It’s a classic chicken and egg question — was it the fall in global markets (including India’s Sensex) that influenced US politics and the accompanying legislation or is it the other way round?
We’ll never know for sure, but embedding the Bush-Paulson $700 billion bailout plan with tax cuts for businesses and households, and raising the limit on banks deposit insurance 2.5 times to $250,000 finally earned the support of 74 senators (25 voted against it).
As the proposal now moves into the House of Representatives, markets gave mixed signals. While Indian markets were closed, seven out of 11 Asian, including Japan, South Korea and China fell. In Europe, six out of 11 markets, including UK, Germany and France fell.
These mixed signals are, surprisingly, backed by logic. While the epicentre of this financial earthquake lies in the regulatory weaknesses and excesses of the US system, other countries have reasons to tremble as well. “There’s an emerging problem in Europe too and some type of complementary package has to be placed for them as well before the financial system can be stabilised,” said Abheek Barua, chief economist, HDFC Bank.
Clearly, things are not in a straight line mode anymore — and are unlikely to get that way in the near future. “The package will only deliver short-term relief,” said Anup Bagchi, executive director, ICICI Securities. “For the long term, deleveraging has to happen and more capital has to be brought into the system so as to bring stability and that will take more than 12 months.”
Deleveraging is a process by which the high-debt investment banks that went bust and were taken over by commercial banks will have to add equity capital to the latter’s balance sheets in order to bring down the debt-equity ratio.