Thursday, August 18, 2011

Forget S &P downgrade, watch Eurozone

The S&P downgrade is a non-event. It could be turn out to be an event for S&P and for other rating agencies, given that the Senate is to initiate hearings into the downgrade. This could eventually result in a major downgrade of the ratings business itself, but that's a different matter.

The downgrade signifies nothing of importance in the US economy itself. All the bad news is already in and there is nothing to suggest that a recession is imminent although recovery will remain sluggish. The danger to the world economy is posed by the Eurozone where bank exposure to government debt has the potential to trigger another financial crisis.This too is a low probability event as of now, since it appears that sense has dawned finally on the leaders in the Eurozone.

Comparisons of the S&P downgrade with the collapse of Lehman are completely misplaced. The Lehman collapse happened when banks were battered and it wrecked money market confidence in the banking system, making things worse for banks. Banks are today better capitalised and bank exposure to Eurozone debt is well documented although exposure to credit default swaps is a grey area. The S&P downgrade changes nothing on the ground and it could, in effect, be something of a wake-up call for leaders everywhere.

The prospects are for slow growth in the world economy and this will impact on India's growth prospects. Since, lower growth is what our policy makers are praying for in their bid to contain inflation, they will not lose much sleep on account of recent developments. More in today's ET column, A continuation, not a repeat, of 2008.

5 comments:

Anonymous said...

I agree, that current downgrade, is after shock of 2008 quake. So there is not much to worry, except for low rate growth.

But, the fact, that India is more vulnerable today to this after shock than it was to the 2008 quake, downgrades market's sentiments.

For the world, AA+ may not be as much concern as it is for India, as our fundamentals are relatively weaker than it was in 2008.

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