The Hindu Business Line : Sub-prime lending crisis keeps every one on tenterhooks

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Sub-prime lending crisis keeps every one on tenterhooks

Jayanta Mallick

Indian markets just begun to feel the indirect effect

What binds Bear Sterns, Macquarie Bank, the falling Sensex, rising rupee and Puravankara IPO alike? All have indirectly been smitten by an ailment called the “US flu.”

The sub-prime lending market crisis continues to rattle the global financial markets and like a distant tornado, seems to grow in momentum by the week for Dalal Street even as players make valiant attempt to shrug off the fear looking at the positives at home.

Last week, Indian equities did manage to regain a seeming circumspection.

However, the apparent calm could prove false if the large-scale sell-off ensues in the US and other Asian markets.

Real angst

Though in July, overseas funds poured record amount of money into the Indian equities (Rs 15,582.20 crore) and were net positive on every single trading day, they pumped out some Rs 1,544.40 crore in the first three days of August.

Last Thursday, the US flu caused FIIs to pull out Rs 982.70 crore, but in the process, the Indian market shaved off a market capitalisation of around Rs 1.8 lakh crore.

When HSBC incurred $6.8 billion loss from the US sub-prime market last year, nobody really felt it would snowball and cause devastation across the globe a year later.

This year there were signs galore. The so-called risk-free yen carry trade did blow-up in February on “unexpected” meltdown in the shares of US sub-prime lenders.

One of the top US housing loan providers Countrywide Financial incurred huge loss, while Century Financial filed bankruptcy proceedings.

When in mid-March this year the former Fed Chief, Mr Allan Greenspan, warned that if US home prices keep falling, there could be more of an impact on the broader US economy and its momentum, the global financial market mandarins downplayed the looming threat.

The damage control exercise in Tokyo and New York saw to it that yen remains weak.

In April, dollar recovered from its lows of March and revived sentiment on Wall Street.

However, now when the sub-prime problem, earlier brushed under the carpet, has extended its tentacles to the global credit system and liquidity, the yen is firming up and the global crude oil is ruling at a level that would hurt everybody in the developed and the emerging markets.

The interconnected stock markets across the borders cannot but remain resistant to the rising heat.

Home truths

This may be another turning point for the pan-globe financial system after the Asian flu in 1997, which continued to produce after-shocks in other parts of the world late in 1998 and the recovery was painstakingly slow.

Indian financial markets have just begun to feel the indirect effect, largely on the liquidity front and the sentiment.

But it may lead to a market turmoil, for which very few appear to be prepared.

This week if the global equity markets turn even more jittery and money begins to flow out in greater volume, Dalal Street may not be able to resist a serious downturn.

In this context, the SEBI chief’s words of caution on forward-looking statements from corporates and the role of hedge fund gain significance.

Bears have only to say the glass is half empty. The rest may create a history.

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