This was how an extremely articulate business leader described the current state of global financial markets a couple of weeks ago. The BSE Sensex has fallen to a little less than 18900 from the highs of around 21000 six months ago! This downward trend is seen in other major markets in the world. Gold prices have appreciated exponentially and crude is again closing in on the $100 mark. Countries in Europe are struggling to stay afloat. Greece almost defaulted.
So what is happening? The answer is: Exactly what was happening a year ago! The PIIGS (the group of European countries namely Portugal, Ireland, Italy, Greece & Spain) were in trouble exactly a year ago, when they were about to run out of cash and the IMF and some of the other eurozone countries bailed them out. These countries are again out on the streets with the begging bowl...at least Greece is, and I am assuming Portugal will soon follow. The austerity measures and structural reforms agreed by these very countries have not worked and have in fact been huge flops. Instead of uniting the entire country in these times of crisis, the austerity measures have been a subject for heated debate and, specifically in Greece, public unrest. Pro-austerity pundits believe the policy makers have not gone far enough for them to work, and the other side of the argument is that the austerity measures have in fact worsened the sovereign credit crisis.
The future of Euro as a currency is in question again as it is very clear that the inability of these countries to control their currency is one of the reasons for the crisis. The United Kingdom, though impacted by the latest crisis, must be standing in the sidelines with a smirk on its face. The fact that it did not join the Euro, is seen as the prime reason that it is not in a bad shape compared to others like Ireland.
Interestingly, everyone fears that the response of the market participants to the latest crisis is going to be very similar to that of 2008. Everyone tries to de-risk, hold tight and clams up, thus causing liquidity issues in the financial system. Investors on strike! The declining volume trends of trades executed in the exchange-traded as well as the OTC markets over the last few weeks are very good indicators of what is in store next. Is it going to be 2008 revisited? A couple of key indicators are definitely different this time compared to 2008. Unemployment rates as well as the level of public debt of major world economies, are both higher this time, thus reducing the ability of the global economy to absorb systemic shocks like a sovereign debt default or a banking system collapse.
Hence, my view is that the world at large cannot afford a policy mistake like the Lehman bankruptcy this time around. Sovereign policy makers as well as key corporate functionaries in today's interconnected financial system, will need to respond in a co-ordinated manner, to understand and control this emerging challenge. There is far too much at stake...as everyone knows.
Take care!
4 comments:
Suresh, Is it not better to let things happen as it should rather than just delay the inevitable. In our recent economic history, there have been shocks, like the depression of 1930s, world war II, the collapse of the Gold system, oil shock, 1987 stock market crash, our own Foreign Exchange crisis in 1991-92, late 90's internet boom and bust and the 2008 economic crash. Except for the last mentioned crash, we have seen terrible bottoms in the stock markets, in the employment generation and the overall economic activity, but we, the world, has bounced back. Like that, if we have led the 2008 crisis to take a logical course, things would have been much different. It is just we are trying to cover up. (Of course, our individual jobs would have been at stake!)
A new world order would emerge and life would go on. There is no point in supporting all the PIIGS one after another.
Take the case of Greece, 50% of the GDP is government spending!?! So there is no private enterprise, which is sorely the need of the hour. Privatise all services, open up the economy would be a sure shot cure for Greece in the long run.
cheers
Venkat
Venkat,
My view is : Doing nothing is tantamount to a collective failure on our part to respond to a grave challenge that lies ahead of us. That is not an option. What is the use of a new world order if it is not by design but a consequence of circumstances? I would rather take the opportunity to correct the systemic imbalances which are the cause of such circumstances.
On a lighter note, we are fast approaching 2012, when the world is supposed to come to an end! You may just get a brand new world order that you are looking for; except that you and me might not be there to witness it! :-)) But that is a topic which deserves a separate post itself, I think!
Cheers!
Suresh
Its very interesting to see that the latest Italian govt bond issue was reasonably taken well by the investors, so there are mixed signals. Sterling is still weaking , although they are watching this from sidelines but internal issues is telling heavily on the economy.
Germany is dragging its heels on the latest round of bailout talks , rightly so . The Germans don't want to bail out other failing european nations.
What am keen to see is the fate of Euro and the capital flight into eurozone to pick up cheap assets if Euro does fail . Also what role does China the big daddy has to play in this round of euro crisis.
Some of the banks have huge exposures to PIIGS would be interesting to see how this thing unfolds.
Indeed Noogle...stay tuned on this one for the next few weeks!
Cheers!
Suresh
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