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Motilal Oswal

By Motilal Oswal 17-May-2010 | 10:41

Warren Buffet says "I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” This is very apt in today’s context as there are horror stories all around us. The financial world as we know it is coming to an end, say a lot of experts. Governments across the world have piled on too much debt. Soon, there will be a wave of defaults and then, everything will be over. These are scary thoughts indeed. And if you, like most others, are holding back your investment decisions fearing the above mentioned spectacle, I have some good advice for you-don’t believe them. The world will surely not come to an end and life would go on normally and everybody would be working towards betterment of their lives".

I am referring this in the context of talks surrounding Greece default. One, its cost of funds shoots up and second, GDP growth suffers. However, as per experts, both these effects are rather short lived. It is important to note that where debts are restructured, it has no significant impact on interest rates after the second year. It is only for the first year the interest rates get impacted. A huge event like a default, which the financial media is hugely cautioning us about, is all but forgotten in two years. Moreover, the impact on GDP growth is also not that sizeable. As the write up highlights, a defaulting country grows by 1.2 percent less per year while its debt is being restructured compared with a country that is not in default. And even this subpar growth lasts for just a year or two after default.

Like in the past, China is in the limelight again. Concerns about the Chinese bubble bursting are not without reason. After all, Chinese banks have resorted to indiscriminate lending and a lot of this money has found its way into real estate. This has then led to inflated asset prices. While the reserve requirements have been raised, a lot may still have to be done to ensure that the Chinese growth remains intact. Moreover, if growth in the developed markets remains anemic, it will be interesting to see how China will be able to sustain its growth in exports and thereby it’s GDP.

I will agree that things are little serious this time around and the effects could linger a little longer. However, an investor in India need not worry. A sovereign default by some other nation would surely have repercussions on the Indian stock markets. But that could actually turn out to be a very good long-term buying opportunity. So, if historical evidence is any indication, the hype around sovereign defaults should indeed be ignored. And such events should be used to one’s advantage for building long-term wealth.