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Crunch time

The green signal for a $700-billion bailout of US banks wasn’t enough to turn the tide in global financial markets. Even six of the world’s central banks coming together to release hundreds of billions into the system couldn’t stem the panic. It has to get worse before it gets better. Puja Mehra reports.

Puja Mehra | Print Edition: November 2, 2008

Last fortnight, the US financial disaster- as expected-blew into a full-fledged global crisis. First stop: Nearly all of Western Europe. Just like the US legislation for the over $700-billion rescue package, governments and central banks across the Atlantic, too, launched into bailout mode. Next stop: Asia, with some real estate lenders in Japan getting wiped out; and Singapore's economy, which plunged into recession.

The International Monetary Fund (IMF) revised upwards its projection of the losses of the US banking system to $1.4 trillion. At which point, the financial tornado hit the west coast of India. For a whole week, it had Indian stock, currency and money markets in high panic. The Sensex lost nearly 2,000 points in a week, overnight inter-bank lending rates shot up to 22 per cent (from single-digit rates), the rupee slumped to Rs 48.72 to a dollar and scared investors in debt schemes of mutual funds pressed the redemption trigger. Within days, money and confidence in the Indian economy vanished into thin air.

The Reserve Bank of India (RBI) stepped in swiftly with liquidity-releasing steps. Finance Minister P. Chidambaram proclaimed the Indian banks' strong credentials and low vulnerability of the system to the growing global financial mess.

The Government cancelled its scheduled borrowing for Rs 10,000 crore from the money market. Chidambaram set up a group of who's who from the financial world to suggest, within a week, ways to ease the liquidity crunch. On October 13, Chidambaram guaranteed liquidity yet again before the opening bell at the stock markets.

Finally, sanity returned when the Asian stock markets posted relief rallies. But that may have just been temporary relief. The ghost of Wall Street is still out there. BT takes a look at the toll in India so far and what to expect next.

Worldwide woes

The financial crisis has spread way beyond its epicentre in the US and has engulfed most of Western Europe. Here's a country-by-country status and assessment.

UNITED KINGDOM

Alarm: The total liabilities of Barclays of £1,300 billion (leverage ratio of over 60), surpass Britain's GDP

BELGIUM

  • The government took partial control of the struggling Fortis Bank

  • France, Belgium and Luxembourg stumped up $93 billion to recapitalise Dexia, a French-Belgian lender that ran up huge losses in its US operations

Alarm: Fortis Bank's liabilities are several times larger than the GDP of Belgium (leverage ratio of 33)

ICELAND

  • The government has nationalised three of Iceland's biggest banks

  • Accounts in these banks stand frozen

IRELAND

  • Has guaranteed all bank deposits

SPAIN

  • Will spend 50 billion euros ($68 billion) to buy bank assets, almost a third of the proposed 2009 central government budget

UNITED STATES

  • May pick up ownership in failing US banks (Morgan Stanley is reported to be one)

  • Fed ready to lend directly to stressed companies

GERMANY

  • Has guaranteed all bank deposits

  • Has organised a credit lifeline of euros 35 billion for blue-chip commercial real estate lender Hypo Real Estate Holding

Alarm: The total liabilities of Deutsche Bank (leveraging ratio of over 50) amount to 2,000-billion euro, which is more than 80 per cent of the GDP of Germany

JAPAN

  • Yamato Life Insurance failed with $2.7 billion in debt

  • The government may revive a bank-rescue law of the 1990s banking crisis

  • Tokyo may set up a $100-billion fund to prop up smaller lenders

Alarm: Real estate companies are folding up, forcing regional banks to raise reserves against bad loans

SINGAPORE

  • Eased monetary policy for the first time since 2003 after sinking into its first recession in six years, hit by the meltdown in financial markets

  • The government revised its 2008 growth forecast to around 3 per cent from an earlier estimate of 4 to 5

ITALY

  • UniCredit Bank has announced plans to raise its capital ratio by spinning of property assets

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