May 26, 2010

Asia: Lessons in crisis recovery

Filed under: Uncategorized — ktetaichinh @ 4:00 am
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The Asian crisis of the late 1990s was triggered when Thailand’s currency, the bhat, went into free-fall in the summer of 1997. Like wildfire, the mass exodus of foreign capital from Thailand’s markets spread to other parts of the region, most notably Indonesia and South Korea, but also Hong Kong, Malaysia, Laos, Vietnam and the Philippines.

Even Japan, Asia Pacific’s economic powerhouse at the time, saw its currency slump and its stock markets and other asset prices tumble.

With several Asian currencies reeling, the crisis exacerbated the region’s growing debt burden. Foreign debt-to-GDP ratios in many countries shot up beyond 180% during the crisis and swooning local currencies were making it increasingly difficult for corporations to service the debt.

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Yung Chul Park and Jong-Wha Lee, economists with the U.S. National Bureau of Economic Research, said at the time the East Asian financial crisis was characterized not only by its severity, but also by how quickly these countries bounced back.

Mr. Park and Mr. Lee argued that the crisis was caused by too much short-term capital flowing into weak and under-supervised financial systems. Once liquidity returned to the market, crisis countries recovered quickly. aided by “large real [currency] depreciation, expansionary monetary and fiscal policy, and an improvement in the global economic environment,” they argued.

More than that, they said, these countries still possessed the same strong fundamentals that had fuelled double-digit growth pre-crisis, namely “high rates of saving, good human resources, trade openness and maintenance of good institutions.”

Just as Thailand was the canary in the coal mine 12 years ago, investors are predicting the sovereign debt problems that have left Greece on the brink of default are not isolated. Fears that neighbouring countries such as Spain, Portugal and Italy may also collapse in a mountain of debt led to global equity markets correcting 10% this month, and the euro is trading at US$1.22, its lowest level in four years.

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“In Greece, there is resistance to restructuring with violent riots in the street. If this is the example, there is much more resistance to change than was the case in Asia,” said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.

While protests also marked the IMF’s intervention in the Asian crisis, Mr. Rosenberg said governments and citizens were relatively quick to adapt to measures prescribed to them.

“They went through the proverbial wringer and lived through a depression that Americans will only end up reading about,” he said. “It’s a different culture. It’s all about thrift and not entitlement.”

Mr. Rosenberg questions the resolve of some European countries to cut back on public-sector spending, including heavy reductions in wages and retirement benefits. As a result, he sees a much slower recovery from the Greece crisis, one that could mimic Japan’s stagnant economic performance over the past 20 years.

“In the aftermath of a credit collapse, what you don’t get in a peak-to-trough decline you pay for in duration. Japan is the extreme case in point.”

Read more: goal, Mr. Hoguet said, was to promote greater reliance on domestic capital markets. In the end, the restructuring helped fuel an export-led recovery.

“When exchange rates fell sharply, it made the cost of labour cheaper, making those economies more competitive,” he said.

In addition to restructuring their debts, Mr. Hoguet said it is essential that Greece and other southern European countries render their economies more flexible and more competitive against Germany and France.

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In the case of Greece, that would require a 25% reduction in real wages, but as part of the European monetary union, Greece cannot do that simply by devaluing their own local currency.

“That’s part of the conundrum,” he said. “To stabilize expectations, you have to convince people things are going to get better,” Mr. Hoguet said.

Until that happens, it seems investors have a right to be nervous for some time to come.

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