Global Readjustments

The trauma and tribulations in the global markets now in the financial markets are bound to see the effect trickle, or maybe a wave, across all sectors and countries. The bail-out packages that are being worked are bound to bring some sense of sanity in the market but it would be naïve to expect that it would have a sustaining effect. One already gets the impression that initial sense of comfort is already beginning to wane. The long term comfort will necessarily have to come from metamorphic changes in the global macro economic and business landscape.

Countries gasping for breadth

There have been some initial pointers in that direction. Let us start at a very macro-economic view point. A couple of countries have already borne the initial brunt of the problem with significant economic implications. Take the case of the help Russia extended USD 5.4 Billion to the banks in Iceland to overcome the problems of the financial fall-out. The extent of funding which is about a third of GDP of Iceland is bound to change the global political alignments in the times to come. The second is the case of the Argentina which is on the verge of commiting default for the third in the last decade. Not a very comforting situation for any one. Now there is news that the Hungary is process of seeking assistance from the International Monetary Fund. Ukarine, Turkey and more will follow suit in the times to come. The number of countries that having been standing the doorstep of the international funding agencies are going up and the list will increase at a faster rate than what has been seen. One should not be surprised if therefore we do find USA itself jumping the queue! Lesser mortals like our own neighbour are in the brink of bankruptcy.

Changing shareholding patterns in national icons

There has already been enough news on the sovereign funds accounting for significant part of commercial organisations that have been more synonymous or iconic in countries to which they belong. Take the cases of Citi Bank where sovereign funds from Abu Dhabi are the largest shareholders. This is the similar story with a whole host of corporate and financial houses in the USA where the Chinese investments are the largest not to speak of the Japanese which always had a significant amount of investments. The recent policy shifts of some of proponents of the free market economy to have government investments in banks point to sudden sense of national insecurity due to foreign shareholding.

In the business world the recent news about General Motors and Ford Motors were having had talks on the sidelines examining the option of merging gives definitive pointers to the ominous future that is unfolding. That having had its problems we now hear that GM and Chrysler are in talks for a possible merger.

The collapse of Kaupthing Bank in Iceland is bound to throw a whole host of problems to commercial houses in UK. The Reykjavik-based bank owns stakes in a variety of retail chains and there is expectation that the administrator of the UK entities may sell the holding to private equity firms.

We may now see the next wave of cross border mergers and acquisitions between companies who were at one point of time fierce competitors. What will be even more surprising is the fact that these mergers and acqusitions would not be restricted to only companies having problems.

On the Indian front, recent announcement of the strategic alliance between Jet and Kingfisher only goes to show that the strategic thinking has taken been quite dramatic. Both the cases one in US and other in India only goes to show that thinking has to be out of the box to resolve issues that are out of the ordinary.

Currency Volatility

The global financial markets have seen an extreme level of currency volatility over the last one year. A number of companies have gone bust in the process of embarking on exotic currency trades. Many companies have lost heavily having paid a hefty price in lure of short term profits. This definitely, in hindsight, was not something that most corporates were equipped to handle.

If the consistent depreciation of the dollar against all currency was the order of the time for a good part of 2007, the reverse has been true over the last couple of months. The dollar has appreciated close to 20% against most currencies in the last couple of months. One is not sure if the dollar has appreciated or other currencies have lost ground. A classic case of glass half full and half empty! What would intrigue most is the fact that on one side the country, viz., USA, is reportedly having problems in its financial system that never seem to ending and here we see its currency appreciating! No one has yet a very plausible reason for it but one rationale way to explain it would be the fact the dollar is the currency for international trade and there is a shortage for dollars as no one is willing to part with it! Banks are not willing to lend to each let out facilitate credit expansion. Banks are refusing the recognize letters of credit issued by other banks. So commercial transactions in international trade is taking place on cash basis that explains the shortage for dollars. Strange it may sound but that appears to be the reality.

The shortage of funds appears to be so acute that gold, normally considered a safe haven investment instrument in uncertain times, has lost close to 20% of its value in the last couple of months. That at a time when uncertainty was at its peak. It is possible to explain the phenomena to excessive speculation in the past but here again the unloading for the purposes of generating cash could be reason.

One of the significant issues that are bound to surface in the next couple of months is the acceptance of Euro! The emergence of a single European currency to counter the dollar is now going to be put to acid test. The foundation of the Euro as a currency is based on the compliance to an agreed macro economic discipline. These are bound to be questioned by nationalists in countries and incumbent governments may be under pressure to take populist decisions that are contrary to the Euro norms! One, therefore, should not be surprised if we see the re-emergence of the dual currency norm in the next couple of months!

As has been rightly said, the DNA of the world is about to change. So let us all brace up and tighten our seat belts for turbulent weather and heavy landing.