In this issue of 5 Minutes Wrap Up:
» Why US shutdown is reason for India to cheer?
» No longer China support for gold
» The worst impacted companies in economic slowdown
» India now lags Sri Lanka, Bangladesh on this metric
» ...and more!
Detailed Report - http://www.equitymaster.com/5MinWrapUp/detail.asp?date=10/04/2013&story=3&title=Will-the-US-do-a-Cyprus&utm_source=5min&utm_medium=email&utm_campaign=e-letter&utm_content=editorial
It was not too long ago when the economy of Cyprus flirted with the danger of going 'bankrupt'! Despite being barely a US$ 23 bn economy, the possibility of sovereign bankruptcy sent shivers down global markets. Imagine if that were to happen with a US$ 15.6 trillion economy! The largest and most powerful in the world! Yes, we are indeed referring to the US and its abysmal state of affairs.
Now consider the statistics. Cyprus had fiscal deficit of 4.9% and bank assets comprised 716% of its GDP in 2012. The US had fiscal deficit of 7% and bank assets comprised nearly 170% of its GDP in 2012 (including off balance sheet items). In fact the top 6 banks in the US alone cornered assets valued at 93% of its GDP. The risk of debt default and collapse of the banking system in the US is therefore hardly worth neglecting.
But that is exactly what the Obama government has been doing so far. Infatuated to the US Fed's money printing policies, the government kept ignoring the warnings of debt ceiling. The debt ceiling limit of US$ 16.699 trillion was breached in May 2013 itself. However, the Treasury chose to adopt extraordinary measures to keep paying its bills. Until the US government finally pulled down the shutters this week, for the first time in 17 years. To get out of this situation, the US government will have to make drastic cut in expenditure or raise taxes or both. In the worst case, it will have to default on debt obligations, which could also lead to a Cyprus-like sovereign crisis. The downside of being the largest economy in the world is that a Cyprus-like bailout will be very difficult for the US to come through.
Thus whether or not the US does a 'Cyprus', the US' debt ceiling is itself an alarm bell for the world economy. Traditionally the US has been able to borrow cheap in the international markets. But a default could damage confidence and drive up the cost of borrowing for Americans. The ripple effect could create a chaotic situation in the international debt market as well.
Investors therefore need to make not just their stocks and gold but also their debt investments with extreme caution. The word 'impossible' can no longer be associated to the risks in global and domestic economy.
Do you think the US will do a Cyprus and ask for a bailout? Let us know your comments or post them on ourFacebook page / Google+ page
How will the decisions of the US government affect Indian stock markets? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!
The US government has shutdown since its leaders were unable to reach an agreement on the broader fiscal policy. This has not really unnerved the Indian investors as evidenced by the Indian share markets which have continued to rally since the shutdown. But if the shutdown persists, there may be reason for Indian investors to cheer more. At least this is what an article in the Wall Street Journal is saying. The reason for this is the Fed's QE policy. If the US shutdown gets prolonged, then the US Fed may find it difficult to taper off its QE plan. In that event, the flood of cheap money that has invaded our markets would continue for the time being. This means that our capital markets as well as our currency may find some sort of a support.
If we recall that when the US Fed had just hinted on a possible taper off, both the markets as well as the Rupee had come crashing down. Therefore any delay or postponement of the actual taper off is something that would provide relief to investors. However, the question is not whether the US government continues its impasse or whether the QE is prolonged or tapered off. The question is, why are our markets addicted to the money flood like to a drug? Why do we need an outside drug to provide stability to our currency and markets? Why is the economy itself unable to provide the same stability? The answer to this lies with the government who seems to be more interested in winning the next elections. Rather than do some actual work to make our economy stronger and th us more stable.
» Why US shutdown is reason for India to cheer?
» No longer China support for gold
» The worst impacted companies in economic slowdown
» India now lags Sri Lanka, Bangladesh on this metric
» ...and more!
Detailed Report - http://www.equitymaster.com/5MinWrapUp/detail.asp?date=10/04/2013&story=3&title=Will-the-US-do-a-Cyprus&utm_source=5min&utm_medium=email&utm_campaign=e-letter&utm_content=editorial
It was not too long ago when the economy of Cyprus flirted with the danger of going 'bankrupt'! Despite being barely a US$ 23 bn economy, the possibility of sovereign bankruptcy sent shivers down global markets. Imagine if that were to happen with a US$ 15.6 trillion economy! The largest and most powerful in the world! Yes, we are indeed referring to the US and its abysmal state of affairs.
Now consider the statistics. Cyprus had fiscal deficit of 4.9% and bank assets comprised 716% of its GDP in 2012. The US had fiscal deficit of 7% and bank assets comprised nearly 170% of its GDP in 2012 (including off balance sheet items). In fact the top 6 banks in the US alone cornered assets valued at 93% of its GDP. The risk of debt default and collapse of the banking system in the US is therefore hardly worth neglecting.
But that is exactly what the Obama government has been doing so far. Infatuated to the US Fed's money printing policies, the government kept ignoring the warnings of debt ceiling. The debt ceiling limit of US$ 16.699 trillion was breached in May 2013 itself. However, the Treasury chose to adopt extraordinary measures to keep paying its bills. Until the US government finally pulled down the shutters this week, for the first time in 17 years. To get out of this situation, the US government will have to make drastic cut in expenditure or raise taxes or both. In the worst case, it will have to default on debt obligations, which could also lead to a Cyprus-like sovereign crisis. The downside of being the largest economy in the world is that a Cyprus-like bailout will be very difficult for the US to come through.
Thus whether or not the US does a 'Cyprus', the US' debt ceiling is itself an alarm bell for the world economy. Traditionally the US has been able to borrow cheap in the international markets. But a default could damage confidence and drive up the cost of borrowing for Americans. The ripple effect could create a chaotic situation in the international debt market as well.
Investors therefore need to make not just their stocks and gold but also their debt investments with extreme caution. The word 'impossible' can no longer be associated to the risks in global and domestic economy.
Do you think the US will do a Cyprus and ask for a bailout? Let us know your comments or post them on ourFacebook page / Google+ page
How will the decisions of the US government affect Indian stock markets? We know it is questions like these that concern you these days. And your trusted source for views and opinions, The 5 Minute WrapUp, too has unfortunately not helped by staying silent on such questions. We understand that, in addition to broad views on global stock markets, you might also be looking forward to our views on few unexpected movement in stocks. And that is why we are taking steps to make The 5 Minute WrapUp more relevant to you. Watch this space for more details in the coming weeks!
The US government has shutdown since its leaders were unable to reach an agreement on the broader fiscal policy. This has not really unnerved the Indian investors as evidenced by the Indian share markets which have continued to rally since the shutdown. But if the shutdown persists, there may be reason for Indian investors to cheer more. At least this is what an article in the Wall Street Journal is saying. The reason for this is the Fed's QE policy. If the US shutdown gets prolonged, then the US Fed may find it difficult to taper off its QE plan. In that event, the flood of cheap money that has invaded our markets would continue for the time being. This means that our capital markets as well as our currency may find some sort of a support.
If we recall that when the US Fed had just hinted on a possible taper off, both the markets as well as the Rupee had come crashing down. Therefore any delay or postponement of the actual taper off is something that would provide relief to investors. However, the question is not whether the US government continues its impasse or whether the QE is prolonged or tapered off. The question is, why are our markets addicted to the money flood like to a drug? Why do we need an outside drug to provide stability to our currency and markets? Why is the economy itself unable to provide the same stability? The answer to this lies with the government who seems to be more interested in winning the next elections. Rather than do some actual work to make our economy stronger and th us more stable.
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