Asia's Debt Crisis: Echoes of Bailouts Past
So far US is largely untouched, but South Korea and Japan struggle een there! Done that!
American economists see a bit of dj vu in Asia's financial crisis.Skip to next paragraph
Subscribe Today to the Monitor
That's because banking problems behind the noise in the foreign financial markets remind them of home - specifically the three bouts of financial troubles in the 1980s and '90s. The United States weathered those banking crises, and analysts expect Asia to struggle through its present crisis with limited damage.
"There is nothing really new about the situation in Japan and Korea," says Harvard University economist Richard Cooper. "They have a banking system burdened with a lot of nonperforming loans" - loans that are not being serviced with payments of interest or principal.
Federal Reserve Chairman Alan Greenspan and other US officials assure stock investors that the American economy is in good shape. So don't panic when Asian markets tumble.
They also are working with the International Monetary Fund (IMF) to contain Asia's financial fires. Last Friday, South Korea became the latest nation to ask the IMF for help to restore confidence in its currency and financial system. It got $20 billion quickly. It is expected to need a rescue package exceeding $60 billion.
At a summit last week of Asia-Pacific Economic Cooperation leaders in Vancouver that included President Clinton, the government ministers issued a declaration Saturday telling investors to maintain their confidence in the Asian region.
So far, all is well in the US. The Dow Jones Industrial Average bounced back last Wednesday above where it stood before the Gray Monday plunge on Oct. 27. Asian currency devaluations have cut import prices for Americans, reducing US inflation.
But Japan - which takes 12 percent of American exports - is in trouble. Korea's crisis adds modestly to its plight, hurting exports. And Yamaichi Securities, a big Japanese brokerage house, appears ready to close its doors tomorrow.
Japan's revival from an extended slump depends on dealing adequately with bad loans stemming from the collapse in prices of stocks in 1989 and real estate in 1991. Japan's banks, struggling with those loans, are tight-fisted lenders. That slows the recovery.
Last Monday, the Nikkei average of 225 leading shares surged almost 8 percent on news that Japan's 10th-largest commercial bank, Hokkaido Takushoku Bank, was being allowed to fail. It was seen as a sign the government is finally tackling the banking problem.
In the next few days, the market went up or down depending on whether Prime Minister Ryutaro Hashimoto was reported to be considering using public funds to clean up the bad loan mess, or whether he was denying that possibility.
"It tells me that the banking problem is more massive than I thought," says Chen Zhao, an economist at BCA China Analyst, a Montreal publication.
South Korea, another major trader with the US, tried last Wednesday to prop up its currency, the won. It tripled to $10 billion a special fund to write off some of the $26 billion in bad loans held by banks. It sought help from the US and Japan, but US officials suggested Korea should seek a bailout from the IMF in exchange for reforms.
Further, the government announced it will force some mergers among debt-ridden merchant banks.
The action wasn't enough to stop the decline in the won - 10 percent a day.
In Thailand and Malaysia, collapsing real estate prices hurt the banks. Operation of some 58 financial institutions was suspended in Thailand last summer. The government plans to shut, merge, or fix them. But political chaos hasn't helped.
In Indonesia, the regime of President Suharto has agreed to shut down some broken banks as part of a reform deal to get a $40 billion IMF loan package.
The vital need in South Korea and in smaller Asian countries is to prevent a "financial meltdown," says David DeRosa, a finance expert at Yale's School of Management in New Haven, Conn.
Banks must be allowed to fail or merge to clean up the mess and allow a new start, he says.
"Nothing will succeed like failure," Mr. DeRosa says.
Failure will wipe out the value of bank shares. The depositors and the national system of payments must be protected.
Yet this process is politically difficult in Asia, as it was in the US. Politicians don't like - because voters don't always understand - using public funds to bail out private institutions.
Yet big bailouts there have been.
After its 1995 peso crisis, Mexico aided banks to the tune of 8 percent of total national output, notes William Cline, an economist at the Institute of International Finance in Washington.
In the 1980s, US savings-and-loan institutions got into trouble after interest rates were deregulated. Cleaning that up cost taxpayers billions as the government sold failed-thrift assets at a loss.
In 1982, Mexico announced it could not serve its massive loans from banks in industrial nations. That launched a developing-country debt crisis that took the rest of the decade to be resolved. Governments were much involved, though losses were primarily taken by the banks.
Then in the 1990s, US banks got stuck again with bad loans, this time on high-priced real estate. When property prices fell, the loans went bad and many banks were merged out of existence.
Strapped banks were stringent in their lending practices, slowing the recovery from the 1990-91 recession.
Now, says DeRosa, Asians will find out if their bank regulatory agencies are able to protect them from losses as they are supposed to.
China, too, has a banking problem. State-run banks have been forced by the government to lend money to failing state-owned companies. They have little hope of recovering all these loans, said to amount to more than $200 billion.
Last week China's top leaders announced a decision to overhaul the financial sector in the next three years.