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Tuesday, 09 August 2011 00:00
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Though markets across the world continued to fall on Monday—the MSCI World Index fell by 1.2% to 1,194.05—in response to S&P’s downgrade of the US, and Moody’s increased the pressure a bit today, there is increasing realisation that the immediate problem is in Europe. Even if investors want to leave the US, in even the medium term, there is no alternative to the dollar and US treasuries. Perhaps why the European Central Bank (ECB) stepped into bond markets on Monday and said it would support both Italy and Spain. Immediately, yields in both countries went down. This only buys time as everyone knows the ECB doesn’t have an unlimited mandate, besides credit ratings of member countries could also begin to look shaky—Jim Rogers is already on record saying he thinks the UK and several other Eurozone members will suffer ratings cuts over the next few months. Some have suggested a single Eurobond backed by all members of the EU as a solution, but Europeans are no closer to opting for this or any other larger solution. Expect a lot more ups and downs in the days ahead—indeed, in both the US and EU, weaker growth will lead to a derating of corporate earnings forecasts over the next few weeks.

Authorities in India have shown they are on alert, and the central bank even issued a statement saying the liquidity position was adequate—aggregate demand for cash from Indian banks on Monday morning at the RBI window was R27,505 crore as compared to R90,000 crore on the Monday after the Lehman collapse—and so were the forex levels. The most comprehensive statement came from credit rating firm Crisil, owned by S&P. While pointing to a 20-sector study which said India Inc’s debt-equity ratio was a comfortable 1 (the top 50 corporates have cash reserves of R3,00,000 crore, equal to 40% of their total debt), Crisil said the immediate pressure would come from the availability and cost of funding, both domestically as well as internationally. More important, as Crisil pointed out, risk levels in India were rising even before the current crisis. In the first quarter of 2011-12, the agency made 105 downgrades as compared to a total of 269 in the entire 2010-11; at 43, the number of defaults in Q1 was more than a third those in the full 2010-11; the upgrade-to-downgrade ratio was lower at 1.05 as compared to 1.1 for 2010-11. As GDP growth slows, this will worsen. Naturally enough, in all of this, few paid attention to Goldman Sachs upgrading Indian equity to marketweight from underweight earlier.


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