Friday, September 19, 2008

The 1997 Aisan financial meltdown: Once was enough

Asian policymakers responding to US meltdown downplay concern about a repeat of 1997 crisis, reports Shamim Adam

Asian policymakers from Japan to Thailand have downplayed concern that the demise of Lehman Brothers and the crisis at American International Group will trigger a repeat of the 1997 meltdown in the region.

"I don't think a financial crisis will take place in Asia," Bank of Japan governor Masaaki Shirakawa said in Tokyo yesterday. "The situation of Asian economies is different from the time of the 1997-98 crisis. They have plenty of foreign reserves."

The Asian financial crisis, set off by plunging currencies, led to the collapse of companies as they buckled under billions of dollars of debt, forcing Indonesia, Thailand and South Korea to turn to the International Monetary Fund for bailouts. The region has since accumulated more than $3.3 trillion in reserves, about half of the global total.

"It's clear that Asia isn't going to have an exchange rate or economic crisis," said Venkatraman Anantha-Nageswaran, head of research at Bank Julius Baer & Co Ltd in Singapore. "It won't be immune to the global slowdown, but it isn't as vulnerable."

Lehman's filing for bankruptcy and the US government's $85 billion bailout of AIG, the world's biggest insurer, sparked concern that the credit crisis may worsen and cause more financial failures. Still, the exposure of Asian banks to Lehman's debt is relatively low and may not cause damage to financial systems, analysts said.

Potential losses of Japanese banks "seem to be within the levels that can be covered by their profits", Mr Shirakawa said. "There's no concern that the latest events will threaten the stability of Japan's financial system."

Japan's banks and insurers, including Mitsubishi UFJ Financial Group, have announced a combined 245 billion yen ($2.3 billion) in potential losses tied to the collapse of Lehman.

"Japanese banks have the largest absolute exposure to Lehman, but nonetheless they generally appear manageable relative to earnings and balance-sheet size," said Scott Wilson, head of Asian credit research at Royal Bank of Scotland in Singapore.

Thailand, which triggered the Asian financial crisis with the devaluation of the baht in July 1997, faces no shortage of capital, central bank governor Tarisa Watanagase said on Thursday, adding that the central bank was ready to inject funds if needed.

"Capital outflows may continue in line with the region as US companies repatriate funds," Dr Tarisa said. "But it may be short term because the Fed had already taken action, so the problems should be solved faster and the stock market will return to normal."

During the 1997 financial crisis, Indonesia, Thailand and South Korea spent most of their reserves attempting to prop up their exchange rates after investors abandoned them. The IMF arranged more than $100 billion of loans to the three countries after their currencies collapsed.

South Korea may use its foreign reserves to provide liquidity to the financial system when needed, Vice Finance Minister Kim Dong Soo said.

Reserve Bank of Australia Governor Glenn Stevens said his country's financial system "is weathering the storm well" and corporate balance sheets are "very strong", even if there are some exceptions involving companies with higher leverage and complexity.

In the Philippines, Finance Secretary Gary Teves said any effect on its markets was expected to be "temporary."

"Our domestic financial markets are fairly stable and should be able to withstand these external shocks," he said. "The country's resilience and stronger macroeconomic fundamentals due to the fiscal and economic reforms that we have been undertaking" may attract investors when markets calm down.

Indonesia's economy can weather the credit crisis that has hit the US, President Susilo Bambang Yudhoyono said.

"We shouldn't panic as if this crisis will lead to a situation such as in 1997, because now our fundamentals are good and well managed," Mr Yudhoyono said.

Still, slowing demand for goods from Asia's biggest markets will weigh on the region's growth and economic prospects. The euro-area economy contracted 0.2% last quarter, while the US has lost 605,000 jobs this year.

"Asia has the benefit of not being as exposed to the problems in the US, and Asian banks are generally in good shape," said Shane Oliver, chief economist at AMP Capital Investors in Sydney. "The bottom line is that the credit crunch is deflationary and it's going to be negative for economic activity." BLOOMBERG NEWS

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