Global markets and Indian Impact

Global share prices sank after Lehman Brothers filed for bankruptcy protection

Global markets went for a toss after Lehman Brothers filed for bankruptcy and Bank of America decided to buy Merrill Lynch for $44 billion. Lehman Brother’s announced that it is filing for bankruptcy came after all potential buyers walked away. They were spooked by the US treasury’s refusal to provide any take over aid, as it had done six months ago when Bear Stearns faltered and earlier this month, when it seized mortgage giants Fannie Mae and Freddie Mac. In other words, Lehman Brothers, burdened by $60 billion (Rs 2.8 lakh crore) in soured real estate holdings, filed a chapter 11 bankruptcy petition in US Bankruptcy Court after attempts to rescue the 158 – year old firm failed. The demise of the independent Wall Street institutions came as shock waves from the 14 month old credit crisis, six months after the collapse of Bear Stearns.

Ten banks – Bank of America, Barclays, Citibank, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Merrill Lynch, Morgan Stanley and UBS – each agreed to provide $70 billion, in order to help enhance liquidity and mitigate the unprecedented volatility affecting global equity and debt markets. The Federal Reserve also chipped in, for investment banks.

In the world financial markets, the dollar lost traction against the yen, setting the Japanese unit on track for its best daily performance in nearly two years. Reflecting a growing sense of panic, futures markets jumped to price in a near 80% chance of a quarter point cut in US Fed interest rates.

Indian companies too fell the present US crisis tremors, set by Lehman and Merrill

The sale of Merrill Lynch to Bank of America and filing for bankruptcy by Lehman Brothers are likely to affect a number of Indian companies dealing directly with these beleaguered US giants. Though India is not directly affected by the US sub-prime loan crisis, the financial turmoil there will have some bearing here. Both Lehman Brothers and Merrill Lynch have taken large stakes in a number of Indian companies.

The news of sale of Merrill Lynch to Bank of America and filing of bankruptcy by Lehman Brothers affected the sentiments of the investors world over. In fact, the crisis in Lehman Brothers, which was reeling under the mortgage losses, had been there for quite sometime, affecting the Indian stock market. In the last four trading sessions, sensex has shed 945 points. The National Stock Exchange index nifty also lost 155.55 points or 3.68% at 4,072.90, after dipping below 4,000 level at 3,955.40

The news about Merrill Lynch particularly, came as a shock as no one was expecting the problem to be so grave that it would be forced to sell itself. This made the investors believe that financial crisis is much bigger than what was being apprehended so far and it is far from over. At the same time, foreign Institutional Investors (FIIS) continued their selling spree. Because of turmoil in the US financial market, dollar weakened against other main currencies like pound sterling, euro and Japanese yen. Even RBI’s intervention in the market to stem the fall was not effective because of the huge demand for the dollar.

The crisis in the US market made the investors turn towards gold, whose prices climbed more than 2% in London. Gold prices spurted by Rs 195 per ten grams to end at Rs 11610 on the bullion market in India.