AIG losses, a further setback to IT firms revival prospects

Written by Rachana Khanzode | Updated: Mar 5 2009, 05:31am hrs
Just when the Indian IT industry thought a market revival would happen mid-year, American International Groups (AIG) fourth quarter loss of $61.7 billion has indicated an open-ended delay. Industry veterans view AIGs announcement as a shock and an indicator that more such shocks can be expected going ahead, which will eventually delay the expected revival of the IT industry for June-July 2009.

If there are constant shocks like these, the estimated bounce back of the IT industry for June-July could further get extended and the timeline cannot be defined with so much uncertainty, said, Partha Iyengar, VP, distinguished analyst regional research director, India at Gartner. Currently, the banking, financial services and insurance (BFSI) sector contribute almost 40% of the revenues of the top IT companies in India. According to Gartner, globally, in 2007 the BFSI sector spent was $176.8 billion for external IT services, about $7.8 billion of this or around 4.4% went to Indian IT companies like TCS, Infosys, Wipro, Cognizant, HCL, Genpact, Patni and Satyam.

AIG that suffered massive losses in guaranteeing mortgage securities hammered by the meltdown in the real estate market has set new benchmarks for losses in the BFSI sector, view veterans. Indranil Deb, principal, Mobius Strip Capital Advisors, said, The equity capital has dried up because the mark-to-market or market cap, loss has swollen to $40 trillion. Banks now do not have the ability to borrow and on the other hand there is liquidity pull back. So what started with Bear Stern in March 2007 and now to AIG is expected to continue further and pull out more such instances.

More over these instances are not expected to be limited to the US, said Deb. Expect the Japanese system too, to experience such shocks and the Australian quarterly results are already indicating similar trends, he added. The size of the damage is almost $3 trillion of the $13 trillion economy of the US, so the bailout funds are obviously too little too late.

Ken McGee, VP & research analyst at Gartner, said, More than the economic recession it is the emotional recession which has a larger impact. AIGs results are going to make it more severe. Obviously the bailout funds are not enough at the moment and the government has to re-look into that.

The US government is now pumping another bailout fund of $30 billion into AIG besides the $150 billion fund it had announced earlier. The US government has already pushed two bailout funds of $700 billion and $787 billion into its banks.