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Sunday 2 November 2008
Worrying about another Asian financial crisis
The question zooming around markets is this: If the worst-case outlook plays out and the crisis continues, could Asia experience another 1997? Equally important, will investors know it when they see it?
It used to be that we searched for economic icebergs in Asia. Now we are on the lookout for Icelands.
Last month, Iceland became the first developed economy to seek aid from the International Monetary Fund since 1976. The country needed a $2.1 billion bailout after investors realized it wasn’t running an economy, but a hedge fund.
While Ukraine, Belarus, Hungary and Pakistan are also lined up at the fund’s door, Iceland’s woes are getting special attention. The thought that a Western European economy that once had an AA credit rating could implode is bringing back uncomfortable memories about Asia’s crisis just over a decade ago.
The question zooming around markets is this: If the worst-case outlook plays out and the crisis continues, could Asia experience another 1997? Equally important, will investors know it when they see it?
Analysts like Mark Matthews of Merrill Lynch advise keeping an eye on banks. “Bank shares are the canary in the coal mine,” he said.
He pointed out that in 1997, shares of banks underperformed in Indonesia, South Korea and Thailand before all three nations asked for IMF bailouts. More recently, drops in banking stocks also preceded a broader realization of troubles in economies like Iceland and Hungary.
So if an Asian economy is on the cusp of an Iceland-like emergency, bank shares are the place to look. And here’s the good news: The industry is holding its own. In the past 12 months, banking shares have outperformed the broader markets by 23 percent, Matthews said.
Banks in Asia had only small amounts of the toxic debt now hurting their U.S. and European peers. In general, Asian banks are reasonably liquid and well capitalized. Nonperforming loans may rise as global growth slows, yet the most likely outlook isn’t for a 1997-style crisis.
South Korea may be an exception. Matthews said the outperformance of Korean banking shares in the past 12 months has been slight, “and more recently they have begun underperforming.”
Asia is anything but immune to this crisis. The cost of insuring emerging-market debt has soared over the past month, as investors fear that a deep U.S. recession will weigh on their export-dependent economies. Slowing growth in Europe, Japan and China means Asia might soon find itself with fewer buyers of its products.
There also are problems today that were not present 10 years ago. The Asian crisis was an emerging-market phenomenon, leaving larger, developed nations less affected. The current one is moving in the opposite direction, from the United States and Western Europe, and is not being contained to any one region. As the turmoil spreads, all economies and markets will feel the pain.
The U.S. Federal Reserve’s decision to provide $30 billion each to the central banks of Brazil, South Korea, Mexico and Singapore shows just how universal this crisis is. Paul Donovan, the deputy head of global economics at UBS, wrote in a report to clients this past week that the Fed’s decision to expand efforts to unfreeze credit to emerging nations was even more significant than its official interest-rate cut.
The trouble is, the United States still may be entering a Japan-like period of stagnation. In cutting short-term rates to 1 percent this past week, Ben Bernanke, the Fed chairman, may have nudged the United States closer to the experience of Japan.
The United States also is borrowing money so fast that it makes Ronald Reagan’s administration seem downright debt-averse. President George W. Bush inherited a surplus when he took office, yet his policies have resulted in deficits and added $1.7 trillion to the national debt.
Financing from nations like China allows the U.S. government, and its citizens, to live beyond its means. Yet the stability of China, the world’s largest holder of foreign currency, is becoming less certain. On Oct. 29, the country’s central bank reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent, and it may keep lowering rates as the global crisis drags down its exports and industrial production.
Developing Asia has its own vulnerabilities. Growth rates are not the problem, with 7.9 percent in India, 6.4 percent in Indonesia, 6.3 percent in Malaysia, 4.6 percent in the Philippines, 4.3 percent in Taiwan and 3.9 percent in South Korea. Yet economies do hit icebergs, and things will cool if U.S. companies start laying off even more employees.
The odds don’t favour the next hedge-fund economy turning up in Asia. With the exception of Japan, Asian central banks generally have ample room to cut rates, the ratios of debt to GDP allow for latitude on tax policies; and large currency reserves offer a cushion. Asia is a very different place than it was in 1997.
If the global turmoil worsens, though, Asia won’t get off easily. But if the region is harbouring an Iceland, banking stocks will provide an advance warning.
1 comment:
Worrying about another Asian financial crisis
By William Pesek, Bloomberg News
2 November 2008
It used to be that we searched for economic icebergs in Asia. Now we are on the lookout for Icelands.
Last month, Iceland became the first developed economy to seek aid from the International Monetary Fund since 1976. The country needed a $2.1 billion bailout after investors realized it wasn’t running an economy, but a hedge fund.
While Ukraine, Belarus, Hungary and Pakistan are also lined up at the fund’s door, Iceland’s woes are getting special attention. The thought that a Western European economy that once had an AA credit rating could implode is bringing back uncomfortable memories about Asia’s crisis just over a decade ago.
The question zooming around markets is this: If the worst-case outlook plays out and the crisis continues, could Asia experience another 1997? Equally important, will investors know it when they see it?
Analysts like Mark Matthews of Merrill Lynch advise keeping an eye on banks. “Bank shares are the canary in the coal mine,” he said.
He pointed out that in 1997, shares of banks underperformed in Indonesia, South Korea and Thailand before all three nations asked for IMF bailouts. More recently, drops in banking stocks also preceded a broader realization of troubles in economies like Iceland and Hungary.
So if an Asian economy is on the cusp of an Iceland-like emergency, bank shares are the place to look. And here’s the good news: The industry is holding its own. In the past 12 months, banking shares have outperformed the broader markets by 23 percent, Matthews said.
Banks in Asia had only small amounts of the toxic debt now hurting their U.S. and European peers. In general, Asian banks are reasonably liquid and well capitalized. Nonperforming loans may rise as global growth slows, yet the most likely outlook isn’t for a 1997-style crisis.
South Korea may be an exception. Matthews said the outperformance of Korean banking shares in the past 12 months has been slight, “and more recently they have begun underperforming.”
Asia is anything but immune to this crisis. The cost of insuring emerging-market debt has soared over the past month, as investors fear that a deep U.S. recession will weigh on their export-dependent economies. Slowing growth in Europe, Japan and China means Asia might soon find itself with fewer buyers of its products.
There also are problems today that were not present 10 years ago. The Asian crisis was an emerging-market phenomenon, leaving larger, developed nations less affected. The current one is moving in the opposite direction, from the United States and Western Europe, and is not being contained to any one region. As the turmoil spreads, all economies and markets will feel the pain.
The U.S. Federal Reserve’s decision to provide $30 billion each to the central banks of Brazil, South Korea, Mexico and Singapore shows just how universal this crisis is. Paul Donovan, the deputy head of global economics at UBS, wrote in a report to clients this past week that the Fed’s decision to expand efforts to unfreeze credit to emerging nations was even more significant than its official interest-rate cut.
The trouble is, the United States still may be entering a Japan-like period of stagnation. In cutting short-term rates to 1 percent this past week, Ben Bernanke, the Fed chairman, may have nudged the United States closer to the experience of Japan.
The United States also is borrowing money so fast that it makes Ronald Reagan’s administration seem downright debt-averse. President George W. Bush inherited a surplus when he took office, yet his policies have resulted in deficits and added $1.7 trillion to the national debt.
Financing from nations like China allows the U.S. government, and its citizens, to live beyond its means. Yet the stability of China, the world’s largest holder of foreign currency, is becoming less certain. On Oct. 29, the country’s central bank reduced its benchmark one-year lending rate to 6.66 percent from 6.93 percent, and it may keep lowering rates as the global crisis drags down its exports and industrial production.
Developing Asia has its own vulnerabilities. Growth rates are not the problem, with 7.9 percent in India, 6.4 percent in Indonesia, 6.3 percent in Malaysia, 4.6 percent in the Philippines, 4.3 percent in Taiwan and 3.9 percent in South Korea. Yet economies do hit icebergs, and things will cool if U.S. companies start laying off even more employees.
The odds don’t favour the next hedge-fund economy turning up in Asia. With the exception of Japan, Asian central banks generally have ample room to cut rates, the ratios of debt to GDP allow for latitude on tax policies; and large currency reserves offer a cushion. Asia is a very different place than it was in 1997.
If the global turmoil worsens, though, Asia won’t get off easily. But if the region is harbouring an Iceland, banking stocks will provide an advance warning.
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