Rating Unsecured Securities that Creates Crisis!

Global stock markets have become volatile since last year and the emerging markets are no such exceptions. Wide fluctuations in scrip’s prices and indices across the globe have created tough times for retail investors who find it difficult to 'time the markets' properly, carrying-in some huge losses on their part. Weak technical factors weighing heavily on the markets as indices saw their benchmarks battered below their support levels leaving investors in panic.

Institutional selling on emerging markets equities continued for the sixth week unabated, and FII's are reeling under domestic redemption pressures to cough up whatever profit they could make. Investors in US and other EU countries have left out their home bias in investment strategies and sought better asset classes outside their domains in the emerging markets. It is estimated that only 5% of US investors invested in emerging market equities, though emerging market returns outperformed their home benchmarks for the last ten years or so.

Where are the Risks: US or EMs?

But with these prospective returns comes the risk of emerging markets volatility since EMs are now much integrated with the developed stock markets and events originating in the US markets are easily spilled over to the emerging markets through contagion effects. And the same did happen on the aftermath of the 'subprime fiasco' with investment banks who earlier banked on these risky mortgage backed CDOs (collateralized debt obligations) have been 'writing down' these bad debts and facing huge losses, the event bearing down substantial effect on the stock exchanges across the platform.

Investors are up-in-arms with the rating agencies that grade securities and critics have called in for stricter regulatory norms and limiting roles of these rating agencies in pricing certain risky bonds and securities. The bull market run has been, according to some analysts, spoiled by the subprime debacle since it started defaulting in the US, and the following market volatility took over as news about mortgage defaults that have become the centre of this whole mess. It has been further reviewed that nearly $450 billion of bad debts are to be written-off this year, most of these by many big international investment banks.