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!
