The Hindu Business Line : Market View

The crisis that came to the fore via the sub-prime debacle has enveloped several parts of the credit market. Just in the past month, at least three more parts of the credit market have joined the woes party now inflicting significant damage across a wider swathe of institutions. In this context, the write-off for poor quality credit assets at global financial majors, that is now approaching $200-billion mark, may have substantial headroom to rise and we could expect news flow, including on institutional collapse (we have already had one major such event in the UK) through 2008.

The ongoing massive write-offs will have an impact on credit flow to the economy because of erosion in capital and this consequence may not be neutralised by the Fed rate cuts. The magnitude of the still unfolding crisis is clear from proposals, which would normally be labelled as desperate and reeking of moral hazard, from persons in high office.

The crisis will have to run its course so that pain is taken out and this will continue to impact emerging markets across the board and economies in varying degree. This is why this round of market correction in India may not reverse as quickly as similar events in May 2004 and May 2006, though the economy may be among the least affected among emerging markets.

Sundaram BNP Paribas Mutual

The most likely outcome for the global economy in 2008 continues to be a soft landing with some decoupling of growth across regions and generally stable inflation. However, PIMCO believes that the risks to this benign forecast are being skewed increasingly to the downside as we continue to witness the importance of global financial market linkages to the US and other economies. Self-feeding global risk aversion in the wake of the sub-prime debacle has resulted in less decoupling of growth from the US than would otherwise have been the case.

On the positive side, it is now apparent that the Federal Reserve and other central banks, as well as fiscal policymakers in the US, understand the gravity of these risks and will respond to them. Even so, heightened risk aversion and the sub-prime induced squeeze on credit have increased the probability of a US recession. PIMCO anticipates a long and arduous unwinding of twin bubbles in property markets and assorted non-bank and off-balance sheet vehicles associated with sub-prime lending.

PIMCO Bonds

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