October 13, 2008 1:28:49 am
Last Tuesday, the UK came out with a three-part plan to resolve the global financial crisis. This appears to be on the right track. They will guarantee short-term inter-bank loans, support medium-term borrowing by banks, and infuse equity capital into distressed banks, with corresponding control in the hands of the government. Over the weekend, all eyes were on the Group of Seven countries and a coordinated plan of a similar nature which would essentially cover all the large banks of the world.
The announcement by the G7 makes five key statements. They will:
• Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.
• Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.
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• Ensure that their banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.
• Ensure that their respective national deposit insurance and guarantee programs are robust and consistent so that their retail depositors continue to have confidence in the safety of their deposits.
• Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.
These five elements are statements of intent but not specifics about what interventions will be made. Details of the actions of each of these countries would come out from each country separately, and would reflect variation in institutional mechanisms.
But will the G-7 communique stabilise world markets? We will know on Monday. Financial market trading on Monday will primarily be a vote on the extent to which markets are persuaded that this communique puts the global financial system on the road to recovery. Early morning in India, the Nikkei 225, one important barometer, will become visible. This is the most important fact to watch before trading starts in India.
Voting by the Indian financial markets on the global and Indian situation will take place in two parts: at 9 am, the rupee-dollar currency futures will start trading and at 9.55 am the Nifty futures will start trading. At 1.30 pm India, the UK stock market will start trading, and their FTSE-100 index will be a very important vote on how this plan is perceived. Some important announcements might be made by European countries from 1 pm IST onward. The most important test of the plan will come late evening India time when trading in the S&P 500 index starts in the US.
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