Indian investors nervous on US bailout plan details

September 29th, 2008 - 5:17 pm ICT by IANS  

New Delhi, Sep 29 (IANS) Indian investors are a nervous lot, and say the bailout bill announced by the Congress is a much watered down version of what was expected and is needed to add liquidity in the system.The Emergency Economic Stabilization Act of 2008 involves taxpayer guarantees and ceilings on executive compensation. The Congress is slated to vote on the bailout bill Monday, and the Senate vote is likely Wednesday.

“There are several major points for nervousness in the markets,” said Jagannadham Thunuguntla, head of the capital markets arm of India’s fourth largest share brokerage firm, the Delhi-based SMC Group.

“There is a lot of nervousness as also a large element of uncertainty,” confirmed Naresh Pachisia, managing director of SKP Securities Ltd, eastern India’s largest distributor of financial products and financial services firm.

“Two years back all asset classes across the world were moving up as there was a lot of liquidity in the system,” Pachisia said.

“Right now there is no liquidity anywhere, so how can you expect markets to grow?” he said.

“The first major point of nervousness is that the US bailout plan will now be in three tranches of $250 billion, then $100 billion and finally $350 billion and the second and third tranches will require further Congressional approval,” Thunuguntla said.

“This means effectively, only $250 billion is now available for buying troubled assets of banks instead of $700 billion outright,” he said, adding: “This doesn’t really solve the problem of liquidity.”

“The second point is that the plan requires that the Troubled Assets Relief Program (TARM) will buy out troubled assets but it will have to sell off these illiquid assets within five years and earn more than the $700 billion that will be used to buy them,” Thunuguntla said.

“If at the end of five years, the TARM is unable to earn more than $700 billion by selling off illiquid assets, then the banks and institutions concerned, from whom the illiquid assets are now being bought, will have to compensate the losses.”

“This again really means that the problem has just been deferred and not entirely removed and nobody knows what will be the long-term consequences. This again does not solve the problem of uncertainty,” Thunuguntla said.

“The third major concern is that the fallout of the US financial crisis is now appearing in the UK and Europe. Bradford and Bingley, the largest moneylender to landlords in the UK and a major bank in its own right has now been nationalised.”

“Similarly, another major European bank, Fortis of The Netherlands, is in trouble and is at the centre of a three-country partial nationalisation after French bank BNP Paribus pulled out of talks to buy it out.”

The Belgian, Dutch and Luxemburg governments invested 12 billion euros or $16.3 billion Sunday night to pick up a 49 percent stake in Fortis.

Last year, Fortis in consortium with Royal Bank of Scotland of the UK, and the Spanish banking giant Banco Santander, had acquired ABN-Amro Bank of the Netherlands.

Fortis’s share of the deal was $32 billion, which it had then taken from the market as bridge finance.

“Now Fortis is in a liquidity crunch and is unable to repay the bridge loans,” Thunuguntla said.

“Even in the US, the crisis is far from over - Wachovia too will probably file for bankruptcy if its talks with Citibank fail, and the credit-default swap rate for JP Morgan-Chase has shot up to $15,200 from $12,200 per $1 million credit protection,” he said.

News that JP Morgan was the largest secured creditor of Lehman Bros with a loan of $23 billion led to the rise in the credit default swap price, as the market now believes JP Morgan will have to simply write off that credit.

The credit default swap is a market arrangement by which a lender can get some kind of cushion or insurance on its lending. So the credit default swap price is a kind of insurance premium.

If anybody is lending to JP Morgan now and wants a credit default swap it will have to pay $3,000 more for every $1 million of lending that the lender wants protected.

Meanwhile, the Financial Times newspaper of London reported Monday that troubled insurance major AIG is considering selling more than 15 businesses in a bid to repay the $85 billion US government loan it had taken earlier this month.

The report said the 15 businesses included its aircraft leasing unit, a stake in a large US reinsurer and billions of dollars in properties.

“The repercussions are slowly emerging and nobody knows what the final picture will look like, but I think the market will get support at the 12,500 levels,” Pachisia said.

“But there is certainly all round nervousness,” he agreed.

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