Sometimes the news flow is slow.But sometimes the news comes so fast he can barely keep up with it. "Europe sparks global sell-off," was the Financial Times' lead headline on Thursday.
Italy's debt was sinking in the bond market. The Italians need to borrow more than $200 billion a year to stay afloat. But yields (the cost of borrowing) were rising to the point where it would soon be impossible. And Europe's bailout fund doesn't have enough money to save the Italians. The European Central Bank announced that it was buying bonds on the open market. But nobody believed the ECB could or would be able to support the market on its own.
This was followed by Friday's FT headline:
"Stock markets plunge worldwide." All over the world, stocks fell on Thursday (reported on Friday). Some sellers sold because they were afraid of Europe. Some sold because they were afraid of Asia. Some sold because they were nervous about the US. And some sold just because everyone else was selling.
The move came even though the Treasury Department said that it had found a math error in the firm's calculations of deficit projections, according to a person familiar with the matter.
S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation's growing spending.
Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.
A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.
But the exact impact of the downgrade won't be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.
"...several lawmakers have publicly questioned whether the ratings agencies have the competence to evaluate the country's finances, and whether it was appropriate for them to be so deeply involved in discussions of fiscal politics."
We are not exactly delinked from the US. It is a major client for nearly all of the exporters. Therefore any recession or slowdown in demand from US would impact the earnings of the export focused firms. To add to this, the domestic demand environment has slowed down as well. This was on account of the monetary tightening measures adopted by RBI to control inflation. Therefore, the domestic demand may not be able to offset the slowdown in demand from overseas. This spells trouble for Indian firms.
But is this problem new? US has been in a crisis since 2007 when Lehman Brothers collapsed. In reality, the crisis started when the banks decided to give loans to people who did not qualify for it.. But then that's history. Nonetheless, the fact is that US has been in crisis for a while now. The recent downgrade is just finally accepting the fact that US is in crisis. The Indian exporters have already learned to live and work around with clients who have tightened their purse strings. They have learnt how to negotiate with them. They have also learned how the crisis and changes in regulatory environment can be used to get better and more work from the clients.
Therefore, the recent selloff does not spell trouble for India. These risks could already be accounted for in the stocks. True there may be more crashes to come due to global volatility. But these should be treated as an opportunity. An opportunity to pick up fundamentally sound companies The market crash is giving us an opportunity to get these stocks at cheaper valuations.
Italy's debt was sinking in the bond market. The Italians need to borrow more than $200 billion a year to stay afloat. But yields (the cost of borrowing) were rising to the point where it would soon be impossible. And Europe's bailout fund doesn't have enough money to save the Italians. The European Central Bank announced that it was buying bonds on the open market. But nobody believed the ECB could or would be able to support the market on its own.
This was followed by Friday's FT headline:
"Stock markets plunge worldwide." All over the world, stocks fell on Thursday (reported on Friday). Some sellers sold because they were afraid of Europe. Some sold because they were afraid of Asia. Some sold because they were nervous about the US. And some sold just because everyone else was selling.
The move came even though the Treasury Department said that it had found a math error in the firm's calculations of deficit projections, according to a person familiar with the matter.
S&P decided to lower the AAA rating, held by the United States for 70 years, to AA+ after a bipartisan debt deal signed into law this week failed to assuage concerns about the nation's growing spending.
Analysts have said a downgrade could increase the cost of borrowing for the U.S. government and lead to tens of billions of dollars in more interest costs per year. That could translate into higher borrowing for consumers and businesses, too.
A downgrade would also have a cascading series of effects on states and localities that rely on federal funding, including in the Washington metro area, potentially raising the cost of borrowing for schools and parks.
But the exact impact of the downgrade won't be known at least until Sunday night, when Asian markets open, and perhaps not fully grasped for months. Analysts say the immediate term impact is likely to be modest because the markets have been expecting a downgrade by S&P for weeks.
"...several lawmakers have publicly questioned whether the ratings agencies have the competence to evaluate the country's finances, and whether it was appropriate for them to be so deeply involved in discussions of fiscal politics."
In short, they were indignant. They thought they had bought the rating agencies when they bought Wall Street. They must feel as though they have been cheated.
What the US debt downgrade would spell for India in particular.
We are not exactly delinked from the US. It is a major client for nearly all of the exporters. Therefore any recession or slowdown in demand from US would impact the earnings of the export focused firms. To add to this, the domestic demand environment has slowed down as well. This was on account of the monetary tightening measures adopted by RBI to control inflation. Therefore, the domestic demand may not be able to offset the slowdown in demand from overseas. This spells trouble for Indian firms.
But is this problem new? US has been in a crisis since 2007 when Lehman Brothers collapsed. In reality, the crisis started when the banks decided to give loans to people who did not qualify for it.. But then that's history. Nonetheless, the fact is that US has been in crisis for a while now. The recent downgrade is just finally accepting the fact that US is in crisis. The Indian exporters have already learned to live and work around with clients who have tightened their purse strings. They have learnt how to negotiate with them. They have also learned how the crisis and changes in regulatory environment can be used to get better and more work from the clients.
Therefore, the recent selloff does not spell trouble for India. These risks could already be accounted for in the stocks. True there may be more crashes to come due to global volatility. But these should be treated as an opportunity. An opportunity to pick up fundamentally sound companies The market crash is giving us an opportunity to get these stocks at cheaper valuations.
The downgrade of the US' credit ratings may make little or no difference to the fundamental prospects of India Inc. But for the fact that the cost of short term borrowings just got steeper. At a time when domestic credit is unviable, thanks to the RBI's strict monetary tightening, foreign money is the only recourse. The latter has been at least 5-7% cheaper than domestic debt and the hedging costs have also been low. But most of that changes with the downgrade of the US' credit rating. For the uninitiated, the yields for most international bonds are linked to US Treasuries. But with the US treasury papers themselves commanding a higher rate, the borrowing cost for corporate automatically gets dearer. While the same may get evened out in the long run, the short term pain itself could be very taxing for companies that are heavily dependent on leverage. What is good here is that the notion of 'cheap credit' is slowly getting phased out. That is expected to bring in more rational re-pricing of risk and allocation of funds.
With the risk of another recession in the developed world looming large, will the Indian Government play the economic stimulus card all over again? Not quite if a leading business daily is to be believed. For starters, the current economic situation in India is different than the period of 2008-09. Right now, the Government is in fiscal consolidation mode. In other words, its expenses exceed its income by quite a bit and any further stimulus would mean putting this number in even more danger.
Also, it is quite possible that the Indian central bank, easily one of the most hawkish in the world, stops its interest rate hiking exercise. This can happen if global commodity prices fall and consequently, inflation in India cools down. Hence, there is a chance here that even without the Government giving a stimulus shot, the economy could be boosted on account of the RBI's measures.
However, it would be wrong to completely rule out fiscal stimulus from the Government. It could well become a possibility if the developed world plunges into a recession worse than imagined. Here, the Indian Government may have to step in to pick up the slack on account of severe slowdown in net capital inflows and trade balance. For the time being though, it is a wait and watch approach by the Government.
Also, it is quite possible that the Indian central bank, easily one of the most hawkish in the world, stops its interest rate hiking exercise. This can happen if global commodity prices fall and consequently, inflation in India cools down. Hence, there is a chance here that even without the Government giving a stimulus shot, the economy could be boosted on account of the RBI's measures.
However, it would be wrong to completely rule out fiscal stimulus from the Government. It could well become a possibility if the developed world plunges into a recession worse than imagined. Here, the Indian Government may have to step in to pick up the slack on account of severe slowdown in net capital inflows and trade balance. For the time being though, it is a wait and watch approach by the Government.
Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and has not been authenticated by any statutory authority. The authors do not claim it to be accurate nor accept any responsibility for the same.
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