Will America drop its Pants? Stock Market says "Yes" !

Even as the predictive theory of the world coming to an end in 2012 remains firmly footed; it could actually be the prospects of a catastrophic economic armageddon that might be in the offing which could have been forecasted by those eminent astrologers.

Even as the wounds of 2008-recession still fresh in the mind of investors, those panic stricken days are back in the reckoning, in a much larger proportion than ever before. With the unrelenting negative economic news flow, market participants fear that the US might well be headed for a double-dip recession, post witnessing a mild recession couple of years back.

While the last time the globe was punctured on the back of the acute US sub-prime crisis and largest bankruptcy filing in the American history by investment banker Lehman Brothers, this time around the news flow revolves around the crippled state of sovereign states across the world, including the US, Europe and Japan.

An often heard phrase – TOO BIG TO FAIL – which was initially used as a colloquial to refer certain financial institutions that were so large that their failure would be disastrous for the economy; has now taken the form of too big to fail sovereign economies, as several developed economies stand on the brink of defaulting on their debt obligations.

The probability of at least one of the major developed economies going down-under has increased manifold now. Well, that’s the kind of skepticism that markets are speculating and shivering with fear; which would eventually mean that a cat is let open amongst a group of pigeons.

United States – Problems Insurmountable!

Needless to say, the US economy has been reeling under tremendous pressure of public debt of $14.58 trillion, almost pegging the country’s debt at 100% of the America’s GDP. Last week, the country struck a deal to raise its debt-ceiling placed at $14.29 trillion, without which the country would have technically defaulted on its debt. The newly signed bill ensured an immediate increase in debt-ceiling by $2.4 trillion, against promise for significant federal spending cuts over the next few years.

More importantly, even as the deal to raise the US debt-ceiling goes through, economists point out that the world’s largest democracy might have averted an immediate crisis, but it still stands the risk of being whipped by a possible downgrade from its AAA status in its credit rating in near future; as at least $4 trillion in deficit reduction is needed for the US government to stabilize its books, as against $2.4 trillion cut planned over 10 years.

Spain – In the Race to Default?

Spain, which is Europe’s fourth largest economy, has been shattered by a property boom that went bust, leaving the ailing country into unusually high 21% unemployment, the highest figures in the Euro zone. Earlier this weak, the Spanish bonds came under heavy pressure, pushing their yields to new euro-area highs at costly funding rates given the higher risk premium on its debt.

However, Spain can take heart from the fact that its debt to GDP ratio is relatively lower, which could help it in remaining solvent, though illiquid – in current hard times.

Italy – Large Debt woes!

As the euro zone contagion spreads, the area’s third largest economy, Italy, also finds itself in the grave mess on account of its limited resources, huge debt and low growth rate. Market pundits are almost certain that the deepening European crisis is most likely to engulf either Spain or Italy, amongst its larger constituent economies. Furthermore, Italy’s national debt stands at about 120% of GDP, which is one of the highest in the world. Italy is now at the centre of Europe’s debt crisis.

Amongst other smaller economies, we have already spoken at length on Greece, Portugal and Ireland, which continue to reel under crisis and busy combating hard austerity measures to tone down their debt flab and annual deficit targets.

What does Global crisis mean for India?

Amongst all the pessimistic views, a silver lining that emerges for India is that global slowdown will play a big role in softening excess and incremental demand for commodities, crude oil and base metals that were fuelling inflation to a large extent the world over. The inflationary concern, which has hit the headlines since a year now, is likely to be subdued and return back to its mean averages in next few months.

The demand for crude oil is likely to get hit substantially – if, indeed, the US economy slips into a possible double-dip recession on the back of ballooning budget deficit, rising unemployment and falling home prices, as cited by renowned economists. Lower crude oil prices would further translate into lower government subsidies and a likely break-even scenario for the Oil Marketing Companies to sell fuel at market-linked rates.

A genuine slowdown-led taming of inflation would eventually allow the RBI to reverse its recent rates hikes, spurring rate sensitive sectors, like real-estate and automobile industry, to make come back in terms of generating incremental demand; and boosting of pending projects in pipeline at infrastructure and manufacturing units, amongst other relatively less rate-sensitive sectors.

However, the global recession would badly hit the IT sector, as both the world’s largest economies – the US and the Europe – seep into deep illness. At least, last time around during the 2008-recession, the Indian IT sector had a succor in the form of only US-led slowdown in business outsourcing demand, but this time it could prove to be a double-edged sword as even the European economy slips into recession.

So, are you stumbling upon the current stock market correction led by panic?