Moneycontrol Pro Panorama | We are still dancing

The global financial market is precariously balanced on an interconnected web of leverage.

Dear Reader,

The Panorama newsletter is sent to Moneycontrol Pro subscribers on market days. It offers easy access to stories published on Moneycontrol Pro and gives a little extra by setting out a context or an event or trend that investors should keep track of.In 2007, then chief executive of Citigroup Charles Prince said, “when the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you have got to get up and dance. We are still dancing” in an FT interview. We know what happened in 2008.

Prince’s remark was in response to the boom in buyouts at that time fuelled ostensibly by cheap credit.

Credit isn’t as cheap now in the US or anywhere else; even Japan is going away from its zero interest rate regime and the global economy has since then changed significantly. That, sadly, does not guarantee immunity from another financial crisis; it only ensures that the crisis does not look like the previous one.

We are not suggesting that a financial crisis is brewing currently. But the Bank for International Settlements (BIS) has sprinkled enough warnings about the global economy and the fault lines visible in markets in its annual report. Manas Chakravarty brings all the details in his piece here and notes that the BIS is perhaps the most conservative and staid organisation. The fact that the central bankers’ banker is nervous should make us anxious too.

At the centre of the worry is US President Donald Trump’s tariff policy. The BIS highlights that global productivity has already declined steadily over the years and tariffs would dent it further. At the same time, tariffs add to cost that inflate prices across geographies. Suddenly stagflation isn’t just a remote possibility but something that is around the corner.

More than tariffs though, the big threat is from the public debt pile of America that would only grow more from the Big Beautiful Bill of Trump which the Senate passed last night. The US public debt is now an unimaginable pile of $36 trillion or 125 percent of its gross domestic product (GDP). The disquiet among economists is not the debt pile itself but the structural changes in the financial system and the bond market. The mini meltdown in treasuries in April has made market participants sit up and notice. So has the BIS. Indeed, we wrote that the Reserve Bank of India (RBI) is worried about the US treasury market where it says the bond market is increasingly dominated by leveraged price-sensitive private investors. it isn’t coincidental that the BIS warns of the repo market which has enabled investors to be leveraged to the hilt.

That brings us the opaque private credit market, a beast growing every day. Indeed, private credit is a liquidity risk at times of high volatility and this risk has landed in the bond markets too. “Private credit markets provide a growing share of finance to smaller, highly indebted firms. Meanwhile, banks remain indirectly exposed to credit risks by lending to private credit firms,” the BIS notes. Indeed, private credit isn’t dangerous per se but its ties with the banking sector, and the economy makes it a potent risk pocket.

Simply put, the global financial market is precariously balanced on an interconnected web of leverage, the size of which is hard to picture. This comes when productivity is low, household incomes aren’t growing, balance sheets are credit-fuelled, and the government is the biggest borrower in many cases.

As Chakravarty writes, it is a financial crisis in slow motion. Of course, like in every period of crisis, even this will have its exceptions. Luckily, India can be counted as one. Our external report card is healthy, growth is cyclically slowing but can keep Indians from getting poor and the stock market is putting up a brave face amid global volatility. Inflation is benign and the odds are very low for it to flare up which makes it easy for the RBI to keep policy growth friendly and interest rates lower.

But like the web of leverage in global markets, a part of India’s economic growth depends on how much the world buys our goods (exports) and another part depends on how much the world invests into our economy (foreign direct investment). On both counts, there is enough to worry.

Meanwhile, the IPO party in Indian stock markets is continuing. Ananya Roy, in her piece, examines how IPOs have been timed and finds that most retail investors have been looking for quick listing gains. This is unhealthy. “IPOs offer liquid opportunities to get in on the ground floor of businesses. But looking at IPOs solely for listing gains is often counterproductive,” she writes. When secondary market sentiment turns for the worse, chasing listing gains will lead to sticky losses.

But will sentiment turn for the worse?

The warnings of financial leverage, risk and volatility are restricted to the US markets. The Financial Times has a piece by Satyajit Das that lists the trades that would sow the seeds of the next financial crisis. Low-cost borrowings, basis trades in bond markets, unlisted private equity, and opaque private credit are the many faces of leverage and could be the undoing of markets.

But as the safe corners of financial markets begin to unravel, the music can stop for our equity markets too. At the moment, though, we are dancing.

Investing insights from our research team

Weekly Tactical Pick: Why this frontline defence stock still offers value

Aadhar Housing to play a critical role in filling the demand gap

Aarti Industries: Return ratios to improve with better sweating of assets

What else are we reading? 

Quick Take: Relief for options traders as SEBI cracks down on Jane Street

Why India’s nutrition crisis is an economic one

Chart of the Day: Policy transmission is held up by fixed rate loans of private banks

Can a unique borrower ID be a game changer in India’s loan market?

Delhi’s ban on fuel sale to old vehicles reveals a patchy solution to pollution

‘Elon has finally woken up’: Musk battles to save Tesla from Trump (republished from the FT)

Whose job is safe from AI? (republished from the FT)

Vault Matters | ‘True and Fair’ or ‘True and Correct’: What should be the objective of a statutory audit?

Bangladesh’s budget reveals that Yunus-government is a mere placeholder

Reset Before You Run: The quiet crisis in AI-driven marketing

A blueprint to get bang for the buck out of government’s Rs 1 trillion research support scheme

Tech and Startups 

India’s top IT firms lean towards IP-led growth as Gen AI shrinks the pyramid

Technical Picks: SWIGGY, POCL, HINDPETRO, BAJFINANCE. 

Aparna Iyer
Moneycontrol Pro