T N Ninan: A crisis foretold

WEEKEND RUMINATIONS

Anyone who looks can see, through the pall of gloom that hangs over any discussion of the economy and the markets, that so many people have been caught unprepared by what has happened, and by what is to come. Of a piece with this is the steady state of denial that has trapped so many observers and players, many of whom seem to be hoping even now that the crisis will somehow go away. Indeed, some believe even now that the gale-strong winds will die down quickly, and that we will all be in calm waters pretty soon. Well, here's hoping.

The fact is that, by January 2007, sensible economists were forecasting a recession in the US, triggered by an overdue correction in house prices. The sub-prime crisis surfaced in the summer, and rolled out in stages. At each stage, banks and other financial companies disclosed trouble in small tranches, only for bigger trouble to be admitted later. The US Federal Reserve has responded not once or twice but repeatedly, but each time the resulting relief was brief as the problem grew in size and complexity. Indeed, an investment banker talks of a closed-door meeting with the Fed chairman late last year, when Mr Bernanke doubted that the US was heading for a recession!

If correctly reported, that would be in line with commentators who have been whistling in the dark (a Bloomberg columnist not long ago pooh-poohed calculations that the sub-prime losses would tot up to $400 billion, a figure that has now been comfortably exceeded). Others (like Martin Wolf at the Financial Times) have grown noticeably bearish in their comments. Now, nine months into the crisis, as the recession in the US is taken as a given and the bulls who remain are close to despair, the time-table from initial blip to full-blown crisis has taken about as long as it took for the Asian crisis to play out 10 years ago. The surprise is that, even now, so many have been caught unprepared for the mutually reinforcing crises in stock, mortgage, currency, credit and other markets, not to speak of the dip in consumer demand.

The picture in India has been no different. As 2007 coursed along, asset prices reached stratospheric levels, helped along by the short-lived theory of de-coupling "" that Asian economies would be largely unaffected by a US downturn. Like the erratic rumbles before a full-blown earthquake, India too got the occasional warnings "" a sharp market correction before prices moved up again, the odd month when industrial production slowed noticeably, poor export numbers ... Few took them as signals of more serious bad news to come. Indeed, a poll of business opinion barely weeks ago showed that confidence was bearing up remarkably well. And the finance minister two weeks ago held out the prospect of 9 per cent GDP growth next year.

Now, few doubt that 2008 is going to bring mostly bad news. There is the sharp dip in stock prices, the realisation that people have stopped investing in homes, the poor industrial production index for January, the torpedo hits below the water line in the form of large corporate and bank losses on foreign exchange derivatives and the debt burden on foreign currency convertible bonds that may not be converted at today's stock prices "" thereby changing the gearing ratio for companies as well as the cost of debt. Confidence has dipped about the next set of announcements on quarterly corporate results "" so you have tech stocks going at the scarcely believable price-earnings multiple of 15. The only question now is when the wheel will turn again. Will it do so quickly, or will it take as long as it took once the 1996 recession set in?