Actually the crisis is a storm in a teacup for me because I am not invested in Stocks or Mutual Funds. If you have holdings in Adani then grit your teeth and hold on.
I’ll start with a disclaimer: I have not researched the Adani group and have absolutely no idea if the stocks of the group companies are fairly valued or not. So take the second sentence of the preceding para with whatever amount of salt you deem appropriate.
But the point I want to make in this article is that there is no risk of a global financial meltdown as was the case in 2008 when Lehman brothers collapsed. The following are my reasons for thinking so despite Hindenburg Research accusing the Adani group (specifically Gautam Adani) of engineering the biggest fraud in economic history.
Following are my reason for thinking so:
Firstly the Adani group is too big to fail and will not be allowed to collapse by the Government. This would have been the case even if Adani had not had a special relationship with the Indian Prime Minister. There is an old saying which goes something like this: If you owe the bank 5 million dollars and are unable to repay then you have a problem. But if you owe the bank 50 billion dollars then the bank has a problem.
The accumulated debt of the Adani group is about 1.8 lakh crores (going by TV news reports) which puts it firmly in the second category.
Secondly the 2008 crisis was caused by toxic assets. These toxic assets consisted of real estate mortgages on which there was over speculation. I don’t have the concept that I would like you to grasp clearly in my mind and in any case I will need to write a small book to explain everything. If you want to understand what caused the 2008 meltdown then please watch the movie The Big Short. It is available on Amazon Prime Video in India and gives you a clear understanding of what happened. It is entertaining as well as instructive and worth watching.
The point is that the entire financial sector of the western nations was holding these toxic assets. And then Lehman Brothers was allowed to collapse and not given a lifeline. This caused a domino effect and the entire financial sector would have collapsed had the US Government not stepped in with its bailout plan.
Lastly SBI and LIC have – the biggest lenders in India – issued statements saying that they are not unduly worried by the present crisis. There is a possibility that they may have to take a haircut as far as recovery of their loans are concerned. But that is the worst case scenario. Going by their statements they seem quite confident that the loans to Adani are not bad loans. And they should be in a position to know.
Adani group companies may be overvalued. They may be grossly overvalued but I don’t think that they are going to go bust. And even if they do SBI and LIC will not be allowed to fail by the Indian government.
So the depositors’ money is safe. But the taxpayers’ money may be used in case the Indian government or the banks have to come up with a bailout plan. So it will be the taxpayers who will be picking up the bill in the worst case scenario.
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