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ShareMumbai: The Sensex is soaring, notwithstanding the occasional bump or two, but...
Gold prices advanced, retreated, and are trying to clamber up again, but...
There is optimism in the air once again, but...
One shudders at all those 'buts'.
While it is wonderful to see a revival of hope, it is frightening when hope soars without the ballasts of caution.
In fact, almost every financial indicator appears to suggest the markets should brace for more shocks in the near future.
India might be spared because of its domestic focus and that it is not dependent on exports as China, Japan or Korea are. This, despite the fact that India, like China, has been helped by a sudden increase in foreign exchange inflows --- presumably because of the hard stand the US and some other European countries have taken against banking secrecy laws and tax havens.
For the global markets, however, the portents are not very encouraging.
The 'BIS Quarterly Review, June 2009 - International banking and financial market developments', brought out by the Bank of International Settlement (BIS) suggests as much.
The report states that risk appetite has rebounded thanks to "glimmers of hope" about stabilisation. But it also cautions that this mood is despite "key economic indicators (being) at depressed levels."
There are also fears about the consequences of expanded credit-easing actions on the part of most governments, and purchases of large quantities of government bonds.
Then, there is the spectre of long-term inflationary implications resulting from the ongoing expansion of public sector commitments.
And this is bound to be India's Achilles' heel as well.
However, the real nature of the financial crisis that could rock global markets becomes evident only when one takes a closer look at the statistical data on the risk markets.
Take the numbers on the left hand side of the table. There was an "unprecedented contraction" in banks' international balance sheets in the fourth quarter of 2008, in the wake of the Lehman Brothers debacle. Interest rate contracts too slowed down, and so did equity linked contracts and the infamous credit default swaps (CDS). The sharpest fall was witnessed in commodity contracts, as oil and mineral prices crashed, and speculators scurried for cover as many went belly up. Overall, the derivatives market shrank 13% to $592 trillion by December 2008. All this is good.
But the numbers on the right hand side indicate that almost all the markets in the world could be in for very severe shocks in the near future. These are the numbers gleaned by BIS after netting off all transactions with counter-parties. It is the number which reflects the liabilities of the markets and which have yet to be resolved. It represents the net exposure of the markets. And this is where the proverbial chill begins to run down the spine.
Watch the increase in exposure on three fronts --- foreign exchange contracts, interest rate contracts and CDS. Defaults by counter-parties, which are yet to be written off as bad debts, have doubled from $20 trillion in June 2008 to $40 trillion by December 2008. This means, more banks are set to either collapse or beg for government bailouts.
It is this number that is driving bankers crazy.
And it is this number that makes one suspect that behind the confident smiles on the faces of most bankers and speculators, there is a lurking fear that their networth could get wiped out overnight if one or more counter-party publicly reneged on its obligations.
