ratio of household real estate assets to gross domestic product was pretty flat throughout the 1960s and 1970s, rose during the 1980s, and then surged after 1997. As wages have stagnated, and the cost of staples such as fuel, food and healthcare have rocketed, so households have run down savings and cashed in on inflated assets, primarily homes, to keep increasing consumption.”
AFAIC, this pretty much hits the nail on the head. With real wage growth in a proper coma for the last couple of decades, the only way the US/UK authorities can generate continued consumption growth is through credit-fuelled binges and asset bubbles. Whether this has been a sustainable model will be put to the test in the next couple of years.
March 20th, 2008 at 5:16 am
Jyoti - where are all our MA PhD ECONOMISTS in BD? Where are they when we need them most? Do they play any role in BD policy-making? Why do Lone Bloggers have to raise national issues? and solve BD problems? where are all our professors in economics, with WB exp, gold medals and what not?
On AEROPLANE business, Looks like there’s a MoU-MELA going on in Dhaka this week!! While there is no rice and chicken on our plates, we are all buying BILLIONS of dollars of brand new aircraft!!
But I dont think we can celebrate the song yet - “bhodroloks are also corrupt”!! Looks like a bigger aircraft selling war is going on in BD, between Boeing and Airbus. All of a sudden, 3 news in one week - Biman, GMG and Best Air. These airlines must be being promised with with BIG loan offers, which they cannot refuse - so go ahead buy the planes - and worry about money later!! So the song should be:
- - “Sa Re gama Padanis, plane diyeche Butenis” -
There should be a national protest, (like the Guimet staute protest, Naeem), if all Boeing & airbus are doing is dump some planes on BD, unless there is explanation from the airline industry - whats going on??
Heres the news:
Mar 16 Biman MoU - 8 Boeings $1.265 Billion http://www.thedailystar.net/story.php?nid=27929
Mar 17 GMG Air - 6 Boeings $900 Million http://www.thedailystar.net/story.php?nid=28090
Mar 20 Best Air - 6 Airbus almost Billion? http://nation.ittefaq.com/issues/2008/03/20/news0565.htm
March 20th, 2008 at 6:43 am
KGazi, I believe the Honourable Chief Advisor has a PhD from Princeton, one of the best there is. The Honourable Finance Advisor is also a well known economist. Muzaffar Ahmed, recently awarded a state honour for his services to the nation, is also a well regarded economist and has the ears of the government. So does Rehman Sobhan, the grand old man of Bangladeshi economists.
So you tell me, why aren’t they asking these questions?
March 20th, 2008 at 2:22 pm
Jyoti, Not just the areoplane question - but the overall 3rd world question also - come on economists!!
Aeroplane - I suspect Boeing & Airbus are cooking some PIE in the SKY formula for FA, Muzaffar and Sobhan - to fix BD - for which they seem quiet.
Where is the media? This is SCARIER than recession.
March 20th, 2008 at 4:24 pm
I respectfully disagree that the plane purchase is a bad idea. I seem to be the lone dissenting voice here so expecting retribution. All those companies (e.g. Biman, GMG) run at about full capacity, and age old inefficent fleet that cost significantly more to operate (high oil prices). If you ever taken a flight from Dhaka to Ctg on one of them it’s scary how old they are. I think I saw a similar model of the plane on in aviation museum here. So in my humble opinion this is a good strategic move. Although I believe Airbus would have been a better choice. This will have positive long term impact in various fronts, including an immediate boost to man power export, which is our 2nd highest remittance earner. However, the systematic propaganda in Arab nations against BD nationals poses a grave threat; the government should make all out efforts to tackle this ASAP.
As Jyoti pointed out, the impact may also be a positive one for Bangladesh. Unlike other economies and markets, DSE is uncorrelated to the US and price decline in commodity (e.g. oil, metals) is good thing for Bangladesh. If someone effectively communicated to hedge funds and investors that our market is not that closely correlated with the US that could have also been a boon for DSE. If GP and some of the other big telecom player goes public this year, as anticipated market will significantly grow in size which may bring some of the large institutional investors.
I concede that price of food is a huge problem, not in Bangladesh but all over the world, especially rice dependent Asian nation. Additionally, CTG should be more conscious of market manipulation by wholesalers. Government’s semi-free market policy is counterintuitive. In one hand they are going to set import restrictions and license restrictions on who and how much can be traded but on the other hand you let the market demand set the price. So even in case of ample demand, supply is limited. Plus rice prices worldwide.
All in all, I am confident in the current administration and its LONG TERM vision. However, they are by no mean perfect and there are bound to be missteps. I don’t think the plane purchase was one of them.
Cheers
March 21st, 2008 at 5:57 am
Jyoti - I am not sure after how India dealt with recent RICE PRICING with BD, whether India is as ‘friendly’ as you suggest.
India is a much shrewder and desperate trader to deal with, than Boeing and Airbus. I am not sure whether our ministers are capable of seeing India’s GAME, when dealing with them (e.g rice).
So, I am horrendized with your idea #13, that “We should also actively seek access to the Indian market in exchange for Chittagong port and/or transit rights.”
No major deal should be carried with India - until our ministers are upto the mark in dealing with India- neither Tata deal - nor transit, and never Chittagong port.
March 21st, 2008 at 6:12 am
Concerned Citizen #18, no doubt we need to upgrade our airlines - but cost must be carefully analysed, with leasing as an alternative for example.
The interest alone for $1.25 Billion will be $75 million per year at 6%. Biman never made any profit, because the system doesnt exist, how will they make money suddenly, to pay off loans, etc?
Does anyone have the economics for airline profit? how $1.25B will be cost-effective over 30 years for 8 planes? I am sure there’s some math.
But ultimately, we need to ask ourselves, do we really need another airline, after all? when there are so many other priority areas that can be improved in BD, with $1,25B ?
March 21st, 2008 at 4:08 pm
KGazi,
I am no expert on the airplane businesses but based on my limited knowledge, it is a better choice to lease because planes depreciate very rapidly.To draws a parallel think car. Also leasing will allow Biman to upgrade to newer, more efficient models in time rather than be stuck with old models as they are now.
As far as profitability goes, it’s a catch 20. Unless Biman buys new fleet and upgrade and become more efficient they can not become profitable, plus their current capacity is limited. Even though there is ample demand the they along with others are failing to serve the market. And the market is projected to grow significantly in the next few years.
If you crunched the numbers you would see the Dubai – Bangladesh route of Emirates is probably the most profitable route, not to mention one with the rudest flight attendants. Anyway, each year labors to these countries have to wait months before they can actually get a flight because all of them are always full. There is a reason why Emirates tell you to confirm your seat a week or two in advance in-route to Dubai.
Anyway hope this sheds a bit more light.
Cheers
March 21st, 2008 at 7:07 pm
Concerned #21, now we are saying, yes maybe - maybe leasing is a better option. But Biman has already signed the MoU to buy, not lease !!?
The need, the routes, the passengers are there - but can Biman PRODUCE enough money to pay off, interest $75M x 30 years = 2.250 Billion over 30 yrs, INTEREST alone, plus $1.25B cost = $3.5B total, for 8 planes?
Or will BD remain IN THE RED, (in debt) forever, to the lenders??
The push always comes from western multinational to SELL ‘white elephants’ to the ‘third world’,
THIS kind of buying BIG-TICKET items has been identified as the classic reason, why developing countries remain PERMANENTLY poor, because they never come out of their debt.
I hope Biman has done the math - maybe there’s enough revenue and profit potential - and of course Biman is now a Limited PUBLIC corp - not fully govt corp.
But - it is important NOT to get too excited about new planes, UNTIL Biman has PROVEN efficiency and profitability established, like other successful airlines.
Emirates is a show case example - and Biman should work closely with them to LEARN how to create a profitable airline - but BEFORE making any commitment for BUYING PLANES.
Welcome the discussion.
March 22nd, 2008 at 6:28 am
Was agreeing with you that leasing might have been a better idea. Guess that did not come across.
However, upgrade was badly needed and will bear fruits in the long term. I believe Emirates and Singapore airline were approached few years back for an alliance and nothing came of it.
Cheers
March 22nd, 2008 at 12:25 pm
Biman DID make profit after it was Corporatized last August. They have 510 crore saved in retained earnings. And the loan rate is 5% not 6%. Also the loan repayment period is for 12 years. Next time don’t try to pull facts out of thin air.
March 22nd, 2008 at 4:27 pm
I was only estimating, to show total cost. News below says 6% (not 5) for 12 years, monthly cost will be MUCH higher - total cost less.
Anyway, article below gives more re-assuring details about THE NEW Biman, maybe in better hands than before.
http://sg.biz.yahoo.com/080311/16/4f5qo.html
April 3rd, 2008 at 11:42 pm
The bounce in US markets should continue untill the middle of May (spiral cluster) then the main event begins. Good night and good luck.