Sunday, September 30, 2012

Lanco Infratech Ltd will raise up to $1 billion by March 2013.


Infrastructure company Lanco Infratech Ltd is set to raise up to $1 billion (about Rs 5,500 crore) by March by sale of assets and equity infusion.
The infusion will be by way of sale of equity covering power projects, road assets and other segments, according to L. Madhusudhana Rao, Executive Chairman.
Speaking on the sidelines of the company annual general meeting here, the Lanco chief said the company has an installed capacity of 4,000 MW and implementing about 10,000 MW of power projects in all. “We plan to raise up to $750 million by sale divestment of equity in the power sector alone.
“We believe that the 10,000-MW capacity which is under the company portfolio, including those under implementation by 2015 are worth $10 billion (about Rs 55,000 crore). By divesting equity stake, we will bring down the overall debt-equity ratio to about 4:1 from about 4.3: 1,” he added.
In fact, Lanco consolidated various power assets and was in the process of finalising a public offer. However, the market conditions are no longer conducive. “Therefore, we are engaged in talks with private equity players to divest stake. We would have actually closed the deals but now we expect to close it by March,” he said.
The company plans to deploy $150 million in solar projects now at various stages of execution. Therefore, the fund raising would span power, roads and solar power segments.
Earlier, shareholders demanded the company management to consider dividend and bonus to reward them. The management stated that the conditions are tough for infra companies and it will take about few quarters more for things to get better.


SP Tulsian's View on Infra:


Q: What is your thought on the processes that are being fast tracked in the infrastructure space and how many projects can come on board and eventually help many of these infrastructure stocks?

A: I think quite positive and this has been the need of the hour, the difficulties which have been faced by National Investment Board will be giving fillip to all the projects. I am keeping my little apprehension on the airport projects except that, all will stand to gain. One can eye this space and mainly power generation because power generations or the power sectors look be the double beneficiary because of the Discom restructuring and formation of the National Investment Board. One can keep an eye on Lanco Infra , IVRCL  , Nagarjuna Construction Company, they will all be seen to be the big beneficiary of this National Investment Board move.

Saturday, September 29, 2012

Warning: Counterfeit Gold Bars Spotted in U.S.


Get your foil hats and stock your bunker, the conspiracy theorists scored a recent victory when it comes to gold. For quite some time now, many have speculated that the amount of gold the U.S. claims to hold is a sham. It is already very likely that gold prices were manipulated alongside LIBOR, but recent news has only added fuel to the fire. Last week, a counterfeit gold bar was discovered in the U.S., as a 10 ounce gold bar sold in Manhattan was shown to be nothing more than tungsten, essentially erasing a near $18,000 purchase. Shortly thereafter, 10 more counterfeit bars were discovered.

Tungsten costs roughly a dollar an ounce compared to gold which is hovering around $1,700 per ounce: just a slight difference in price. You may be asking yourself how someone could fall for such a scheme, but in reality it is very hard to spot the fakes. “What makes it so devious is a real gold bar is purchased with the serial numbers and papers, then it is hollowed out, the gold is sold, the tungsten is put in, then the bar is closed up.  That is a sophisticated operation” writes Ti-Hua Chang. The bar was handled by a respected dealer, making the situation even more pressing, as it is extremely difficult to spot the fakes.

In fact, the only reason this fake was discovered was because the merchant heard about tungsten filled bars going around in Europe, so he decided to drill into some of his bars and spotted the grey metal. These counterfeit bars had been circulating overseas earlier this year but the fact that one has now been spotted in the U.S. hits home with many investors

Now comes the question of how can you tell the difference in your physical gold if the merchant’s selling it can’t even tell the difference? 

Thursday, September 27, 2012

Global Elections Update.



The upcoming November 6 US presidential election likely catches no one unaware. But it’s critical to not ignore the rest of the world. Politics are a critical driver of stock returns (along with economics and sentiment)—and we live in a global investment world.  Here’s an update on major upcoming elections abroad.

Netherlands
On September 12, Dutch voters rejected euro-skeptics, sticking with the pro-euro parties that led their last coalition government. Should previous Prime Minister Mark Rutte’s liberal VVD party manage to form a coalition with the Labour Party (PvdA) again, it would mark the first major elected body that supported the euro, dealt with contentious budget cuts and hiked taxes to survive a popular election.

South Korea
Restricted to a single five-year term by the South Korean constitution, the pro-business President Lee Myung-bak will be termed out February 2013. Elections for his successor will be held on December 19. The outcome likely has some impact on various measures Lee undertook during his presidency, including the country’s stance on dealing with a transitioning North Korea, ties with the United States (including a once-contentious free-trade pact) and the country’s currently accommodative business environment.

Venezuela
Despite undergoing numerous operations for cancer and significant speculation about his general health, President Hugo Chavez is seeking a third consecutive six-year term at the October 7 “elections.” Given his near-dictatorial powers, Venezuela’s election is more political theater than anything else. However, his health continues to be particularly concerning to international-watchers, given he has never ceded power or named a successor.

China
Not so much an election as much as a power transition, China’s October Communist Party Congress is still worth watching. President-in-waiting Xi Jinping went missing for several weeks earlier this month. Since the party tightly controls the media, little information was released as to his whereabouts, leading to rampant speculation on Chinese micro-blogs and in Western news outlets. However, Xi reappeared late last week, putting some rest to the rumors. Regardless, given their history of relatively smooth (at least, as far as external observers are allowed to see) power transitions, it’s likely this one follows suit, with the party continuing to take measures to liberalize financial markets and boost stimulus measures this year.

Italy
Unless a snap election is called before then, the next Italian general election will be held in April 2013 to determine the members of its two houses of parliament. Although Italy may make significant debt and deficit reduction and growth reform progress between now and then under technocrat Mario Monti, expect much consternation over any incoming government’s commitment to maintaining that progress.

Iran
Following 2009’s contested presidential election, where many Western countries expressed concern over irregularities in incumbent Mahmoud Ahmadinejad’s victory, the June 2013 presidential election will likely be closely watched globally. Though the President of Iran is the highest elected official by direct popular vote, he is far from the most powerful leader in the country and holds little control over foreign policy and the military. That distinction falls to the Supreme Leader of Iran, currently Ali Khamenei—so major changes in the country, even with possible presidential turnover, are unlikely.

Japan
Following passage of a bill to raise Japan’s consumption tax from 5% to 10% earlier this year to rein in the ballooning fiscal deficit, current Prime Minister Yoshihiko Noda vowed to call a snap-election by autumn 2013. The tax legislation, regional free-trade pacts and ongoing conflict with China over disputed island territories have somewhat fractured his party and hurt his popularity—opening the door to perhaps the eighth Japanese Prime Minister in as many years and an ongoing political morass in the country.

Germany
Perhaps the most important election to the ongoing survival of the euro, Germany holds parliamentary elections in September 2013. So far, German Chancellor Angela Merkel and her Christian Democratic Union / Social Democratic Party coalition have managed to drum up strong support from the electorate in support of the euro. However, should German economic growth slip materially or efforts to preserve the euro falter, it’s possible the coalition splinters or her popularity suffers. Nevertheless, Germany has invested dearly in the preservation of the euro, so to us, it’s unlikely even a new government changes tack much when it comes to maintaining the common currency.

Saturday, September 22, 2012

Countries with Largest Silver Reserves.


Like its commodity cousin gold, silver has a rich history dating back thousands of years. It was first mined about 5,000 years ago in Anatolia (modern day Turkey). When the Europeans came to the New World, they found abundant silver. In fact, in the period between 1500 and 1800, the Latin American countries of Peru, Bolivia and Mexico accounted for more than 85% of global silver production. Since then, however, silver has been discovered in regions all over the world, making silver mining a global industry.
Silver does have one major difference from gold: only about 20% of silver output comes from primary silver production. Much of it is produced as a by-product of mining for other metals such as copper, lead, zinc and gold.
With silver’s volatile, but sharply upward, movement in price over the last decade and increased demand from individual investors for the precious metal, it may be worth investors’ time to find out about which countries have the largest in-ground silver reserves to see if there are investment opportunities to be found there.
Even though silver is now mined globally, Latin America still plays a key role in the industry. In 2011, Mexico and Peru were the top producers, followed by China. According to the U.S. Geological Survey, the country with the most in-ground reserves of silver is still Peru (120,000 tons) which is followed surprisingly by Poland and then Australia.

Peru

Peru is at the center of the silver mining industry and has been for centuries. Some analysts even call it the “Saudi Arabia of silver” and rightly so. It produced nearly 110 million ounces of silver last year and is one of the few countries over the past decade to add to its silver reserves.
Fortunately for U.S.-based investors, there are a couple of easy ways to invest into Peru’s silver industry. The first is through the precious metals mining company Compania de Minas Buenaventura SA ADR (BVN). Another interesting way to play Peru’s mining industry is through an ETF, the iShares MSCI All Peru Capped Index Fund (EPU). Buenaventura is the top position in the fund at nearly 17%, and nearly 60% of the fund’s portfolio is invested in mining companies.

Poland

Poland is not a country that investors normally think of when it comes to commodities, but it is rich in coal, natural gas, copper and even silver, for which last year it was the sixth-biggest producer. It has become the country with the second-biggest silver reserves on the planet. According to the U.S. Geological Survey, this revision in reserves is a recent one and came after new information was given to them by both Polish government and silver industry sources.
Poland is also home to the world’s largest silver producing company, KGHM Polska Miedz S.A. (KGHPF), which last year produced some 40.5 million ounces of silver. The company is also a major copper producer, and it gets its silver as a byproduct of copper and zinc production at major mines like its Lubin mine in Poland.

Australia

Australia is, of course, a country well known for its abundance of natural resources. Silver is no exception as in 2011 the country was the fourth-biggest producer of the precious metal at 55.2 million ounces. That is quite impressive considering the industry’s modest start near Adelaide in south Australia in 1840 with a single lead-silver mine. Much of Australia’s silver is produced from highly mechanized lead, zinc, copper and gold mines.
In fact, the world’s second-biggest producer of silver is none other than Australian resources giant BHP Billiton ADR (BHP). The company owns the Carrington silver-lead mine in northwest Queensland, the world’s leading primary silver mine, which produced 32.17 million ounces of silver last year.
Other silver hotspots in Australia include the Mt. Isa deposit in Queensland and the McArthur River mine in the northeast portion of the Northern Territory. Other large producers of silver in the country include mining powerhouse Xstrata ADR (XSRAY) and Minmetals Resources.

Stock Buy backs can damage Investors.


The Ruinous Truth Behind Apple's Stock Buyback

Take Apple Inc. (Nasdaq: AAPL) is the stock everybody loves these days.

This $653 billion company recently announced a $10 billion stock buyback over three years, beginning October 1. Naturally, shareholders cheered, believing the buyback would boost the share price. 

But consider this: Apple is buying back shares at several times book value, so the buyback will actually dilute Apple's book value per share. 

Based on the latest quarter, Apple's tangible book value was $106.3 billion, or $113 per share, while its stock closed today near $697 a share, or 6.2 times book value. 

If Apple does a $10 billion buyback, it will reduce its book value by $10 billion to $96.3 billion while it reduces its share count by $10 billion/697 or 14.3 million shares, thus reducing its book value per share by 8.0% to $104. 

Yes, its share price may trade at a greater premium to the reduced book value, but the chances are its premium will only increase modestly - in which case the $10 billion share buyback will REDUCE Apple's share price. 

What's more, Apple is so generous to its top management and its share price is so high that its $10 billion share buyback will probably not be sufficient to satisfy management's stock options. 

That means that at the end of the three years, Apple will have more shares outstanding than it had at the start. 

Given that the buyback will almost certainly be carried out in private transactions between Apple and the large investment institutions, the benefit of the buyback to us ordinary shareholders thus escapes me. 

Apple has also started paying a cash dividend, which is worth something; in this respect, good for them! But the buyback is a pure waste of shareholder money. 

The other problem with the Apple buyback is that, being carried out at a price above $600, it is very expensive. For Apple, this may not matter much; the company's cash pile is so vast that it may be able to continue buybacks even during the next recession. 


Summary: 

Dividends are paid in cash, to all shareholders, and thus represent a real value return on your investment.

On the other hand, stock buybacks give nothing to the individual shareholder, may reduce his share price if carried out at too high a price, and may endanger his dividend by reducing the company's cash reserves in the next recession.


Courtesy: http://moneymorning.com/2012/09/21/what-wall-street-will-never-tell-you-about-stock-buybacks/

Friday, September 21, 2012

TCS Falls for the time being.




Here are the reasons for the sharp fall in TCS:

1. The TCS management warned analysts about the possibility of lower margins in the second quarter. Q2 earnings before interest and tax (EBIT) margins are seen growing at a slower pace than the 27.5 per cent in the first quarter. 

2. The TCS management also expects Q2 volume growth to be slower than the 5.3 per cent in the June quarter. 

3. The company has increased on-site hiring in the Second quarter, which may result in higher salaries. 

4. TCS also cited higher growth in the APAC region, where margins are lower than average. 

5. Brokerages are not upbeat on the stock. Global brokerage CLSA said over ownership makes the risk-reward for the stock further unfavourable at current levels. We will use the recent strength to pare position in the stock.

Courtesy: http://profit.ndtv.com/news/cheat-sheet/article-tcs-why-shares-fell-8-in-3-days-311039

Thursday, September 20, 2012

Lanco Infra finishes Imported Coal Based Thermal Power Project (1200 MW)

Lanco Infratech Limited has informed the Exchange that Udupi Power Corporation Limited, a Subsidiary of the Company, having setup Imported Coal Based Thermal Power Project Unit-2 of 1200 MW (2 x 600 MW) in Udupi District, Karnataka, after completion of the formalities, has declared the Commercial Operation on August 19, 2012. 

Further, the Principal Buyers of Power have established 400 KV Transmission Line to evacuate Power from the Project. The Government of Karnataka have dedicated the Transmission Line to the Nation on September 12, 2012. 

With these, both the Units of the Project are in Operation.


Courtesy: ww.nseindia.com

Wednesday, September 19, 2012

KPN to replace BT as largest client of TechM in next 3-5 years.

KPN Royal Dutch Telecom, which earlier this month signed an international partnership agreement with Tech Mahindra, may in three to five years replace BT as the Indian firm’s single largest customer, a top Tech Mahindra official told Financial Chronicle.
“The partnership could become as big as the one we have with BT in terms of revenues; we will not only get service-related revenues from them, but also sell a suite of products developed by us and our subsidiary CanvasM using the KPN client base and network in the Netherlands, Germany and Belgium,” he said.

Last week, Erik Hoving, chief of strategy, innovation and technology of KPN Royal Dutch Telecom, told media here that his company had signed a major services contract with Tech Mahindra. “We are also in the process of negotiating a second major contract with Tech Mahindra that we cannot disclose at the moment,” he added.

KPN said in a press release early this month that it expected savings of at least ¤200 million (Rs 1,414 crore) over the five-year period of partnership. The Indian firm signed the contract for the development and support of over 150 applications in the operational IT systems of the Dutch firm and help it simplify its IT environment and operational process.

“We would like to understand how mobile service operators in India are profitable and enjoy the Ebitda margins they do at the average revenue per user that they do,” said Hoving.

KPN will also resell a wide variety of solutions developed by Tech Mahindra on a revenue share basis. While Tech Mahindra will provide solutions to KPN customers either on its own or in collaboration with other software service providers, KPN will own the customer relationships and will bill the customers for an integrated service offering.

“We do not provide application maintenance and development services to our corporate clients. Also, we only provide infrastructure management services to our customers. The tie-up will allow us to offer a much larger bouquet of offerings on the B2C side, such as mobile payment and also on the B2B side, leveraging Tech Mahindra’s deep domain knowledge,” said a KPN official involved in the transaction.

As part of the partnership, KPN will reduce the number of telecom software suppliers it works with.

BT, a JV partner of Tech Mahindra, is the company’s single biggest customer, now accounting for 37 per cent of its revenues. However, its contribution has declined steadily as Tech Mahindra focused on widening its non-BT share of revenue.

BT has also been steadily selling its stake in Tech Mahindra and wants to prune it further. Experts say BT may look towards exiting Tech Mahindra completely by the time it merges with Mahindra Satyam.

At the end of August, BT sold 14.1 per cent in Tech Mahindra for Rs 1,395 crore, taking its stake down to 9.1 per, cent and hinted at further dilution in the future.

Two BT-nominated directors, Richard Cameron and Nigel Stagg, resigned last December from the Tech Mahindra board.


Courtesy: http://wrd.mydigitalfc.com/news/kpn-replace-bt-largest-client-techm-511

Tuesday, September 18, 2012

NSE to exclude 51 securities from F&O segment.


The National Stock Exchange has decided to remove 51 securities from futures & options segment after the regulator revised the eligibility criteria for stocks.

The NSE said, "The existing unexpired contracts in the following securities for the month of July, August and September 2012 would continue to be available for trading till their respective expiry and new strikes would also be introduced in these existing contract months."

Name Of Company

Aban Offshore
Alstom India
Bajaj Hindusthan
Bajaj Holdings & Investment
Balrampur Chini Mills
Bharat Electronics
BEML
BF Utilities
BGR Energy Systems
Bombay Dyeing & Mfg Company
Bosch
Core Education & Technologies
Cummins India
Development Credit Bank
Delta Corp
Educomp Solutions
Escorts
Essar Oil
Fortis Healthcare
The Great Eastern Shipping Company
Glaxosmithkline Pharmaceuticals
Gujarat Mineral Development Corporation
Hindustan Construction Company
Hindustan Oil Exploration Company
India Infoline
Indian Bank
Jet Airways (India)
Jindal Saw
JSW Ispat Steel
Lanco Infratech
Max India
Mangalore Refinery And Petrochemicals
Mahanagar Telephone Nigam
Oil India
Onmobile Global
Orchid Chemicals & Pharmaceuticals
Patel Engineering
Polaris Financial Technology
Praj Industries
Rolta India
Ruchi Soya Industries
S Kumars Nationwide
Sobha Developers
SREI Infrastructure Finance
Sterlite Technologies
Tata Coffee
TTK Prestige
Tata Teleservices (Maharashtra)
TVS Motor Company
Videocon Industries
VIP Industries


Monday, September 17, 2012

BSE shifts 74 stocks to T2T group.


The Bombay Stock Exchange (BSE) will shift 74 stocks to trade-to-trade (T2T) group with effect from August 31 including Wockhardt  , SKS Microfinance  , HeidelbergCement India  and Mastek, reports CNBC-TV18.

Following is the list of stocks that will shift to trade-to-trade segment with effect from August 31

Name of the Company
ACE EDUTREND 
Addi Industries 
Anukaran Commercial Enterprises
Artefact Projects 
Ashapura Minechem 
ASTEC LIFESCIENCES 
Autolite (India) 
Birla Cotsyn (India) 
Control Print (India) 
Coventry Coil-O-Matic (Haryana) 
Creative Eye 
Cupid 
Cupid Trades & Finance 
Dalmia Bharat Sugar and Industries
Dion Global Solutions 
Enterprise International 
EPC Industrie 
Fairfield Atlas 
Fame India 
Fortune Financial Services (India)
Four Soft 
Futuristic Solutions 
Garg Furnace 
HeidelbergCement  India 
High Energy Batteries (India) 
Indian Infotech And Software 
Kale Consultants 
KLRF 
Koffee Break Pictures 
Krebs Biochemicals & Industries 
LS Industries 
Mahan Industries 
Mastek 
MVL 
Neo Corp International 
Newtime Infrastructure 
NGL Fine Chem 
NPR Finance 
Omni Axs Software 
ORIPRO 
Paras Petrofils 
Parenteral Drug (India) 
Parsharti Investments 
Prag Bosimi Synthetics 
Prime Property Development Corp
PRITI MERCANTILE COMPANY 
Rai Saheb Rekhchand Mohota Spg
Reliance Broadcast Network 
Richirich Inventures 
ROMAN TARMAT 
S Kumars.com 
SAHYADRI INDUSTRIES 
Santaram Spinners 
Sarda Papers 
Silver oak Commercial 
Simran Farms 
SIP Industries 
SKS Microfinance 
Sonata Software 
South Asian Enteprises 
Sri Lakshmi Saraswathi Textiles
Technocraft Industries (India) 
Tricom Fruit Products 
Trigyn Technologies 
Vardhman Concrete 
Vindhya Telelinks 
Visaka Industries 
Vivid Global Industries 
VSF Projects 
Wall Street Finance 
Wire And Wireless (India) 
Wockhardt 
Worldwide Leather Exports 
Yuvraaj Hygiene Products


Courtesy: 
http://www.moneycontrol.com/news/buzzing-stocks/bse-shifts-74-stocks-to-t2t-group-sks-micro-down-10_750006.html

Friday, September 14, 2012

Bernanke Fights Back with QE3.


Ben S. Bernanke  for the first time pledged that the Federal Reserve  will buy bonds until the economy gets closer to his goals, cementing his place as the Fed’s most innovative chairman and signaling the battle against unemployment eclipses any concerns about inflation for now.
The central bank yesterday announced its third round of large-scale asset purchases since 2008, with the difference that it didn’t set any limit on the ultimate amount it would buy or the duration of the program. Instead, Bernanke said stimulus will be expanded until the Fed sees “sustained improvement” in the labor market.
Bernanke is “going to fight and fight until he sees a real improvement in the economy,” said Ethan Harris , co-head of global economics research at Bank of America Corp. in New York . “He’s not going to let his critics stop him. He believes quantitative easing can help the economy and the Fed can avoid inflation, so he’ll just keep at it until there’s a real turn in the economy.”


Stocks rallied, sending benchmark indexes to the highest levels since 2007, and gold climbed after the Fed announced it would buy $40 billion of mortgage debt a month. The central bank also extended the prospect of near-zero interest rates  until mid-2015 and said policy will stay accommodative “for a considerable time” even after the economy strengthens.
“This is a Main Street policy, because what we’re about here is trying to get jobs going,” Bernanke said at a news conference yesterday in Washington. “We’re trying to create more employment. We’re trying to meet our maximum employment mandate, so that’s the objective.”

Buying Bonds

Harris, a former researcher at the Federal Reserve Bank of New York , said he expects the Fed to continue buying bonds until the unemployment rate, which was 8.1 percent in August, declines to 7 percent. The rate has been stuck above 8 percent since February 2009, when the nation was still mired in a recession.
When the Fed’s current program to swap short-term Treasuries with longer-term securities expires at the end of the year, the central bank will also start outright purchases of U.S. government debt , according to Harris, the author of “Ben Bernanke ’s Fed: The Federal Reserve After Greenspan.”
Bernanke said he isn’t worried about the economy “overheating any time soon” and that the Fed has delivered on its mandate of price stability  since the mid-1990s. Central bankers can use communication tools like the interest-rate guidance into 2015 to ease policy because they have “considerable credibility,” he said.

Thursday, September 13, 2012

Indian Banks' credit growth stagnant in first 5 months of FY13.


Credit growth at Indian banks was almost stagnant in the first five months of the fiscal year that started in April, as policy inaction and bureaucracy held up major infrastructure projects and dampened investor sentiment, bankers said.



Banks' loans grew 0.6% as of August 24 since the beginning of April, while deposits were up 3.2%, data from the Reserve Bank of India showed on Wednesday.


The central bank forecast a credit growth of 17% and deposit growth of 16% for the full fiscal ending in March 2013.


"The infrastructure sector absorbs a large chunk of bank credit, but it has been facing various issues like not getting clearances from the government, which has hampered credit growth," a senior official of a state-run bank, who did not wish to be named, said.


Typically, banks see higher demand for credit in the second half of the fiscal year, but this year, though some pick-up in credit is expected in the October-March period, bankers said they could fall short of the RBI forecast.


As of August 24, banks' credit stood at 47,217.92 billion rupees, marginally lower than 47,234.58 billion rupees two weeks ago, while deposits were at 62,916.99 billion rupees, up 0.1%.

Tuesday, September 11, 2012

Penny Stock - Pump and Dump.

Folks, let me educate you a little on penny stock investing. 

Pump and dumps are when the shareholders in an empty bogus shell company hire a penny stock marketing group for $50,000 to promote their stock. They have no product. No patents. Just a lot of good sounding talk. Then if/when their penny stock climbs 100% or more following the promotion, they sell huge amount of shares into the upward move causing the stock to dump. 

For their $50,000 investment to hire the penny stock market group, they made an additional $500,000 or more selling their at the elevated price before the dump. That's a pump and dump. It happens on 3/4ths of the penny stock promotions you will ever see. But there's about 1/4th of penny stock promotions that go on to have HUGE gains with sustained uptrends that last several days, several weeks, and even several months.

Courtesy:
http://www.guerillastocktrading.com/lessons/how-to-pick-penny-stocks-like-aerius-international-aers/

Thursday, September 6, 2012

Draghi's Plan - OMT.


Thursday, ECB President Mario Draghi announced a series of measures orchestrated to send a clear message to markets: The euro is here to stay.

The measures shouldn’t be surprising to euro-watchers, who’ve repeatedly witnessed EU officials commit to “do whatever it takes to preserve the euro.” As we’ve often said, there’s no silver bullet to cure all that ails the eurozone. However, the measures announced aim to buy troubled peripheral nations still more time to right their fiscal imbalances and increase economic competiveness and productivity.

Draghi unveiled the ECB’s new bond buying program, Outright Monetary Transactions (OMT). 

The OMT was designed to replace the previous Securities Market Programme (SMP), which was effectively shuttered with this announcement. The OMT program, as its name implies, allows the ECB to openly buy sovereign debt in secondary markets (with durations of up to three years) with the aim of pushing down interest rates of the target country. However, to prevent stoking inflation (and raising the ire of the inflation-wary Bundesbank,) the ECB will sterilize any secondary market debt purchases by removing an equal amount of liquidity from circulation by offering banks interest on short-term deposits at the ECB. 

(Following the ECB announcement, the Bundesbank issued a statement of their own reaffirming their stance that ECB bond purchases amount to “financing states via the printing press.”)

Draghi also dispelled rumors of debt subordination—the ECB taking seniority in any debt purchases over private or other creditors. Following the Greek bond swap earlier this year, which made the ECB whole for its Greek debt holdings and forced many private creditors to take losses, some folks feared another ECB bond-buying program would be undermined by investors clamoring to shed the debt of any country that was party to it—negating its effectiveness. However, under the OMT, the ECB will be subject to the same losses (if any) as private creditors.

The program comes with some strings attached. Countries eligible to participate must tap the EFSF/ESM for aid and follow strict reform and austerity measures. Already bailed-out Ireland and Portugal will be allowed to participate when they fully regain access to credit markets. Countries failing to comply with targets would face “discontinuance of bond purchases” under the OMT. (Or, at least, so Draghi says now. We’ll see if his tune doesn’t change later.)

In our view, the terms of the OMT highlight Draghi’s second major message, “policy-makers in the euro area need to push ahead with great determination with fiscal consolidation, structural reforms to enhance competitiveness and European institution-building.” Reducing yields on sovereign debt for the troubled periphery likely eases funding concerns in the fore (if it works as planned). But this only buys time to iron out their various competitiveness issues. Some nations have more work to do on that score (we’re looking at you, Greece) and others, less (ahem, Ireland).