Sunday, June 10, 2018

This is a Test of Asia's Emergency System

A decade after the Asian financial crisis, countries in the region now have the (admittedly unwelcome chance) to test whether the preparations they have made during the intervening years have bulked up their defence mechanisms to withstand the "animal spirits" unleashed by periodic dislocations, this time the US-led subprime crisis. Let us begin with South Korea, a country strongly beset the last time around that was forced to borrow from the IMF as lender of last resort. Although its president believes the country's larger firms are now "action-ready" come what may, the traditionally more interwoven role of the "development state" is still there as the government claims that it stands ready to assist smaller firms which may come under duress:

South Korean President Lee Myung Bak urged officials to take ``immediate and active'' steps to protect against fallout from the global credit squeeze, including aid to any small companies facing cash shortages.

``Most recently, the local and overseas financial situation has stabilized,'' Lee was quoted by his spokesman as saying in a meeting with ministers and aides in Seoul today. Still, further unexpected events may arise ``and have a negative impact on the real economy...''

`Larger companies have some reserves but small and medium- sized companies can go bankrupt, even if they post profit, because of a cash shortage,'' Lee said. ``Financial authorities and related institutions should closely review individual companies' status and prepare countermeasures.''
Bloomberg then goes on to discuss Asia's efforts in general to calm matters down. In particular, China and Thailand are mentioned. China is interesting for while it didn't really get affected by the Asian financial crisis with its very capital controls and pegged currency, Thailand did. Thailand, of course, got the contagion a-rolling. Of particular relevance here is the cushion of a whopping $3.3 trillion piled on in reserves by Asian countries exactly to guard against what is happening now. If that weren't enough, there is a system allowing a total of $83 billion in bilateral swaps through the Chiang Mai Initiative should some of the less reserve-endowed in the region suffer from balance of payments problems:
China and Thailand's central bankers said there has been limited fallout for their banks from the U.S. credit crisis that sent Lehman Brothers Holdings Inc. into bankruptcy and wiped $19 trillion from world stocks in the past year.

``There is not much impact on Asia this time because the problems haven't taken place here,'' Bank of Thailand Governor Tarisa Watanagase told reporters today in Bangkok, where she is hosting a meeting of central bankers. ``So far the impact on Thai banks is very little.''

The region's policy makers this week played down concerns that their countries will be subjected to a meltdown similar to that of 1997, saying contagion from the U.S. turmoil is unlikely to infect their financial systems. Asia's key stock index rebounded yesterday from a three-year low as central banks pumped cash into money markets and the U.S. worked on plans to shore up banks and insurers.

``The direct impact of the subprime crisis is currently limited,'' China central bank Deputy Governor Su Ning said at a financial conference today in Shanghai. Still, ``China will be highly alert to the negative effects of unstable global financial markets and decreasing overseas demand.''

The MSCI Asia Pacific index rose 5.5 percent yesterday and Asian currencies, including the South Korean won, Philippine peso and Indonesia rupiah, advanced. The U.S. government announced plans to purge banks of bad assets and crack down on speculators who drove down shares of financial companies...

Central banks in Japan and Australia pumped $113 billion into money markets this week, joining European and U.S. counterparts in supporting the financial system and attempting to revive confidence. Earlier in the week, China cut interest rates for the first time in six years and allowed most banks to set aside less reserves.

``We central bankers need to be watchful and decisive,'' Tarisa said today. ``We have a swap arrangement between us and standby credit to inject liquidity if problems arise.''

Central banks around the region have boosted cooperation to strengthen their financial markets and set up emergency measures to bail out their systems in case of crisis. Japan, South Korea, China and Asean countries are discussing the creation of a pool of $80 billion in Asian foreign-exchange reserves to be tapped in case the nations need to protect currencies.

The reserve pool is an expansion of a current arrangement that only allows for bilateral currency swaps. It is designed to ensure central banks have enough to shield their currencies from speculative attacks like those that depleted the reserves of some countries during the Asian financial crisis a decade ago.

The region has since accumulated more than $3.3 trillion of reserves, about half of the global total.

Thailand, which triggered the Asian financial crisis with the devaluation of its baht in July 1997, has no shortage of capital and the nation's lenders are ``strong and resilient,'' Tarisa said this week.
Despite being far better placed to withstand contagion, I have no doubt that Asia will be affected by the US-led slowdown. Despite the passage of time, these countries have done little to generate more regional demand as opposed to relying on the West (particularly the US) to buy their stuff. Metaphorically speaking, there are fewer folks willing to buy Asia's flat screen TVs when many Americans are, well, flat broke.

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