News Hour:India is World's Fastest-Growing Big Economy Officially

India on Monday forecast that annual economic growth would accelerate to 7.4 per cent in the year ending in March after its statisticians changed the way they measure Asia's third-largest economy.

The new estimate is sharply higher than the Reserve Bank of India's (RBI) growth projection of around 5.5 per cent under the old method as well as a revised 6.9 per cent growth a year earlier.

Under the new method, the economy grew 7.5 per cent in the quarter ending in December, outpacing China's 7.3 per cent growth in the latest quarter and making India the fastest growing major economy in the world.

The revisions mark a dramatic turnaround for an economy that barely a fortnight ago was assumed to be still struggling to gather momentum under Prime Minister Narendra Modi's reform-minded government. Prior to PM Modi's election last May, the economy had endured its weakest phase of growth since the 1980s.

The apparent recovery is, however, in large measure due to changes both in the way authorities calculate gross domestic product (GDP) and the base year.

India now measures GDP by market prices instead of factor cost, to take into account gross value addition in goods and services as well as indirect taxes. The base year has been shifted to 2011/12 from 2004/05.

The reading, however, is at odds with other indicators such as industrial production and trade data, which suggest the economy is still suffering from slack.

A. Prasanna, economist at ICICI Securities Primary Dealership Ltd, questioned the credibility of the data and asked the government to explain glaring gaps.

"The government has itself been saying that tax collections are slow due to a slowdown in the economy, but the other wing of the government is saying that GDP growth has been good," he said.

"That means either one part of the economy is not taxed or there is an issue with the data."

GDP growth for the first half of fiscal 2014/15 was also recalculated and revised up to about 7.4 per cent from the 5.5 per cent reported earlier.

(Copyright: Reuters 2015)

News Hour: RBI governor Raghuram Rajan warns of another market crash

MUMBAI: Reserve Bank governor Raghuram Rajan has warned that global markets are at the risk of a "crash" due to the lingering competitive loose monetary policies being followed by the developed economies. 

Warning that the current build-up of financial sector imbalances may cause sudden price reversals and sharp spikes in volatility, Rajan said, "we are taking a greater chance of having another crash at a time when the world is less capable of bearing the cost". 

In an interview to London-based 'Central Banking Journal' on Wednesday, he said, "unfortunately, a number of macro- economists have not fully learned the lessons of the great financial crisis. They still do not pay enough attention - en passant - to the financial sector. Financial sector crises are not as predictable. The risks build up until, wham, it hits you". 
The governor expressed fears that central banks "may be exhausting room on the financial side and creating a situation where there will be a discontinuous movement in the financial sector." 

Discounting arguments from a section of economists that asset price hike is not due to credit growth, Rajan said problems do not appear to be arising from credit growth although this is an issue in some emerging markets. 

"They (global investors) put trades on even though they know what will happen as everyone attempts to exit positions at the same time, there will be major market volatility," the RBI chief said. 

Reiterating his warnings that emerging markets are especially vulnerable to big shifts in capital flows brought on by unprecedented monetary accommodation in rich nations, Rajan warned, "there will be major market volatility if such a crash occurs. True, it may not happen if we can find a way to unwind everything steadily. But it is a big hope and a prayer". 

The former IMF chief economist, who famously predicted the 2008 financial meltdown — three years before at an event in US — from which the global economy is yet to recover fully, compared the current global markets to the 1930s which marked the worst recession in the financial history. 

Stating that the Great Depression was due to a long period of competitive devaluation of national currencies, Rajan said, "we are back to the 1930s, in a world of competitive easing. 

"Back then, it was competitive devaluation, but competitive easing could lead to competitive devaluation. If there were no consequences, to competitive easing, fine; but there are consequences." 

The central banks of the rich nations are now engaged in ever more accommodative policies, he said, and called for more coordination between the major monetary authorities. 

Rajan first made this demand early this year in Sydney during the BRICS finance ministers and central bankers summit. He repeated the same at the annual summit of the World Bank group in Washington a few months later. 

Calling for more policy co-ordination and research into effects of central bank policy spillover and spill-backs, he said monetary policy changes by the developed world central banks can cause "substantial levels of uncertainty" at a time that may suit the policy instigator but not be convenient for other central banks, especially in the emerging markets. 

Welcoming the IMF recent statement that it would "examine" monetary policies of major central banks to check their net benefits, the Governor said this is a major change in the international organination's stance. 

"The sensitivity this kind of discussion raises in central banks will make them think about the value of policies and whether they are helpful elsewhere." 

"I have no doubt that countries will still do what is largely in their interests. But over time we need a little more effort looking at the global interest. My sense is that once the debate is engaged, we will figure out a way to move in that direction," the ex-Chicago University professor said. 

Expressing concerns about the impact of investors quitting emerging markets all at once after buying heavily into assets inflated by these loose central bank policies, he said continued failure of leading economies to comprehend the dangers of financial cycles pose significant risks to the global economy. 
(Source: www.timesofindia.indiatimes.com)

Expectations are high, but here’s why markets may crack on Budget Day

The Indian markets are riding high on expectations of a pragmatic Budget this time, which is expected to focus on reducing fiscal deficit, boosting growth and reviving the investment cycle.

The S&P BSE Sensex has already rallied a little over 1600 points or 6.7 per cent since June and over 22 per cent so far in the year 2014.

Now the real question in front of investors is - will the dream run continue for the markets post Budget? Well, the answer might not be as simple as a 'yes' or a 'no'. But, the direction for the markets remains on the upside.

Given the fact that there are lots of expectations from the government fuelling the rally, any disappointment may lead to a knee-jerk reaction on the Budget day itself.

"It is very true that the way we have seen the market move over the last two to three days, clearly talks about a pre-Budget rally. The sectors which are expected to have some positive announcements coming through in the Budget have been the participants in this rally," said Tushar Mahajan, Head-Derivatives (Listed F&O), Nomura India.

"But I would like to add a word of caution here that the more the market rallies before the Budget, the higher is the extent of disappointment that might come about if the Budget does not deliver even close to what the market is expecting," he added.

The Union Budget 2014-15 would be the first litmus test for the newly-elected NDA government which came to power with an overwhelming mandate - the best in the last three decades.

Most analysts on Dalal Street expect the NDA government to deliver a pragmatic and inclusive Budget interspersed with doses of 'bitter medicine', which could lay the foundation for growth and moderate inflation.

We are just four trading days away from the big event, but markets have run ahead of fundamentals and if there is any disappointment, markets may fall considerably on the Budget Day, fear analysts.

"The Budget is holding the market up and the gut feeling is that the Budget comes and the market could correct and then virtually everybody on the street, corporates included, maybe the media included, will say budget was good, but it came as per expectations," said Mehraboon Irani of Nirmal Bang Securities.

"Ultimately things will improve, but whether things will improve at the pace at which the market wants, is difficult to say. But we want everything to happen in a hurry and there could be some disappointment," he added.

So what should investors do with their portfolio?

Although the trend remains on the upside, with marginal corrections in between - analysts advice investors to remain stock specific and look for quality stocks in PSU, midcap stocks.

(source: economictimes.indiatimes.com)

News Hour: Rail passenger fares hiked by 14.2%, freight rates by 6.5%

NEW DELHI: Get ready to pay more for train travel. The Narendra Modi government administered its first dose of harsh economic medicine on Friday in the form of a sharp increase in rail fares that could presage a budget that will eschew populism in favour of fiscal consolidation.

While the Opposition protested against such a move weeks before the government is expected to unveil its railway budget, the Modi administration defended itself, saying it was only implementing a decision that the previous UPA dispensation had cleared and then frozen.

The Congress party attacked the increase, accusing the government of adding to the burden on the common man in a month of coming to power. "This comes at a time the prices of onions and potatoes have skyrocketed. Also, there is concern about delay in the monsoon and the ongoing problem in Iraq is also having an effect on global crude prices," party spokesperson Ajay Maken told reporters. 


"This hike will affect prices of food items, coal, and hence we strongly condemn it." Congress and other parties demanded an immediate rollback of the hike.

The decision to raise passenger fares by 14.2% and freight charges by 6.5% effective June 25 will help Indian Railways raise an additional Rs 8,000 crore in the financial year. Successive governments have been unwilling to risk unpopularity and raise passenger fares while treating the loss-making utility as a means of dolin .

To be sure, Modi has given ample notice of his government's intent to take tough and unpopular decisions to revive an economy that's grown at less than 5% in the past two years.

"I am well aware that my steps may dent the immense love that the country has given me," he said last weekend. "But when my countrymen realise that these steps will result in getting the financial health back, then I will regain that love."

The budget is expected to be announced in the first week of July. By tradition, the railway budget is announced two days before that.

The fare increase had been proposed by the previous government in the interim budget but was put on hold because of elections.

Justifying the decision, Railway Minister Sadananda Gowda said, "I was forced to implement the order that was done by my predecessor. I am only withdrawing the withholding order."

He said the interim budget presented by the previous government had assumed certain revenues on the basis of the proposed hike that was announced on May 16. That was the day the Lok Sabha election results were announced, giving the Modi-led BJP a clear majority and arming it with the numbers needed to take hard decisions. The hike was notified but put on hold immediately that day.

"Meeting the annual expenditure would not be possible unless the revised rates as finalised by previous government is implemented," said a railway ministry statement.

"Hence (the) order of withdrawing implementation of revised fare and freight has been withdrawn." Of the total increase, 4.2% and 1.6% is the fuel adjustment component respectively in passenger and freight charges that goes up or comes down in line with fuel prices. This has been added to the increase made by the previous government according to the laid-down practice.

With Indian Railways incurring a loss of aboutRs 900 crore per month in the passenger segment, economists hailed the move as a step in the right direction that won't do much to push up prices.

"The rail price hike is a very positive move. It clearly shows that the government is willing to bite the bullet on public finances," said DK Joshi, chief economist, CrisilBSE 0.05 %. "While it will help the financials of railways, the impact on inflation will only be mild." 

ndustry welcomed the decision but said service quality also needed to be given attention.

"Railway freight rates have been increased with a view to resource mobilisation, which is today the most critical requirement for Indian Railways," said Chandrajit Banerjee, director-general, CII. "Without adequate resources, Indian Railways will not be able to afford its modernisation, capacity addition and safety plans." The increase in freight rates will impact a number of sectors, including power, coal, cement and steel but markets may cheer what they see as the government's intent to forge ahead with difficult policy changes aimed at shoring up the economy. The move will also inflate the fertiliser subsidy.

"The railway freight hike would be negative for sectors such as cement, coal and steel, but markets may show some resilience as this shows the government's intent to go ahead with hard reforms," said Kunj Bansal, executive director and CIO at CentrumBSE -1.93 % Wealth Management.

It is likely that the new government will make passenger fares and freight rates the responsibility of an independent Railway Tariff Authority after the budget, putting it outside government control. 
(Source: http://economictimes.indiatimes.com/industry/transportation/railways/rail-passenger-fares-hiked-by-14-2-freight-rates-by-6-5/articleshow/36890075.cms)

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News Hour: US-Iran thaw fuels hope in energy-hungry India

WASHINGTON: The United States and Iran are renewing direct diplomatic contact after nearly 35 years. Responding to Iranian overtures, President Barack Obama on Tuesday asked his Secretary of State John Kerry to hold talks with his Iranian counterpart on the sidelines of theUN General Assembly. There are expectations that Obama himself may exchange at least handshakes with Iranian President Hasan Rouhani later in the day in what may be seen as one of the watershed moments in 21st century geopolitics.

Cautious optimism marked the American response to Iranian initiatives at the United Nations. Obama devoted part of his 45-minute explanatory discourse on US foreign policy to Iran, saying he was encouraged by the moderate course chosen by the new Iranian president and Teheran's forswearing of nuclear weapons, including a fatwa against them by the clerical leadership. On its part, the Washington was not seeking regime change in Iran and respected the right of the Iranian people to access peaceful nuclear energy.
These mutual commitments, he said, offered the basis for resolution of a complex issue in which the US would recognize Iran's right to access nuclear energy if Teheran gave up pursuit of nuclear weapons in a transparent, verifiable manner.

The thaw, if it comes about, may not be as momentous as the one that followed the 1972 Nixon-Mao meeting, but it will result in cooling of global oil prices, an easing of West Asia tensions, including the conflict in Syria where Iran is a player, a dilution of Israeli-Iranian hostility and a constructive role for Tehran in Afghanistan.

"I don't believe this difficult history can be overcome overnight. The suspicions run too deep. But I do believe that if we can resolve the issue of Iran's nuclear program, that can serve as a major step down a long road toward a different relationship, one based on mutual interests and mutual respect," Obama said, underscoring the hard task ahead given decades of mistrust from both sides. "The roadblocks may prove to be to great, but diplomatic roads must be tested," he added.
In Tehran, Iran's foreign office spokeswoman Marzeih Afkham said the meeting could be the "beginning for nuclear talks in the new era."

US officials indicated that Kerry, along with his counterparts from the other P-5 nations, would be meeting Iranian foreign minister Javad Zarif within a day or two, perhaps on Thursday.

The possible US-Iranian thawing could largely overshadow Indian Prime Minister Manmohan Singh's visit to Washington (he meets Obama at the White House on Friday) and his UN engagements on the weekend, including a possible meeting with Pakistan's Prime Minister Nawaz Sharif on Sunday. But besides being relatively inconsequential given Pakistan's growing marginalization, New Delhi has greater stakes in the US-Iran thaw, because both countries are major energy suppliers to India.

In his exposition on US foreign policy, Obama pushed back at questions (principally from Russia) about American exceptionalism, noting that it was only the United States that out both lives and money where its mouth is. The danger for the world is not an America that is too eager to immerse itself in the affairs of other countries, or to take on every problem in the region as its own, he said; The danger for the world is, that the United States after a decade of war, rightly concerned about issues aback home, aware of the hostility that our engagement in the region has engendered throughout the Muslim world, may disengage creating a vacuum of leadership that no other nation is ready to fill.

"Such disengagement would be a mistake. America must remain engaged for our own security, but I also believe the world is better for it. Some may disagree. But I believe America is exceptional. In part because we have shown a willingness through the sacrifice of blood and treasure to stand up not only for our own narrow self interest, but for the interest of all," Obama said.

(Source: timesofindia.indiatimes.com)

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News Hour: Sensex rallies over 600 points, Nifty ends above 6,100

MUMBAI: The 50-share Nifty index posted its highest close since May 30 and hit a 3.5-month high on the back of short coverings on Thursday, after the US Federal Reservedecided to continue with its bond purchase programme.

Institutional investors rushed to buy rate sensitives like realty and auto in anticipation of rolling back of some liquidity tightening measures by the Reserve Bank of India Governor Raghuram Rajan on Friday at the mid-quarter review of monetary policy 2013-14

The Nifty posted highest close since May 30 and hit a 3.5-month high. The index closed at 6,107.85, up 208.40 points or 3.53 per cent. It touched a high of 6,142.50 and a low of 6,040.15 in trade today.

The BSE Sensex rallied over 700 points to touch its highest level in 34-months. The S&P BSE Sensex ended at 20,625.55, up 663.39 points or 3.32 per cent for the first time since November 10. It touched a high of 20,739.69 and a low of 20,347.30 in trade today.

The S&P BSE Midcap Index was up 2.22 per cent and the S&P BSE Smallcap Index was 1.15 per cent higher.

The S&P BSE Bankex surged 6.81 per cent, the S&P BSE Realty Index was 5.32 per cent higher, the S&P BSE Capital Goods Index advanced 4.71 per cent and the S&P BSE Metal Index gained 3.62 per cent.

The S&P BSE IT index closed 0.42 per cent lower.

SBIBSE 8.07 % (8.32 per cent), Tata SteelBSE 6.96 % (7.17 per cent), Tata PowerBSE 6.48 %(6.48 per cent), ICICI BankBSE 6.55 % (6.55 per cent) and Tata Power (6.48 per cent) were among the top Sensex gainers.

WiproBSE -1.87 % (1.87 per cent), InfosysBSE 0.12 % (0.15 per cent) and Coal IndiaBSE -0.03 %(0.03 per cent) were the only index losers.

The market breadth was positive on the BSE with 1,427 gainers against 998 losers.

The foreign institutional investors bought shares worth Rs 580.13 crore while domestic institutional investors were net sellers worth Rs 508.41 crore on Wednesday as per the provisional data from the National Stock Exchange.

(All figures are provisional)

(Source: economictimes.indiatimes.com)

News Hour: Manmohan Singh on Indian economic crisis

NEW DELHI: Expressing concern over successive depreciation in the value of the Indian rupee, Prime Minister Manmohan Singh on Friday said this was an outcome of external developments and promised measures internally to address the situation.

In a bid to lift sentiments in the currency markets towards the Indian currency, he also assured that there would be no measures on capital controls.

"Sudden decline in exchange rate is certainly a shock which will be addressed by other measures not by resorting to capital controls or reversing reforms," Manmohan Singh said.
"The depreciation in the value of the rupee since end of May is a matter of concern," the Prime Minister told the Lok Sabha. "What triggered the sharp depreciation in rupee was the market's reaction to unexpected external developments," he added.

"US federal reserve's tapering has caused general weakening in global currencies," the Prime Minister said.

"Clearly, we need to reduce our appetite for gold, economize the use of petroleum products and take steps to increase our exports," he said. At the same time, the fall in rupee's value was also good to some extent as it makes exports competitive.

The Prime Minister also assured that growth, which has slipped, will also pick up, even as everything would be done to contain the fiscal deficit at 4.8 percent of the gross domestic product (GDP). "Growth in first quarter of 2013-14 likely to remain flat will pick up in the next quarters," he said.

Manmohan Singh said the economy was also getting hit due to high current account deficit. He said the government and the RBI were taking necessary steps to reduce this current account deficit. "Government is confident of lowering current account deficit to $70 billion this fiscal," he said.

The Prime Minister expressed confidence that the rupee would recover and said macro stabilization was underway.

(source: economictimes.indiatimes.com)

News Hour: Will rupee plunge below 70?

MUMBAI: The Indian rupee today is the worst performing currency in the world. The rupee is down more than 7.5 per cent this week and more than 13 per cent in August alone. It has plunged nearly 25 per cent in 2013. A host of negative factors have been responsible for its fall.

The latest one to spook the markets has been the geo-political concerns in the MiddleEast. There are allegations that Syria used chemical weapons on civilians. The US, UK and France are contemplating a military action against Syria, which has had negative impact on financial assets markets including currencies and equity.

The Asian economies have already been under stress on speculation that US Federal Reserve will sooner than later start curbing stimulus leading to money flowing out of these economies.

The whole of Asia and other emerging economies are in a tight spot. The Indonesian rupiah, Philippine peso, Malaysian ringgit, Thai baht have been falling every day and are now at multi-year lows.

The Indian rupee has outperformed all these currencies on the downside. It started falling on factors like record high trade deficit, lower growth and high inflation. The fact that the structural and fundamental issues in India are not getting resolved also hurt the currency.

The government measure came in too late and were not been appreciated by the market. It forced the government to come out with host of steps in all directions. The measures seen as a desperate act ahead of general elections next year are proving counterproductive.

The markets read the government's short- term measures as quick fix and band aid steps, which will not lead to long standing solution nor get immediate liquidity into the markets.

The curbing of outflows by the government sent the markets into a panic mode and since then any step or assurances from the finance ministry have been taken with a pinch of salt.

The passage of Food Security Bill in the Lok Sabha couldn't have come at more inappropriate time. The market is worried that it will further burden the government's finance. It's a play of weak fundamentals and even weaker sentiment.

The Indian equity markets are on a downward spiral. There are worries that panic may set in if FIIs start selling actively in equities as did in the debt market.

At the beginning of 2013, the commodity prices were soft and that was a positive for the economy. But the bad news comes in droves. The commodity prices turned around following optimistic economic data from the developed world.

The crude prices are trading at 18-month high, gold is at 3-month high, base metals are at multi-month highs as well.

The Europe seems to be coming out of lows, The US economic numbers have been good, China has also started re-stocking raw material, leading to higher prices in non-ferrous metals, iron ore and steel.

The Finance minister along with other major banks and brokerages have been calling the rupee as overshot and undervalued.

JPMorgan believes the rupee weakness is leading to more weakness and the fundamentals are not so weak. CLSA in a note said the most of the India's problems are self inflicted and they don't rule out more pain.

(source: economictimes.indiatimes.com)

News Hour: Gold breaks past Rs. 29,000 level after 4 months

Domestic gold prices edged past Rs. 29,000 mark after nearly four months tracking firm global trend. Gold prices rose by Rs. 755 to Rs.29,200 per 10 grams in the national capital. The sharp fall in the rupee, which traded near record low, also helped gold prices on Wednesday.

Sentiment in the precious metal was bolstered ahead of a Federal Reserve meeting that may signal a roadmap to taper down its stimulus program.

Gold in Singapore, which normally sets the price trend on the domestic front, rose by one per cent to $1,339.74 an ounce and silver by 1.4 per cent to USD 20.01 an ounce.

Gold of 99.9 and 99.5 per cent purity spurted by Rs. 755 each to Rs.29,200 and Rs. 29,000 per 10 grams, respectively, a level last seen on April 12. However, sovereigns held steady at Rs. 24,400 per piece of eight grams in scattered deals.

Silver ready jumped up by Rs. 915 to Rs. 42,260 per kg and weekly-based delivery by Rs. 42,160 per kg respectively. Silver coins also sky-rocketed by Rs. 1000 to Rs. 81,000 for buying and Rs. 82,000 for selling of 100 pieces.

News Hour: RBI keeps key rates unchanged; cuts GDP forecast for FY-14 to 5.5%

NEW DELHI: The Reserve Bank of India (RBI) in its first quarter review of monetary policy kept both the repo rate and Cash Reserve Ratio ( CRR) unchanged. This is in line with market expectations. 

Maintaining an extremely hawkish stance,RBI also cut the GDP growth forecast for FY14 to 5.5% from 5.7% earlier. RBI Governor Subbarao cited various risks that are likely to hamper economic growth. Both domestic and global uncertainty were admitted to be a deterrent for economic recovery. 

RBI said that it can revert to supporting growth with continuing vigil on inflation. The RBI will endeavor to keep inflation, which is under threat from a depreciating rupee, at 5 per cent by March end. 

It also said that the recent liquidity tightening measures, taken to support the rupee, will be rolled back in a calibrated manner as stability is restored to the foreign exchange market, enabling it to revert to the policy of supporting growth with continuing vigil on inflation. 

"The policy stance is guided by the need for continuous vigil and preparedness to pro-actively respond to risks to the economy from external developments, especially those stemming from global financial markets," Subbarao said. 

The effect of the Reserve Bank's recent interest rate increase and liquidity tightening to bolster the rupee will fizzle out if the government does not move to reduce external trade imbalances, a central bank policy review says. 

Giving the policy guidance, the governor said "monetary policy going forward will be shaped by the consideration of supporting growth, anchoring inflation expectations and maintaining external sector stability." 

The current situation of low headline inflation, prospects of softening food inflation on a good monsoon and decelerating growth warranted a pro-growth policy stance, but for the difficulties on the external front, as reflected in the almost 10 per cent depreciation in the rupee and the rising current account deficit, he said. 

Stating that the external sector was the "biggest risk to macroeconomic stability," Subbarao called for urgent policy steps from the government to curtail the CAD to a sustainable level of 2.5 per cent of GDP and said that the RBI is ready to use all instruments under its command help in the efforts. 

"It should be emphasised that the time available now should be used with alacrity to institute structural measures to bring CAD down to sustainable levels," the Governor said. 

The recent liquidity tightening measures, brought in to reduce speculative pressures on the rupee, which had hit a record low of 61.21 to the dollar on July 8, will be rolled back once the currency stabilises, which will lead to a shift in the monetary policy to be more accommodative and pro-growth, he added. 

On inflation, while Subbarao acknowledged the ongoing rupee depreciation would create trouble for the price rise scenario, he stressed that the RBI will use all instruments at its disposal to contain it to 5 per cent by March. 

Inflation as measured by wholesale prices increased marginally to 4.86 per cent in June. 

News Hour: 3000-pound cash bond for visas for visitors from India, 5 other countries

LAGOS, NIGERIA: The British Home Officeconfirms it will demand a 3,000-pound ($4,350) refundable bond for visas for "high-risk" visitors from six former colonies in Africa and Asia.

A statement on Monday says Britain will go ahead with the pilot scheme which has caused outrage, charges of discrimination and warnings of retaliation and that the move will hurt trade.

The statement sent by email did not say when the pilot would start. It said if the scheme is successful Britain would like to apply the bond "on an intelligence-led basis on any visa route and any country."

The countries affected are Nigeria, Ghana, India, Pakistan, Bangladesh and Sri Lanka.

Britain's Home Office said it hopes the bond system deters overstaying of visas and recovers costs of foreign nationals using public services.

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News Hour: Detroit files biggest-ever US municipal bankruptcy

DETROIT: Detroit, the cradle of America's automobile industry and once the nation's fourth-most-populous city, filed for bankruptcy Thursday, the largest U.S. city ever to take such a course.


The decision, confirmed by officials after it trickled out in late afternoon news reports, also amounts to the largest municipal bankruptcy filing in U.S. history in terms of debt. 

"This is a difficult step, but the only viable option to address a problem that has been six decades in the making," said Gov. Rick Snyder, who authorized the move after a recommendation from the emergency financial manager he had appointed to resolve Detroit's dire financial situation. 

Not everyone agrees how much Detroit owes, but Kevyn D. Orr, the emergency manager who was appointed by Snyder to resolve the city's financial problems, has said the debt is likely to be $18 billion and perhaps as much as $20 billion. 

For Detroit, the filing comes as a painful reminder of a city's rise and fall. 

"It's sad, but you could see the writing on the wall," said Terence Tyson, a city worker who learned of the bankruptcy as he left his job at Detroit's municipal building Thursday evening. Like many there, he seemed to react with muted resignation and uncertainty about what lies ahead, but not surprise. "This has been coming for ages." 

Detroit expanded at a stunning rate in the first half of the 20th century with the arrival of the automobile industry, and then shrank away in recent decades at a similarly remarkable pace. A city of 1.8 million in 1950, it is now home to 700,000 people, as well as to tens of thousands of abandoned buildings, vacant lots and unlit streets. 

From here, there is no road map for Detroit's recovery, not least of all because municipal bankruptcies are rare. State officials said ordinary city business would carry on as before, even as city leaders take their case to a judge, first to prove that the city is so financially troubled as to be eligible for bankruptcy, and later to argue that Detroit's creditors and representatives of city workers and municipal retirees ought to settle for less than they once expected. 

Some bankruptcy experts and city leaders bemoaned the likely fallout from the filing, including the stigma it would carry. They anticipate further benefit cuts for city workers and retirees, more reductions in services for residents, and a detrimental effect on future borrowing. 

"For a struggling family I can see bankruptcy, but for a big city like this, can it really work?" said Diane Robinson, an office assistant who has worked for the city for 20 years. "What will happen to city retirees on fixed incomes?" 

But others, including some Detroit business leaders who have seen a rise in private investment downtown despite the city's larger struggles, said bankruptcy seemed the only choice left - and one that might finally lead to a desperately needed overhaul of city services and a plan to pay off some reduced version of the overwhelming debts. In short, a new start. 

"The worst thing we can do is ignore a problem," said Sandy K. Baruah, president of the Detroit Regional Chamber. "We're finally executing a fix." 

The decision to go to court signaled a breakdown after weeks of tense negotiations, in which Orr had been trying to persuade creditors to accept pennies on the dollar and unions to accept cuts in benefits. 

All along, the state's involvement - including Snyder's decision to send in an emergency manager - has carried racial implications, setting off a wave of concerns for some in Detroit that the mostly white, Republican-led state government was trying to seize control of Detroit, a Democratic city where more than 80 percent of residents are black. 

The nature of Detroit's situation ensures that it will be watched intensely by the municipal bond market, by public sector unions, and by leaders of other financially challenged cities. Just over 60 cities, towns, villages and counties have filed under Chapter 9, the court proceeding used by municipalities, since the mid-1950s. 

Leaders in Washington and in Lansing, the state capital, issued statements of concern late Thursday. A White House spokeswoman said President Barack Obama and his senior team were closely monitoring the situation. 

"While leaders on the ground in Michigan and the city's creditors understand that they must find a solution to Detroit's serious financial challenge, we remain committed to continuing our strong partnership with Detroit as it works to recover and revitalize and maintain its status as one of America's great cities," Amy Brundage, the spokeswoman, said in a statement. 

The debt in Detroit dwarfs that of Jefferson County, Ala., which had been the nation's largest municipal bankruptcy, having filed in 2011 with about $4 billion in debt. The population of Detroit, the largest city in Michigan, is more than twice that of Stockton, Calif., which filed for bankruptcy in 2012 and had been the nation's most populous city to do so. 

Other major cities, including New York and Cleveland in the 1970s and Philadelphia two decades later, have teetered near the edge of financial ruin but ultimately found solutions other than federal court. Detroit's struggle, experts say, is particularly dire because it is not limited to a single event or one failed financial deal, like the troubled sewer system largely responsible for Jefferson County's downfall. 

Instead, numerous factors over many years have brought Detroit to this point, including a shrunken tax base but still a 139-square-mile city to maintain; overwhelming health care and pension costs; repeated efforts to manage mounting debts with still more borrowing; annual deficits in the city's operating budget since 2008; and city services crippled by aged computer systems, poor record-keeping and widespread dysfunction. 

All of that makes bankruptcy - a process that could take months, if not years, and is itself expected to be costly - particularly complex. 

"It's not enough to say, let's reduce debt," said James E. Spiotto, an expert in municipal bankruptcy at the law firm of Chapman and Cutler in Chicago. "At the end of the day, you need a real recovery plan. Otherwise you're just going to repeat the whole thing over again." 

The municipal bond market will be paying particular attention to Detroit because of what it may mean for investing in general obligation bonds. In recent weeks, as Detroit officials have proposed paying off small fractions of what the city owes, they have indicated they intend to treat investors holding general obligation bonds as having no higher priority for payment than, for instance, city workers - a notion that conflicts with the conventions of the market, where general obligation bonds have been seen as among the safest investments. 

Leaders of public sector unions and municipal retirees around the nation will be focused on whether Detroit is permitted to slash pension benefits, despite a provision in the state constitution that union leaders say bars such cuts. 

Officials in other financially troubled cities may feel encouraged to follow Detroit's path, some experts say. A rush of municipal bankruptcies appears unlikely, though, and leaders of other cities will want to see how this case turns out, particularly when it comes to pension and retiree health care costs, said Karol K. Denniston, a bankruptcy lawyer with Schiff Hardin who is advising a taxpayer group that came together in Stockton after its bankruptcy. 

"If you end up with precedent that allows the restructuring of retirement benefits in bankruptcy court, that will make it an attractive option for cities," Denniston said. "Detroit is going to be a huge test kitchen." 

Around this city, there was widespread uncertainty about what bankruptcy might really mean, now and in the long term, although leaders of other cities who have been through court cautioned of lingering effects. 

"The label sticks with us, unfortunately," said Daniel E. Keen, the city manager of Vallejo, Calif., which filed for bankruptcy in 2008. 

For some Detroiters, recent memories of bankruptcies by Chrysler and General Motors - and the re-emergence of those companies - appeared to have calmed nerves. But experts say corporate bankruptcy procedures are significantly different from municipal bankruptcies. 

In municipal bankruptcies, for instance, the ability of judges to intervene in how a city is run is sharply limited. And municipal bankruptcies are a form of debt adjustment, as opposed to liquidation or reorganization. 

Residents are likely to see little immediate change from the way the city has been run since March, when Orr arrived to oversee major decisions. A bankruptcy lawyer, he is widely expected to continue to run Detroit during a legal process. Mayor Dave Bing and Detroit's elected City Council are still paid to hold office and are permitted to make decisions about day-to-day operations, although Orr could remove those powers at any point. 

Orr has said that as part of any restructuring he wants to spend about $1.25 billion on improving city infrastructure and services. But a major concern for Detroit residents remains the possibility that services, already severely lacking, might be further diminished in bankruptcy. 

About 40 percent of the city's streetlights do not work, a report from Orr's office showed. More than half of Detroit's parks have closed since 2008. 
(Source: economictimes.indiatimes.com)