TILL A FEW WEEKS AGO, IT LOOKED AS IF THINGS WERE STABILISING IN GLOBAL MARKETS. Ted spreads were falling, Aaa bond rates declined a bit, banks had begun to lend and stock markets were steadying. But with Citibank, Bank of America, Deutsche Bank, Royal Bank of Scotland, and a host of others declaring disastrous results, it is clear the financial mess is far from being sorted out. As if in confirmation, IMF has, in three months, upped its estimates of sub-prime-related writedowns by another $800 billion — which means programmes like Tarp are far from adequate.
This is without accounting for losses related to corporate defaults which will rise as the economies slow. Apart from mark-to-market losses which aren’t permanent, IMF estimates a $500-billion shortfall in funds required for recapitalisation in the US and Europe in the next two years.
More frighteningly, most Tarp and other such funds are not being lent out, but are finding their way back to the Fed or ECB — deposits with the Fed rose from around $150 bn in October 2008 to around $800bn now. It’s much the same story in India with the cuts in repo rates by RBI not getting passed on to borrowers as jittery banks refuse to lend. Revival of confidence is key, and that’ll remain in short supply till the bad news from global banks continues to come in.
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