October 14, 2008 2:13:50 am
European countries unveiled a series of initiatives aimed at resolving the global financial crisis. While these were not tightly coordinated, they do show a shared approach, and the magnitude of resources involved is staggering.
Britain announced it would use public money to assist equity raising by three banks of $64 billion. In Germany, a few hours later, a rescue package involving over $500 billion in loan guarantees and $110 billion to bolster the banking system was announced. France said it would provide $435 billion in loan guarantees and $52 billion of equity to banks if required. Smaller interventions were announced by other countries.
Monday morning in the US saw Neel Kashkari, who is in-charge of implementing the US bailout, unveiling the first specific details about the functioning of the $700 billion package aimed at supporting the home loan market.
World markets responded positively to these actions and performed very well on Monday. Markets in Asia did well — 3.7% in Shanghai and 3.8% in South Korea. Markets in Europe did very well, with 4.9% in the UK and 8.8% in Germany. In the US, the S&P 500 index had recovered by 5.8% (at 8.40 pm IST). US financial firms, who are at the heart of the crisis, gained 3%. Indian ADRs trading in the US did very well: 18% for Infosys, 23% for Wipro, 20% for ICICI Bank and 10% for HDFC Bank.
While the first response has been positive, there is no room for complacency. The VIX, which measures uncertainty in the US as perceived by the market, dropped significantly to 64%. However, this level was still acutely high and does not suggest that the crisis has substantially subsided.
In India, the the Finance Minister and RBI governor too assured markets that liquidity would be their first priority. Nifty recovered by 6.4%. ICICI Bank gained 17%. Derivatives on ICICI Bank were very active at the NSE.
RBI’s easing yielded a tangible impact on liquidity. The call money market had rates of roughly 10%, which are much lower than the turbulence of Friday. In addition, the money taken by banks from RBI’s repo dropped to Rs 60,000 crore as compared with Rs 92,000 crore on Friday. At the same time, the call money rate continued to exceed 9%. This suggests that RBI’s operating procedures continue to struggle with ensuring that the call rate stays within the two rates specified by RBI and further liquidity cuts may be required.
Even as equity markets responded positively, it is the effect on money markets that governments and central banks are looking for. If the banking system stabilises, money and credit should start flowing again. There is reason for optimism, but it is too early to say.
(Ila Patnaik will track global economic developments as they unfold)
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