Tuesday, August 10, 2010

When is Next Financial Crisis ?

Now a days everyone is talking about when is next financial crisis going to come up and in it what form its going to come up ?. A school going kid asked her father Jamie Dimon Chief Executive Officer of  JPMorgan Chase & Co.  "what is financial crisis"? , with a smile he said that "its event which occurs once in 5 to 7 years" And he went to say the same thing to Financial Crisis Inquiry Commission .The point he is talking is we should be getting ready for another crisis anytime from now.

To Reduce the chance of happening another crisis is not to ban products which increase speculation but to make the products more transparent and allowed over regulatory body( like a exchange). Most of the products like OTC derivatives which are widely believed to be cause of crisis should be regulated and thereby reducing the risk.

At the same time they(economists,traders,investors) say a debt bomb and mother of all bubbles ..(Chinese Debt) is still raising and one small pin can burst it in coming days. From the vast amount of literature on web one can say that Chinese real estate prices  multiplied in past 2-3 years due to easy lending by Chinese banks and they cannot sustain to easy lending practices for very long time .
Here are couple of new items:
Pricking the bubble
Fitch warns China banks face big 'bubble risk'

The important thing over here is how much of its market is correlated with India in larger time frame. I believe we have a strong correlation with Chinese economy and also we might face the same problems in coming days. The exceptional growth we had in past few years is generated with debt(its kind of PONZHI Scheme which only government can run...borrow money to pay the bill ) and creating growth with debt is not all a bad idea.But for how many years we can stimulate the growth with this debt is the question.

And coming to shorter time frame Once the RBI starts increasing the interest rate to tackle inflation or removing stimulus ,it might lead to situation where it will become hard to sell houses by real estate companies or companies finding tougher to borrow money etc which in turn might lead to asset price fall which again has domino affects on banks balance sheet.

And if u look at my previous post of Chance of India Defaulting?  one can see that we might face huge redemption pressure in coming years. To repay the small amount in 2010 and to meet to the government funding gap for this year it already dis-invested a lot of companies and many more in line in this year. If they carry on like this am not sure how many of PSUs can remain with public in future and how our future generation will share the burden will be determined in coming days(years)  :)

1 comment:

  1. Infact a Lame person like me is also talking about Crisis :)