The Crisis…
In March investors across the world were worried that the financial system had all collapsed. Analysts were predicting huge losses in sub prime crisis. Now within five after, everyone is cool. Stockmarkets have stabilised and corporate credit spreads (the excess interest rates paid by risky borrowers) have come down sharply. Gold and silver are cheap. Bankers talk about having put the worst behind them. After 2%, now Rates may even have reached the bottom.
When the Fed helped JPMorgan Chase to rescue Bear Stearns, it sent a signal to the markets—we will not let any bank fall. If the Fed was willing to save an investment bank, without any retail depositors, then the system would not be brought down by a counterparty in the derivatives market. The boost to confidence has helped banks to repair their balance sheets by raising large sums from both shareholders and the bond markets.
But all is not rosy on the fundamental front. Although the system as a whole is safer, plenty of problems remain for particular banks. In the money markets, the banks are still having to pay a high margin over official rates to borrow short-term money, despite the ingenious efforts of the Bank of England, European Central Bank and America’s Fed. Investors are still worried that banks could get into trouble. There is probably more troubling news to come on write-offs; declared losses so far are well short of the $945 billion that the IMF estimated were the global losses from the crisis, much of it outside the banking system.
The problem that started the crisis—the American housing market—is still getting worse.
And losses are now emerging in areas other than housing. After a long period with scarcely any bond defaults by companies, there have been 21 failures this year, according to Standard & Poor’s, a rating agency; some 122 issuers, with debt of around $102 billion, are deemed vulnerable to default. Ominously, corporate debt is the shaky foundation for trillions of dollars of derivative contracts. Here in India also huge derivative positions are open.
Consumers round the world are grappling with higher food and fuel prices. British house prices are now showing annual declines. Europe’s economies seem to be deteriorating. In April the Belgian business confidence indicator, a good gauge of the continent’s conditions, suffered the biggest decline in its 28-year history. Commercial property looks vulnerable, as do some emerging markets, especially in central and eastern Europe. And things are shaky in Japan, where industrial production declined more than 3% in the latest month.
America’s new president will be elected against the backdrop of a shrinking economy and on taking office will face months of economic malaise. That in turn will imply bigger budget deficits, and redefine next year’s big domestic policy debates: whether to roll back George Bush’s tax cuts for the wealthy, for instance, and how ambitiously to reform health care. It could fuel protectionist and populist sentiment, particularly since Americans are already unusually fed up. A new CBS/New York Times poll finds that eight out of ten people think the country is “on the wrong track”, the most since the question was first asked in 1991. Today the opposition is asking the same question of Next government inheriting the deficit legacy in India.
