Greece has cast its spell on global markets yet again. With credit rating agencies downgrading the country (and Portugal) to 'junk', investors are running for cover. The US and European markets closed anywhere between 2-3% down yesterday. Asian markets are feeling the pain today with markets down in a range of 1-3%. Amidst all this, gold prices are up by 0.3%.
Rating agency S&P earlier lowered Greece's and Portugal's debt to 'junk' and 'near-junk' respectively. This is given that the contagion from Greece's debt crisis is expected to spread through the European region. Overall, it is the fear that Greece or Portugal may affect other countries of Europe and derail the economic recovery that is still in its very early stage. And if it really happens - Greece or Portugal failing - the world markets will see further and extended pain.
The reason Greece has been downgraded is that it has not been able to meet its 2009 budget. Not surprisingly, it had appealed to other Euro nations as well as to the IMF to provide it with funds to keep it afloat. However, the support does not seem to be very forthcoming. Other European nations are scared that a bailout will cut into their own sovereign capital, thus making it difficult for them to raise loans. Not a good sign especially in the current troubled times.
Anyways, a Greece default would not just mean an adverse impact on stockmarkets. It would also shake the global financial system that was supposedly limping back to normalcy (so what if under the influence of printing machineries run by central bankers!). A Greek default would mean losses at European banks that hold Greek debt. Clearly, once one takes on too much debt, there are very few places to hide.
We believe whether it is a corporation or a country, being overleveraged is a dangerous situation to be in. This was amply demonstrated in the current crisis with companies going bust and even governments defaulting on payments (Dubai was another recent example). And experts like Marc Faber and Nouriel Roubini foresee something similar to happen in the US as well.
A 'junk' status sinks Greece's hopes even deeper. Losing investment-grade status for its bonds means that Greece will have to pay higher costs to borrow if it taps debt markets again. This will also increase the chances that existing debt will have to be restructured.
Coming to the impact on Indian markets, yes there will be one. And it could be severe given the nature of the crisis. In fact, all emerging markets will be in for a rude shock if Greece actually defaults. Not because these 'economies' are dependent on the Greeks for their growth. But simply because these 'markets' depend on cheap US and European funds for keeping the prices of their stocks and real estate high. Now with funds expected to dry up owing to the Greek crisis, the emerging markets will suddenly see the liquidity tap run dry!
For Indian markets, the impact could well be knee-jerk i.e., short term. But whatever it is, it could provide you with opportunities to buy into your favourite stocks at lower prices. The idea is to not take cues from the 'price action' that will follow a Greece default, but to take a call on stocks' 'valuations' and then act.
Warren Buffett once said, "The dumbest reason in the world to buy a stock is because it's going up." This also applies to selling stocks when they go down.