From my experience of 5 years of involvement into stock markets, I have often noticed that positive gains are accumulated at a gradual pace, but most of them get wiped out in one go, on a single bad day on the street.
But, just as I am writing this, for the first time I am witnessing exactly the opposite. The losses of last week have been engulfed to the extent of almost 50%, on the back of positive rescue package announced by European Union leaders.
On the back of this mega bailout package, Indian stock markets surged 3.5% with Sensex up 560 points and Nifty up a whooping 175 points, easily erasing half of the losses witnessed during the period of last one week.
What a recovery it has been in stock markets and currencies today!
The finance ministers of all 16 Euro zone countries have unveiled a mammoth rescue package of $1 trillion (720 billion euros) to guarantee the debt of any crisis-led country included under the umbrella of the European Union.
The crisis-hit Euro surged to $1.30 against the dollar as the European Union showed immaculate resolve to fund any sovereign debt crisis within Europe and ensure survival of the euro as a global currency. The euro has appreciated around 4% against the yen from this breaking news of giant package.
In a measure to avert further crisis of confidence, European Central Bank (ECB) said it will purchase government and private debt of countries under severe recession in order to protect them from attack from the lightening speed of speculator.
Out of the emergency loan package of 720 billion euros, 500 billion euros have been contributed by European Union members whereas remaining 220 billion euros are chipped-in from the IMF’s side.
In fact, I would like to point out over here that Europe is slowly moving the US way. They’re pumping in money to rescue their member countries and ensure survival of Euro.
This could, in fact, render the Euro zone weaker over longer horizon, as it is almost given that not just Germany, but even remaining countries of the European Union is coming in to the rescue aid of weaker debt ridden countries, in order to save their Euro zone.
The extra premium that the investors demanded to lap-up treasuries and bonds of debt-ridden European countries has come down drastically. Germany’s central bank as well as ECB are said to be purchasing government debt in order to calm wild speculation in the financial markets.
The bailout package may calm the nerves of jittery investors over the near term horizon. But, ultimately, the indebted countries need to deliver on plans of cutting spending and initiating austerity drives to cut back on their deficit targets.
As can be seen in the case of the US, on the back of the humungous bailout package announced during the global recession, their economy is still reeling under crisis of debt and current account deficit.
Such economies take years to come out of the debt until they come up with innovative ways of increasing their exports in order to scale down their deficit targets. Possibly, same fate is waiting to happen for the European nations after such a huge package.
Lending the money to over-borrowed government is not going to solve the problem over longer horizon. It may be positive in the near term, but ultimately some one has to pay for it! If that some one is not borrowing country, it has to be the lending one.
If Europe and the US both come for the beating, it is time for Indian exporters to review their business model seriously, over longer duration.
Will the emergency bailout package be able to hold on to Euro zone for long?