Asia's Debt Crisis: Echoes of Bailouts Past

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.

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