Running for cover

17 Sep 2008, 0041 hrs IST,TNN

This is a race against time to prevent a global financial collapse, and on Tuesday, the clock was ticking louder than ever. Markets went into a tumble — with Wall Street slumping more than 4%, its worst loss since the immediate aftermath of 9/11, seven years ago. Policymakers went into a huddle. And investment bankers gathered in droves — on social networking sites and at offline watering holes — to rage against the seismic change in their fortunes from 'masters of the universe' (to quote bestselling author Tom Wolfe) to a tribe living in fear of the pink slip.

Already shaken by the bankruptcy of Lehman Brothers and the sale of Merrill Lynch, markets tanked further as major credit rating agencies downgraded US' largest insurer American International Group (AIG), leaving it fighting for survival. The company, whose stock plummeted 61% to $4.76 in New York on Monday, is such a big player in insuring risk for institutions around the world that the prospect of it going under raised fears of a cross-border meltdown.


The London and Tokyo markets tumbled more than 4% on Tuesday, hitting their lowest levels for more than three years. Central banks hit back, with the Federal Reserve, European Central Bank, Bank of England and Bank of Japan together injecting $210bn into money markets.



The Dow opened 29 points up on hopes that the government would step in to bail out AIG. A Fed meeting later in the day was expected to cut US interest rates. And there were hopes that Barclays might pick up some of Lehman's assets in the US.


In India, AIG has two insurance joint ventures with the Tatas — Tata-AIG — one for life and another for general. IRDA on Tuesday said according to accounts on March 31, 2008, both companies "have satisfactory solvency margins which are adequate to meet their liabilities", but following the US crisis, it has asked them to submit reports.



The fear of a global slowdown drove oil prices to below $90 a barrel, down almost 40% from the record high of above $147 per barrel in July.


Unfortunately, the declining rupee means this benefit is unlikely to reach consumers. The rupee seems to have gone into free fall, all but touching 47 in the course of the day. It posted its sharpest fall in a decade on Tuesday, closing another 82 paise lower against the dollar, at 46.88, after touching a low of 46.99.



RBI late Tuesday evening issued a statement saying it "stands ready to take such pre-emptive action as may be necessary to contain excess volatility in the domestic financial markets". It vowed it would continue to sell dollars and intervene directly in the forex market even as it announced a slew of measures like increasing interest rates on foreign currency deposits.


A finance ministry official was quoted as saying the US crisis could impact FII inflows. There are other indications that the American storm could rain on India Inc's parade.


ICICI Bank is in danger of taking a Rs 375-crore hit due to Lehman Brothers going bankrupt. Banking sources claimed SBI and PNB had also suffered losses, though the banks did not confirm this. With Lehman, Merrill Lynch and AIG having substantial exposures to real estate in India, realty companies might find themselves even more cash-strapped. With some large projects at risk of being put on hold, a price correction might be seen in some major Indian cities.



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