Monday, October 6, 2008

World Economy under Threat

The financial crisis in the US, sparked off by subprime loans, has finally taken wings. The monster has build its nest in Europe, where several leaders, beginning with German Chancellor Angela Merkel, have decided to use government (read, taxpayers') money to insure deposits.

In the US, Congress has approved a $700 bn bailout package to save the banks that are left. But this has not assuaged panicked investors as the Dow Jones fell sharply by over 500 points (at the time this was being written) to sub-10,000 levels for the first time in four years.

In Europe, all major indices took a beating, losing anywhere between 6 to 8 percent. In London, FTSE 100 component Royal Bank of Scotland Group (RBS) fell by over 20%, as did other financial stocks. Iceland, where the net value of the banking sector is nine times the island's GDP, is in a deep crisis. However, a European bailout package seems unlikely, with the UK and Germany rejecting the very idea.

Now, the fear is that the crisis might finally land in Asia, which has been the engine for growth around the world. Today, all major Asian markets, from Hong Kong to Mumbai, were down by 4-6%. In Mumbai, the BSE Sensex lost 725 points to close below 12,000. After this, market regulator SEBI lifted curbs on P-Notes, which were put into place a few months back. Also, the RBI cut the CRR by 0.5% to 8.5% for the first time in two years, just months after the Bank of China did something similar.

The Russian RTS exchange was closed after the index collapsed by 15%. In Shanghai, the Shanghai Composite lost 5% and is nearing the critical 2,000-mark. Already, it is down over 60% from it's all-time high. 

Although most Asian nations do have banks that are tied up with US banks, a majority of them have no exposure to toxic assets. However, the three largest developing economies here - China, India and Russia - are particular concerns. For example, ICICI Bank (IBN) in India lost a few million dollars in the crisis, but the RBI has clearly said that there is nothing to be worried about. Also, some American JVs in Asia, such as those of Lehman Bros. and AIG, had to make sure that they were not going to disadvantage depositors in any way.

Overall, the world is a very gloomy place. Europe and Japan are in a recession, and the US will undoubtedly fall into one too. Unless the situation turns from a recession to a depression, Asia and Latin American will not stop growing, but will slow down. Also, the oil wealth of Arabian shaikhs is still enough to cool off this entire mess, if you can get hold of it, that is.

Oil Update
In Asian electronic trading, oil fell to $90/bbl for the first time since Feb. this year as the credit crisis created fears of a major slowdown in demand even in Asia.

However, an Iranian minister said that oil falling below $100/bbl was not acceptable to either producers or suppliers and asked fellow OPEC members to keep it at those levels. This, after OPEC rejected a proposition by Indian Finance Minister P Chidambaram to create an acceptable price band for oil.

[With inputs from NDTV, CNN, CNN-IBN and CNBC]

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