US DEBT CRISIS

SUB-PRIME ISSUE

SUB-PRIME LOAN
In the US, borrowers are rated either as Prime: - indicating that they have a good credit rating based on their track record. Sub-Prime : meaning their track record in repaying loans has been below par.

 Loans were traded in US 56000 crores utook off 33000 crores FII took their money back thats why India was effected As debt rises, price of gold also rises India's banking are strong

LEHMAN BROS
On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639 billion in assets and $619 billion in debt, Lehman's bankruptcy filing was the largest in history Lehman was the fourth-largest U.S. investment bank at the time of its collapse, with 25,000 employees worldwide. Lehman's collapse was a seminal event that greatly intensified the 2008 crisis and contributed to the erosion of close to $10 trillion in market capitalization from global equity markets in October 2008, the biggest monthly decline on record at the time.

WHAT EXACTLY IS US DEBT CEILING????

It is a United States-based financial services company. It is a division of The McGraw-Hill Companies that publishes financial research and analysis on stocks and bonds. It is well known for its stock-market indices The company is one of the Big Three credit-rating agencies Its headquarters are in 55 Water Street in Lower Manhattan, New York City.

WHY S&Ps ACTION IS FLAWED?

Political motivations Poor arithmetic or malicious intent S&Ps business model S&Ps professional incompetence A recent history of defrauding investors

 Expansion of the housing bubble Simple credit conditions Sub-prime lending Predatory lending

 Deregulation Over-leveraging Complexity in financial modernization Inaccurate pricing of risk Debt ceiling

INDIAN ECONOMY
Us debt stands at $14.3 trillion. Indias exposure to us debts is $41 billion and is ranked at 14th position in terms of countries having exposure to us debt.

 EXPORTS

IMPACT ON INDIAN ECONOMY

Indias exports to US include

IT services

Consumer durables US It services & pharmaceuticals account a third of indias export. Us downgrading may result in: 1.Increase in borrowing cost 2. Increase in taxes (making exports costlier in either case)

Pharmaceuticals

 IMPORTS
India mainly imports crude oil from US US downgrading have lead oil prices to fall How the fall in prices will help India??? o reduce cost of production commodity prices fall Inflation declines o Major sectors to benefit: Consumer goods, Construction automobiles , Capital goods

WHY RBI INCREASED INTEREST RATES?????????

To curb inflation and to achieve balanced growth. Reasons for increasing interest rates:
o Higher inflationary pressure o Wage price spiral

workers demand higher wages increase in input cost price rise price expectations as a result follow upward trend and thus resulting in further rise in wages

INFLATION