IT AIN'T OVER TILL THE FAT LADY SINGS
Recent news articles gleefully sing the optimistic hope that the ASIAN CONTAGION may be over - I DON'T THINK SO!!!!!!!!
It all started without much fanfare about a year ago. Once it came to the attention of the international wire services, the President of the U.S. was asked his opinion on the rapidly deteriorating stock market and monetary situations in Southeast Asia. His now infamous and cavalier retort to the question echoed round the world: "Oh, it's just a glitch in the road." Some "glitch!" Some rocky-road!
DRACONIAN IMPACT TO DATE
During the last 12 months the Asian Contagion has reaped devastating effects upon seven countries of Asia… and immediately threatens a host of others. Those most affected in the last year are (ranked in descending order of economic and monetary destruction wrought): Indonesia, South Korea, Malaysia, Thailand, the Philippines, Hong Kong and Japan. Furthermore, three more countries being sucked into the deadly maelstrom are Australia, China and New Zealand. And despite present optimistic media reports, it won't stop there!
Summary of Damage Assessment
Stock market loses are the most visible and severest damage so far. However, sympathetic FOREX Currency casualties are nearly as tragic.
Leading the pack of hapless seven in BOTH categories is Indonesia - having already seen its stock market prices plummet more than 85%, while the Rupiah plunged just slightly less.
To appreciate the horrendous magnitude of the Indonesian's total loses, let's translate it into US dollars. Suppose a typical Indonesian had the equivalent of $!0,000 invested in their stock market. In the last 12 months his stock portfolio plunged in value to only $1,500. But while this hell was consuming his life-long savings, the value of the rupiah also freefell 85%. His "nest-egg" is now worth a mere $225. What probably took 15-20 years of family toil and sacrifice to accumlute was decimated by 98%… ALL WITHIN A 12 MONTH PERIOD. Truly a saddening story… but is there still more destruction to come?
The seven fallen Asian stock markets have suffered an average loss of more than 65% during the last 12 months - while the average FOREX loss (versus the US dollar) is a painful 36%. Only the Hong Kong dollar is relatively unscathed, due to massive support intervention by nationalist China.
Root of the Asian Crisis
A broad-brush description of the root of the Asian crisis is the following. Whereas western journalists are wont to heap all the blame upon the Asians, a few internationally acclaimed experts of Far-Eastern economies - like the insightful John Kutyn - put the blame where it squarely belongs: In the greedy and reckless laps of Western Banks.
During the last 10 years Western Banks lent countless billions to anyone in the Orient with a half-baked idea. As long as the building plans were feasible, "LEND THEM THE MONEY" was the bankers' war-cry. In essence it was "GIVE 'EM ALL THEY WANT."
Never mind examine how the loans were going to be repaid. Never mind that future amortization depended 100% upon projected income of - hopefully - ever increasing revenues emanating from the financed projects. Never mind that inventory was building much more rapidly than product consumption. Never mind that most loans were collateralized by stock portfolios and real estate at absurdly high book values. NEVER MIND, because the IMF was always around to bailout the bankers if they got into a mess.
WELL… the bankers are indeed in a financial mess - and it appears it is much more than the IMF can chew.
Whereas Asia's private sector went on a borrowing rampage, it was aided and abetted by Western Banks' on a lending spree. Financial regulators in Asia, Europe and America failed to spot that private banks in the West invested heavily in the Asian markets, and that many Asian companies took on far larger loans than they could ultimately afford.
Ironically, regardless of how much bailout billions the IMF can cough up, Asian companies hamstrung with burgeoning debt will ultimately succumb to 'consumption' of too much borrowing. And pathetically, more lending by the IMF to the sinking Asian economies will be the coup-de-grace --- as nearly all income generated by the teetering companies goes to the unproductive use of paying rapidly accumulating interest on mounting debt… never mind principle amortization.
The Moral Hazard
The BBC is one of the few media voices which sees the Asian Crisis in an objective light. Per the BBC, "Some politicians are questioning the wisdom of bailing out the private banking sector. They cite the 'moral hazard' of IMF intervention, and believe that banks and countries should be allowed to go effectively bankrupt."
The BBC further comments: "Some politicians argue that banks will have no incentive to properly investigate their loans, if they can assume that the IMF will bail them out. This view has gained some credence in the US Congress, which is still considering whether to give more lending authority to the IMF."
The Ad Hoc Cure Which Kills
Others are accusing the IMF of causing a panic in the financial markets by demanding economic reforms, which, are too harsh, worsen the economic crisis and undermine what remaining financial strength still resides in Asia.
Between a Rock And A Hard Spot
The private sector unable to pay down its crushing debt has been laying off workers for months - to the point where unemployment is at multi-year highs in all Asia.
Those who have lost their jobs cease to become active consumers (they don't have any money). And those fortunate enough to still have jobs have dramatically reduced consumption - since every moment they fear being fired due to company down-sizing. Therefore, consumption is grinding to a near halt… and inventories continue growing like a cancer… reducing many companies' ability to pay down its bank loans - which forces banks to summarily halt credit extension, causing a stifling credit crunch in the entire economy. Consequently, factories are obliged to reduce production… and subsequently lay off more workers. It has literally gone full circle.
It all feeds on itself - as it relentlessly spirals into recession, ultimately leading to DEFLATION.
The Worst Has Yet To Be Seen
Recent days have witnessed relative strength in Asian stock markets and in their currencies. For example, during the week of June 22th the Nikkei penetrated downward the psychologically all important 15000. Although it languished there for a couple days, it has since zoomed to nearly 16500 (Up exactly 10%). Similarly, the Yen has risen from a low of 146 to a recent high value 134 (versus the $US). The prime motive force behind the yen's strength was a massive joint-effort of the US Fed and the Bank of Japan. However, even that has its limits.
However, without warning or fanfare the Yen was driven back to nearly 142 on July 2cd - losing nearly four yen on the day - indeed a significantly large loss.
Meltdown in Asia - Chronology of the Asian Crisis
Much of the following chronology is courtesy of the BBC News.
The most important events and dates of the Asian Meltdown are listed here to put all into a meaningful chronological perspective.
July 2, 1997: Thailand devalues the baht
As rumours spread that Japan would raise interest rates, investors move out of weaker currencies. The first to be affected is the Thai baht. With limited reserves, the Thai central bank soon runs out of dollars. The currency is devalued by 20% as the government asks the IMF for assistance.
July 11, 1997: Philippine peso devalued
The Philippine government is the next to feel the pressure of the currency markets as the peso is devalued - and the IMF is called in. A rescue package of $1.1 billion is agreed to a few days later.
July 24, 1997: Asian currencies collapse
The currency crisis spreads throughout Southeast Asia as the Thai baht, the Malaysian ringgit, the Philippine peso, and the Indonesian rupiah all come under renewed pressure.
August 14, 1997: Indonesian rupiah plunges
Indonesia is forced to abandon its fixed exchange rate against the dollar - and the rupiah drops dramatically on currency markets.
October 8, 1997: Indonesia asks IMF for assistance
Indonesia is forced to ask the IMF for assistance to stablise its currency and restore the confidence of international markets. It eventually receives nearly $40 billion.
October 20-23, 1997: Hong Kong stock market panics
The Hong Kong stock market loses one quarter of its value in four days over fears that the Hong Kong dollar will not be able to maintain its fixed peg to the US dollar.
October 27, 1997: Panic spreads to Western stock markets
The Dow Jones Industrial Average plunges 554 points - its largest one-day loss - on fears that the Asian crisis will hit US companies.
November 17, 1997: Korean won collapses
South Korea abandons the defense of the won, which collapses to 1,000 to the dollar; the government calls for IMF assistance.
December 4, 1997: Korea gets IMF bail-out
The IMF gives approval for its largest bail-out yet, a $21 billion loan as part of a package that eventually totals $60 billion.
January 12, l998: Peregrine goes bust
Peregrine, Hong Kong's largest independent investment bank, goes bankrupt as a result of bad debts to Indonesian companies run by relatives of President Suharto. Stock markets in Hong Kong and China fall.
January 22, 1998: Rupiah falls to lowest level ever
The Indonesian currency reaches an all-time low against the dollar over skepticism about the commitment of the government to reform. The central bank intervenes to pull the currency back from 17,000 to 11,800 to the dollar, but Indonesia suspends debt repayments a few days later.
January 28, l998: South Korea restructures debts
Seoul agrees with private foreign banks the roll-over of $24 billion in short-term credits into longer term loans of 1-3 years.
February 14, 1998: IMF and Indonesia clash
Indonesia's plan for a currency board to stablise the rupiah at a fixed rate draws the ire of the IMF, which threatens to end its financial support. One month's payments are eventually held back.
April 1, 1998: Japan begins liberalising financial markets
Japan begins its "big bang" aimed at opening its financial markets to Western competition. Markets should be "free, fair and global." Yen begins slide against dollar.
May 11, 1998: India nuclear blasts spook markets
India's nuclear tests, and subsequent ones by Pakistan, hit South Asian markets and currencies as the US and Japan impose sanctions.
May 21, 1998: Suharto resigns after riots
The Indonesian government falls after riots sweep through Jakarta and other major cities. The new president, B.J. Habibe, pledges economic and political reform.
June 17, 1998: US intervenes with BOJ to rescue the yen
The US government intervenes with the Bank of Japan in foreign currency markets for the first time to boost the yen, which has fallen to an eight year low against the dollar at ¥146.
June 26, l998: Major Japanese bank merger
The Long Term Credit Bank of Japan, the 22nd largest in the world, is in merger talks with Sumitomo Trust Bank, to stave off a collapse.
July 1, 1998: Nikkei continues to recuperate
During the last four trading days the Nikkei has soared 10% - based on a short-term renewal of confidence.
July 2, 1998: The Japanese yen Plummets Again
After nearly two weeks of strength against the greenback, the Nippon currency falls nearly four yen to 142.
It Ain't Over Till the Fat Lady Sings
Some naïve Asian market observers have been bullishly enthusiastic lately - reflecting mostly the recent strength in the yen, and of course, an impressive 10% gain in the Nikkei. Contrary to this misplaced confidence, this analyst feels the Asian Contagion is going to get a lot worse before it gets any better.
The crux of the Asian Meltdown has NOT been resolved: Burgeoning Debt, Growing Unemployment, Loss of Confidence by the Populace in their Governments and Financial Institutions, Increasing Inventory Levels, Diminished Consumption by the Public and the relentlessly Mounting Interest Payments.
The recent strength in the Asian stock markets and currencies will eventually be recognized as just a respite of the inevitable. Asian currencies will resume their depreciation against the greenback, while their stock prices will continue to plummet.
Before we all hear the "Fat Lady Sing," heralding the ultimate bottom, Asian stock markets and their currencies will most likely suffer massive washouts. Neither Greenspan, nor Rubin, nor Hashimoto nor the joint-Trio can jawbone a lasting solution to the Asian Contagion. Were the Asian Crisis already over, the U.S. Secretary of the Treasury would NOT have uncharacteristically warned : The situation in Asia is serious…VERY SERIOUS!
What has taken years to degenerate, will demand much more time to rectify and make sound again. Unlike a rubber ball, investor confidence in the Asian arena will require much time to bounce back. The Asian Crisis continues... and ominously ripples westward.
As Asia goes... so goes the West.
4 July 1998
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