Wake-up call

What the world of investors ought to realise about the Standard and Poor's downgrade of US bonds last Friday is that it is not in the same league as the Wall Street crash after September 2008. When the markets tumbled off the cliff into a free fall after Lehman Brothers crashed, they did so in response to a systemic breakdown in the financial edifice in the western economies and then, to varying degrees, in the rest of the world. On Friday evening, when one rating agency, in an action that has so far not been emulated by the other two agencies, pegged US treasury bonds a notch lower than their hallowed AAA rating, what the world witnessed was a judgment, on arguable grounds, of an economy that has led the world in its post-World War-II prosperity by its financial and economic prowess. The rating agency is entitled to its views; so is the rest of the world, and what the latter has said post-Friday is that it has faith in the US administration, to not just honour its debt commitments despite the political gridlock but also ride out the short-term panic of the markets.

That ringing endorsement came not just from governments around the world but also from the Indian bourses. On Monday the Sensex closed at 16,990.18, down by 315.96 points, or 1.82 per cent, from the previous close; the Nifty closed down by 92.75 points, or 1.78 per cent, to end the day at 5,118.50. In part, the fall was on account of reactions to European markets that opened later in the day and fell, as was to be expected. It is important to keep in mind that European investors may have also been coloured by pessimism over the ongoing debt crisis. In India the strong sentiment of confidence expressed by the Finance Minister, Mr Pranab Mukherjee, in the Indian economy and his understated stance that this was not like the September 2008 scenario helped matters. This is why the threat held out by Standard and Poor's that India and others, such as Japan and Malaysia, could also face downgrades may not weigh much with investors. All indicators reveal that the emerging economies have been faring well despite fiscal deficits in some countries, such as India. As the world has been quick to realise, markets may respond to sentiment in the immediate term but it is the fundamentals that eventually govern investor confidence and, as far as that is concerned, almost every country on S&P's radar screen defies its judgements about financial and economic instability.

Much as Mr Mukherjee may have done to bolster confidence among jittery investors, policymakers cannot ignore the fact that their tasks have been made doubly urgent with the prospect that rating agencies could spoil the party. More decisive and aggressive reforms are the need of the hour.

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