The Bank for International Settlements, or BIS, also known as the bankers’ bank, has added its powerful voice to the chorus of doomsters’ warning that the current economic crisis is a long way from being resolved. If some of us were still wondering why the stock markets are in free fall, the BIS annual report doesn’t mince any words.
The crux of its argument is that the subprime mortgage crisis in the West was a trigger for, rather than the cause of, all the disruption that has followed. So what was the underlying cause? “The fundamental cause of today’s emerging problems was excessive and imprudent credit growth over a long period,” it says.
The report says that all the different trends of the last few years, such as rising equity markets, high property prices, low risk spreads, the low cost of insurance against market movements, and even the fancy prices paid for fine wine, antiques and postage stamps, had one common cause—plenty of cheap credit. It also says that this explanation sits well with the recent acceleration in global inflation. Some other reasons that led to the stock market crash, says the bank, include financial market innovation, and lax internal and external governance.
Now that we know the reason for the meltdown, we’d like to know how bad can it get. BIS is happy to oblige, but unfortunately, what it has to say sounds a lot like a dirge. “The current market turmoil in the world’s main financial centres is without precedent in the post-war period,” the report says.
“With a significant risk of recession in the US, compounded by sharply rising inflation in many countries, fears are building that the global economy might be at some kind of tipping point. These fears are not groundless.”
How long will the pain last? BIS believes that given the variety of the influences underlying current economic and financial difficulties, their interactions and their long-standing nature, “we should not expect a quick and spontaneous return to normalcy”.
But won’t actions by central banks and governments be able to help contain the damage? The bankers’ bank doesn’t offer much hope on that front either. “Nor should we expect quick and easy policy solutions,” it says.
What about inflation, the biggest threat to emerging markets? Surely a global economic slowdown will also rein in inflation. BIS is not optimistic on that score either. “Evidently, a global economic slowdown would help reduce overall inflationary pressures. Given the inertia in the inflation process, however, this might still imply an uncomfortably long period of high inflation along with slower growth.”
BIS is the first official agency to sound such a pessimistic note, but then, it had also been one of the few voices in the wilderness warning of the threat from the unchecked growth of the derivative markets.
Its prognosis deserves to be taken extremely seriously.
Accenture results: encore from Indian IT firms?
Management consulting and technology services multinational Accenture Ltd, which competes with India’s top software services firms for outsourcing work, reported decent results for its third quarter that ended on 31 May. Accenture’s accounting year ends in August.
The company’s revenues from the troubled banking, financial services and insurance, or BFSI, sector grew by a healthy 8% quarter-on-quarter, which coupled with strong growth in its products business, helped the firm beat its revenue guidance by about 1%. What’s more, Accenture’s operating margin expanded to 14.1%, the highest levels in any quarter in recent years, according to the company’s management.
Not only that, the company announced after it reported its results that banking clients were “coming to us for cost-improvement initiatives”. It also said it would maintain its growth in the next accounting year to August 2009, and prospects in the year that lies ahead looked better than they did a year ago.
Does this mean the June quarter results of India’s IT firms—expected to start arriving next week—would be much better than expected and their take on prospects equally bullish? Before jumping to such a conclusion, one should note that although Accenture competes for similar work, its business model is different. It might not, therefore, make sense to expect similar sentiments from India-based firms.
Analysts at Edelweiss Securities say that given Accenture’s core strength of consulting, it works closer with its clients in setting their IT budgets. In bad times such as these, the company would be involved with clients in optimizing their budgets and generating cost improvements. This gives it an early peek into client budgets and thus, it benefits more compared with Indian IT firms that entered consulting much later. Besides, Accenture’s annuity revenues are much higher than Indian firms, and its exposure to the US is much lower at 40%, which is around 60% for large Indian firms.
Most India-based firms said in April that much of the growth in the fiscal year to March 2009 would come in the second half. That position is unlikely to change, although based on Accenture’s commentary, one could expect some positive statements on banking clients and the overall demand situation in the US.
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