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Bailing out euro

India can profit from the rally because of ECB move,but domestic cues are still absent

Written by The Indian Express | Published: September 8, 2012 1:04:27 am

The strongest rally in two months by the Indian stock markets on Friday is part of the cheerful reaction in Asian markets to the European Central Bank’s announcement of an unlimited buyout of bonds of struggling European economies. The rupee too moved up against the US dollar,mirroring the upbeat expectations in Asia about the impact on trade with Europe. The hope,all around,is that this plan will work.

It needs to. Without naming Germany,ECB President Mario Draghi said it had opposed writing cheques for the unlimited bailout — the only one among member nations to have done so. Draghi,of course,is banking on the expectation that the Outright Monetary Transactions programme,as it is called,will calm the bond markets and stop traders betting against the Spanish bonds. At present,Madrid has to pay a very high interest rate on the bonds it issues,which makes it impossible for Spain to float more papers and difficult to get finance to restart the economy. The ECB backstop potentially reduces the rates. But the extent to which it can do so will remain a question for the bond markets. That and Draghi’s affirmation that there will be conditions for the backstop could be a problem for all the PIIGS economies. They have argued that there can be no more cutbacks on government expenditure for social support. The ECB conditions could make matters worse,especially as an internal forecast by the bank of the GDP growth rate for the continent has again slipped back to minus 0.4 per cent.

At this juncture,if the Indian government were to push through a decision to raise domestic diesel prices,it will provide the direction the markets need. Else,they will have to wait for cues from the index of industrial production due on Wednesday. Yet,as the ECB cobbles a semblance of fiscal union and accords to itself the role of the lender of last resort for a fractious Europe,the prospects certainly seem better than they have at any time this year. Allied with the US decision not to kick off another quantitative loosening any time soon,reiterated this week by Fed Chairman Ben Bernanke,Thursday’s outcome makes this weekend possibly one of the best that the global financial order has seen for some time. Monday will be a time for reckoning again,but for now,there is a sense of disaster averted.

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