India Faces Mass Default And Restructuring As Devaluation Looms

India's mounting economic and political woes are prompting market players to raise the specter of a Greek-style crisis in Asia's third largest economy, Reuters reported on an International Financing Review story. This is not simply idle speculation. Last Friday, the rupee crashed to an all-time low against the dollar of 54.9 and it was stuck most of Tuesday at the psychologically significant Rs55/USD level, where the currency is seen as having no obvious technical support. And the implications of a rupee collapse would be immense. "It could go to stratospheric levels against the dollar and it looks to me as if the Indian government is aiming at a de facto devaluation in an effort to prop up flagging economic growth. And you then have to worry about all the unpleasant boxes such an action would inevitably tick, such as straining further the country's already strained balance of payments as well as bringing on an almighty wave of inflationary pressure," said a credit analyst at a ratings agency in Singapore. He added that a spike in the rupee would strain the cashflow of corporates and banks as they struggled to service dollar-denominated debt and that the odds of a widespread Indian debt restructuring would be low. In his opinion the market will determine the rupee's level, with a formal devaluation seen as unlikely given the consequent need for interest rates to be pushed significantly higher to contain capital flight and counter toxic inflation levels. As the country's government faces political impasse amid infighting, principally between prime minister Manmohan Singh and finance minister Pranab Mukherjee on the subject of tax reform, and India limps from one corruption scandal to the next, the sense of decay is palpable. Read more.