The Hindu Business Line : All eyes on the US bail-out package

Worried stockbroker looking at the monitor as the BSE Sensex closed down 6.3 per cent last week on persistent foreign investors’ selling. Now a few market participants are pinning hopes on the US bail-out package –

The US lawmakers are expected to work through the weekend and attempt to stall a bloodbath on Wall Street on Monday. However, on the other side of the time zone, Asian markets, including Dalal Street, on Monday may tumble further on persistent uncertainty and continuing flight of capital. Even early signals on Monday could be crucial.

But, if the stalemate in the US Congress continues, global markets may head for a rout. Time being the essence of this unprecedented fire fighting any delay would precipitate the crisis.

Best-case scenario

If the Congress clears the proposed $700 billion bailout package by the Bush administration on Monday, without much mutilation, the psychological impact across the markets would be one of relief. This may not fully arrest the current unwinding by FIIs on the local market, but its severity may not trigger mayhem.

Already a significant sell-off and rebalancing has taken place in the recent weeks. This has not only brought the sentiment and indices down, but also put a great deal of pressure on the local currency, which weakened against the greenback.

The financial market crisis has come to the threshold of affecting the global real economy.

The bailout package and immediate release of money may put balm on the frayed nerves in the short term but its impact on the US and global economy in the medium to long term could be negative. Increasing US deficits would put pressure on the dollar, which is currently ruling strong against euro and Asian currencies except yen.

The currency market movements are likely to reverse in the medium term and the greenback may seriously weaken against other currencies and if other central banks decide to reduce reserves of weak dollar, it may snowball into a currency market crisis.

Worst case

If there is a serious delay in arriving at a consensus on the bailout package this week, there may be a virtual collapse of the US financial system. Europe, with it own recent economic de-growth situation, is in a tight spot. Though its financial markets are far less leveraged than that in the US, it may totter on spread of contagion.

India’s economic problems may turn complex in a situation when developed markets get into deeper trouble. Simply put, if Wall Street collapses this week, Dalal Street may not be able to resist it.

Even hardcore pessimists shudder to think how violently choppy the global markets may turn if US fails to put together an appropriate crisis management response now. The negative response of the local markets may be painfully staggered over a long period.

All said and done, this week would surely prove to be a turning point for equity markets and the global economy. How the change in course would shape the Indian economic landscape and plot the Dalal Street charts in the short, medium and long terms, however, would be indicated right this week.

(Responses may be sent to jayanta_mallick@thehindu.co.in)