09 August 2011

Another recession: Are you worried?

Are we moving towards another recession? The global economic developments after Standard & Poor's (S&P) downgraded the U.S. credit rating, point towards the advent of a global economic meltdown. Leading rating agency S&P for the first-time downgraded its long-term sovereign credit rating on the U.S. from 'AAA' to 'AA+' and kept a negative outlook. The debt ceiling could not prevent the S&P downgrading. The historical downgrading also worsened the word economy which is already on the brink of a recession driven by the weakened U.S. financial recovery and the debt-ridden European economy.

While the debt crisis is likely to hit banking, manufacturing, real-estate and pharmaceutical sectors in the U.S., the crisis is said to cause only a minimal impact on India. It will presumably result in less capital flow to the Indian economy and our capital markets may face volatility head. Being the 14th-largest creditor to the U.S., India has exposure to close to $41 billion in U.S. treasury bonds. U.S. has an overall national debt of around $15 trillion of which the country owes $4.5 trillion to foreign countries holding government debt securities. However, the recession fears have gripped the world economy and here is a short peek into its impact across the globe.


Despite the assurance from S&P that the U.S. credit rating is unlikely to have any immediate impact on Asia-Pacific sovereign ratings; the Asian markets nose-dived on Monday. Likewise, amid re
peated assurance from the Finance Minister Pranab Mukherjee that the U.S. credit downgrade will not hit India, the shares fell more than 3 percent on Monday trading, the lowest level in more than a year. South Korean stock market plunged more than 7 percent initially and later recovered partially to close down at 3.8 percent while Tokyo and Hong Kong lost more than 2 percent. China is the largest foreign holder of U.S. Treasuries which is about $1.2 trillion and this make the communist nation highly vulnerable to U.S. fiscal policy.


The massive increases in the public debt and budget deficits in European countries have brought them to the brink of a fiscal crisis. The debt-ridden countries are riding the world to a w
eakened economy and the European Central Bank's (ECB) pledge to calm down the financial markets has reportedly failed as most global stock markets sank again on Monday. Britain's FTSE 100 index of leading British shares slipped to 1.7 percent at 5,160 while France's CAC-40 fell 2 percent to 3,214. Germany's DAX was 2.3 percent lower at 6,096. Amidst the intense activities from ECB, Group of 20 and G-7 countries are increasingly engaged in constant discussions to prevent a second recession.

Middle East

The debt crisis in U.S. and downgrading of its debt rating by Standard & Poor's have shook the trading world in the Middle East. The first day of the trading week saw about stock marke
ts slipping about four in Dubai and Egypt. The impact was worse in Israel where even delaying the opening of Tel Aviv Stock Exchange by 45 minutes could not avoid panic. The U.S. developments caused the Israeli stock markets to be plunged by seven percent. The Middle East economy is totally affected by the U.S. situation and the fear of the advent of a new recession is already giving jitters to the market. Israelis, severely affected by the skyrocketing price of housing, food and gasoline, took it to the stress in pretest which saw a quarter of a million Israelis demanding the government to lower taxes, subsidize housing and bring prices down. Saudi Arabian market plunged 5.5 percent when it opened on Saturday. Dubai experienced the steepest decline in the region tumbling more than 5 percent in early trading. Other Middle East markets including the Abu Dhabi and Qatar market indexes each slumped 2.5 percent.