PIIGS can't fly but FII bucks sure can

The European crisis and its subsequent management will hit inflows from the FIIs, but only in the near term.

Citigroup, in a recent report, has dubbed it the e750-billion 'backstop'. A backstop in investing jargon is the lastresort support often provided by an underwriter to buy unsubscribed shares in a securities offering.

Indeed, as the Citi analysts go on to suggest, the bailout package designed by the European Central Bank (backed by the International Monetary Fund), which amounts to more than eight per cent of the euro zone's GDP "will buy some time for the most stretched countries to address their fiscal excesses." The stretched countries being Portugal, Ireland, Italy, Greece and Spain or 'PIIGS' as they are called collectively.

So, to cut to the chase, what does the rumble in the euro zone mean for Asian and emerging economies? The wise men at Barclays, in a recent report, put it this way: "We consider the supportive macroeconomic and policy environment in the emerging world and the new policy framework in Europe to be sufficient to shore up the resilience of emerging markets." In case you're still wondering, that's good news if you are in India, or in Asia.

For example, real GDP in China increased nearly 12 per cent on a year-ago basis in the first quarter of 2010 (although fears of an overheated property market and inflation spiralling out of control are two dampeners in the immediate term). And the expansion is not confined to China alone. Many other countries in the region, including the large economies of India, Korea and Taiwan, are posting positive growth rates.

So, is the European crisis positive for Asia? "Not on an absolute basis," says Rob Carnell, Chief International Economist at ING. "But in a relative sense, it is positive in terms of investors flows, currency and capability to issue debt," Carnell adds.

Yet, knee-jerk reactions to the euro crisis were evident in significant selling by foreign institutional investors (FIIs). Against $2.1 billion of net inflows in April, FII net outflows had touched $866 million by May 19. "If the crisis worsens, 20-30 per cent of the current year's FII inflows may flow out," says Deepali Bhargava, Economist with ING Vysya Bank.

"But that is an extreme scenario," she adds. "In the medium term, flows to India would resume," says Ramit Bhasin, MD & Head-Markets (India), Royal Bank of Scotland. "But volatility is here to stay in the near term."