Global Meltdown and India Subprime worries

Global equity markets tumbled yet again after a key manufacture sector gauge in the US tumbled to a five-year low and concern about the housing and credit market turmoil deepened. A series of economic reports released this week showed no signs of improvement in the US economy. As a result, the Dow Jones dropped 4.3% while the Nasdaq slid 4.8% (excluding Friday's session). In Asia, the Nikkei in Tokyo lost 6% and the Hang Seng slumped 7.5%. The FTSE in London was down 3.1% while the Bovespa in Brazil did relatively better, losing just 0.8% (till Friday). Markets also tanked in India, with the BSE Sensex plunging 9% and the NSE Nifty dived 8.7%.

Citigroup shares tumbled to their lowest level in more than nine years after Merrill Lynch slashed its full-year earnings forecast, citing billions of dollars in subprime-related writedowns and other problems. Citigroup also said it will reduce its mortgage assets by US$45bn over the next 12 months. JP Morgan Chase stated that Swiss bank UBS may have sold its 25 billion Swiss franc (US$24.1bn) prime Alt-A portfolio in a fire sale. JP Morgan also increased its estimate for 2008 write-downs at UBS to 18.5 billion francs from 15 billion francs. Separately, Merrill Lynch also raised its estimate for additional charges for UBS.

Carlyle Capital Corp., the listed credit fund of the private-equity firm Carlyle Group, said it missed margin calls totaling US$37mn from four repo financing counterparties and has received a notice of default from one counterparty. The Amsterdam-listed fund said some of its residential mortgage-backed securities have already been liquidated by lenders and it's possible that additional securities may be liquidated after the latest margin calls. Thornburg Mortgage plunged on bankruptcy fears after the residential mortgage lender said it had failed to meet a US$28mn margin call and is now in default on US$320mn in financing.

The problems for bond insurers such as Ambac and MBIA continued to weigh on investors' mind. The companies need to raise enough capital to maintain their top-tier credit ratings, which will enable them to generate new business. Ambac raised US$1.5bn by selling stock and convertible bonds. If the bond insurers lose their ratings, that could spark another wave of multi-billion writedowns at big global banks like Citigroup and UBS. Markets were also bracing for Friday's US jobs report, which could provide critical signals about the health of the world's biggest economy. The report might also help the Federal Reserve make up its mind on the next move on interest rates later this month.

Shattering the false sense of security that Indian banks are not affected by the subprime mortgage crisis in the US, Minister of State for Finance Pawan Kumar Bansal said that ICICI Bank has suffered a mark-to-market loss of US$264.34mn. This loss is on account of its exposure to credit derivatives and investments as on January 31, Bansal said. The news took the market and analysts by surprise, as Indian banks are believed to be relatively insulated from the losses arising from the housing sector mess in the US. ICICI Bank led other bank shares down on the news.

However, ICICI Bank's joint MD Chanda Kochhar said, "We don't have any direct exposure to subprime. It's not technically a subprime loss." Bansal too added that there was no sign of large-scale credit losses among Indian banks. "So far, no specific instance of significant losses suffered by large financial institutions in India, especially from subprime mortgages in the US, has been noticed," he told the parliament. The figure stated by the minister would be accurate only if the bank sold its securities, which it did not intend to do at present, Kochhar said. Asked about the impact on the bank's profit, she said: "It would be a single-digit number."

Kochhar said ICICI Bank directly held securities with a face value of US$1.6bn, and a subsidiary held securities worth US$0.5bn. "The face value continues to remain the same because there is no default and everybody is paying as per schedule," she said. These securities had a payment schedule of four to four-and-a-half years. "When we recoup it over a four-year period, the benefit will come back to the profit-and-loss account." The bank has suffered only because of the interest rates, Kochhar said. "In general, interest rates have widened in the global economy, and since this is a portfolio of securities you have to mark this to the global interest rates as they move globally. That is the indirect impact," she said.

ICICI Bank has already made provisions for US $90mn and would provide for an additional US $70mn, with US $20mn for subsidiaries included in both sums, Kochhar said. The rest will be set off against the bank's net worth, she added. The bank claimed there is no loss on account of subprime exposure, but the overseas loans given to Indian corporate overseas from the UK and Canada subsidiaries were held as investments as credit derivatives or credit link notes. These have lost market values in the past couple of months because the credit spreads have increased over the past few months.