Mumbai: As the European Union pledged support to ward off a debt crisis in Greece, markets around the world have taken a hammering. There are fears that the debt crisis might turn into a contagion, given the slow economic growth rates in Europe. Mint spoke to Aninda S. Mitra, vice-president and senior analyst, sovereign risk group at Moody’s Investors Service Inc., to find what the impact on India is likely to be. Edited excerpts:
How will the sovereign debt crisis in Greece and other European countries affect India?
We don’t expect much by way of any direct impact. We do think there is an underlying level of support. We don’t envisage that Greece will go the way Lehman (Brothers Holdings Inc.) did. So, if something catastrophic happened, of course, everyone will be impacted. But our reasoning is precisely that we don’t expect Greece, or Portugal or Spain to lose access to financial markets in that fashion (because of underlying element support from euro zone countries).
Graphic: Yogesh Kumar/Mint
What about interest rates?
Already credit spreads have widened in these specific countries. And there could be some spillover effect given the macro financials. Investors are averse to Greek bonds and other emerging markets as well. But precisely because we are saying that losses will be limited, we do not expect a huge kind of deleveraging around the world, which is what happened in the aftermath of Lehman’s collapse.
In the last five months, we’ve had Dubai, which faced a similar crisis. Now there are these euro zone countries. Do you expect any more to follow?
Well, possibly. In the sense, we are looking at very sub-par growth in a lot of European economies. And they are already saddled with very high levels of debt. On top of that, we have banking systems that are facing a lot of stress. So it’s going to be a slow recovery around the world and it’s going to be choppy.
India’s debt to GDP ratio is around 80% now. Do you think it is sustainable?
We were rather worried about the sustainability of India’s debt to GDP ratio in the last one or two years. But some of those concerns have dissipated as the growth response has been more resilient than what a lot of people expected. And also, the government appears to be showing signs of consensus on various fronts, such as pushing forward with disinvestment as well as possibly reining back some of the stimulus. Also, pushing forward with some structural reforms such as hiking fuel prices on a one-off basis or possibly following the Kirit Parikh panel recommendation which could be quite significant. These things will certainly help the sustainability although we are awaiting the 13th Finance Commission recommendations, or managing the debt position through the medium term.
So what could be the triggers for a downgrade?
We are not expecting a downgrade at this stage. We have a positive outlook on the local currency; bond ratings of the country is Ba2, which is one notch below investment grade; foreign currency ratings are Baa3, which is (a) stable outlook, the lowest in the investment range grade. As I said earlier, the consensus on disinvestment, reining back the stimulus—these things tend to point towards an improving fiscal position, not a deteriorating fiscal position. So, in view of that, it’s inappropriate on our part to consider downgrading sovereign ratings. We were quite worried about the fiscal deficit one or two years back, but those concerns are easing. If the position does improve, we will consider upgrades to the rating.