|ASIAN ECONOMIC TURMOIL|
The Fallout of the Yamaichi Collapse
December 8, 1997
Return to this forum's introduction.
Questions answered in this forum:
Won't this have a negative impact on the U.S. economy? What signs will indicate improvement? Why does Singapore seem more stable? What is the IMF and how does it work? How would an Asian Monetary Fund affect economic and political dynamics?
Donald Gillies of Phoenix, AZ asks:
What signs should we look for to indicate that the Asian crisis will spread into an overseas collapse? What signs should we look for to indicate these economies are turning the corner on recovery ?
Arthur Alexander responds:
Many Asian banks have bad loans that cannot be repaid. The properties and projects that these loans originally financed are not earning sufficient returns to pay back the interest and principal. This inability to cover loan requirements means that the economic value of these properties and projects are lower than the numbers on the banks' books. We will know that the crises are being resolved when the properties are revalued at market value and when the loans are revalued on the banking sector's books.
Such a resolution implies that many companies will go bankrupt as their assets are reappraised by the market. The loans will also have to be revalued and many banks are also likely to enter bankruptcy. If the properties are sold off expeditiously to new owners at economically appropriate market prices, they can be used productively and earn acceptable returns.
In order to maintain public faith in the financial system and to encourage the high savings rates that have been the chief engines for growth in the Asian fast growers, the depositors in failed banks will have to be paid off. Protection of depositors is usually also a political necessity because of the large number of people that are potentially at risk. The political question in each country is whether other losers will also be paid off. The cost to the budget will go up astronomically if others, such as shareholders and creditors, are also protected.
The signs for whether these countries are turning the corner are the speed of closing down or repackaging failed enterprises, revaluing assets, marketizing prices, and reallocating resources. If the same old banks continue to support the same old failed companies, recovery will be indefinitely delayed.
Will the crisis spread? Each of the countries that have been hit hard had a large amount of underlying rot. The wind that shook the tree and knocked down the bad apples did not create the rot in the first place. The competitive relations among Asian and non-Asian countries is changing because of drastically revised exchange rates and foreign bank exposures to bad loans. If there is rot in a domestic economy, these external forces may knock down some more bad apples, but it is in the domestic economy that we should be looking for spread of the Asian disease.
Nariman Behravesh responds:An early indication of the so-called contagion effect would be pressure on the currencies and stock markets of other emerging countries. Some of this has already happened, with Brazil being among the hardest hit countries. However, so far, the impact elsewhere has been relatively limited. If Japan were to have a financial meltdown, then all bets are off.
The key to recovery in the Asian countries hardest hit by the crisis is the speed with which they tackle their structural problems (industrial overcapacity and banking problems). If they deal with these problems aggressively, as Mexico did in 1995, then they will be able to recover quickly.
Next: Why does Singapore seem more stable?