The prospect of European banks deleveraging and getting rid of their Asian assets has been a cause of much concern for Indian companies, which have borrowed heavily from markets abroad. But with European Central Bank (ECB) President Mario Draghi committing to an unlimited bond purchase programme on Thursday, the fear of European banks selling Indian assets and refusing rollover look remote.
There isn’t any immediate impact on Indian companies, even as the refinancing of foreign currency convertible bonds (FCCB), will take place soon. Over time, Indian companies may find it easier to raise external commercial borrowings (ECBs) as the overall sentiment is expected to improve in the medium term, with European banks being more willing to lend. Once European banks stabilise, they would look at emerging markets which may result in more capital flowing in to emerging markets.
However, it’s too early to expect any big changes as far as Indian banks and companies are concerned. M Rego, executive director, treasury and international business, IDBI Bank, says, “ECB’s move has had a positive impact as the spreads on Indian paper have come down by five basis points. Fund raising for Indian companies has become relatively cheaper in overseas markets. However, the markets continue to remain volatile and this cannot be looked at as a long-term trend. There can be change of 5-10 basis points based on developments in the global markets.”
Some of the large Indian companies have raised funds abroad through bonds (which are traded). Also, many Indian banks, including the State Bank of India and ICICI Bank, have issued medium-term notes or bonds, to raise money which is disbursed to Indian companies abroad. After Draghi’s announcement, Indian companies can issue bonds at lower coupon rates. D Patwardhan, chief executive, Foreign Exchange Dealers Association of India (FEDAI), believes it is a positive development, as the pace of deleveraging (shedding debt - loans and bonds - of Indian companies) will moderate. Another indirect benefit, albeit in the long term, will be lending opportunities for banks as the real economy begins to receive investments.
Last year, when Italian and Spanish bond markets came under severe pressure, a banking crisis seemed imminent as European banks were thinking of selling their Asian assets as part of their plan to raise capital. However, that fear has now abated, as European banks got a longer lifeline on Thursday. Siddhartha Sanya, economist at Barclays, says, “The Draghi announcement is big and its impact is visible on the markets. However, these measures will impact financial markets more than the real economy. The banking system will get support from these measures and the liquidity conditions will be easier for European banks and, therefore, they won’t be in a rush to get rid of their Asian assets. However, India has its own set of problems, which may impact foreign borrowings of Indian corporates.”
Economists are now coming around to the theory that the Euro zone crisis is likely to have limited impact globally, compared to the crisis of 2008. Nomura’s strategists Jens Nordvig and Charles St-Arnaud, say, “Compared to the downturn in 2009, the downturn in 2012 has been less globally synchronised. One explanation why the effects of the euro crisis have been more localised can be found in the behaviour of financial conditions. In the 2009 slowdown, a key feature was a general tightening of financial conditions globally, as banks deleveraged indiscriminately. In the context of the euro crisis, tightening financial conditions have been much more concentrated in the euro zone.”
Clearly, the ECB’s three-year bond-buying programme has helped calm the banking system and has also reduced volatility in risk assets.