By Chow Wei Cheng
There are two misnomers regarding the Asian currency crisis. The first is that it is an Asian crisis and the second that it is a currency crisis. This is a global, not a regional, crisis. It is not a currency crisis but an economic crisis that has revealed the limited nature of the newly industrialising countries' [NICs] development.
The line coming from the International Monetary Fund, US President Bill Clinton and Federal Reserve chairperson Alan Greenspan is that these problems stem from protection of the local market and government intervention.
From the press, particularly in Australia, there has also been a racist jibe that lays the blame on "Asian cronyism" and the "Asian way of doing business": riddled with corruption, nepotism and favours for mates. Supposedly, business is a lot cleaner in the west.
Appearing to be on the opposite side of the spectrum is Malaysian Prime Minister Mahathir, playing the radical populist card. He denounced currency speculators as "morons", "criminals" and "wild beasts" for causing the crisis and called free currency trade "unnecessary, unproductive, immoral".
This debate is really centred on who will control whom and the extent of such control, not the efficacy of markets or the worth of speculation. Imperialism is using the crisis as a means to move in and take control, and the local relatively independent capitalists are resisting as best their economies allow.
Dollar peg
Many Asian economies had pegged their currencies to the US dollar or maintained a currency within a tight range that simulates a peg. During the growth period, the peg ensured that investment and loans had no prospect of losing value by the currency depreciating against the dollar. This encouraged foreign investment.
However, the peg also implied a relationship between domestic inflation and interest rates and US inflation and interest rates.
Domestic interest rates were significantly higher in the NICs because inflation and money supply growth pumped up the domestic economy. This made foreign borrowing disproportionately cheaper than domestic borrowing. Hence the amount of foreign debt spiralled.
With high rates of growth and such cheap finance, the Asian borrower would just have to keep pace with inflation, something not hard to do, to make a large profit. This clearly encourages over-investment, massive credit growth and speculation in assets such as property and shares.
There are two key issues. First, the peg may break if the economy is weakening and the country does not have sufficient reserves to back its currency. Second, the spiralling debt becomes increasingly difficult to repay if the economy weakens.
Excess capacity associated with over-investment develops, export markets to imperialist countries slow, wages start to rise due to a growing militancy in the working class, and profits are limited to cyclical or low margin industries.
As this occurs, the profitability of local firms weakens, and the huge debt burden starts to become a noose. The NIC stock market crashes indicated the lack of confidence of investors in the profit outlook of these firms and the increased probability of bankruptcy.
Local banks were the facilitators for financing arrangements. They borrowed massive amounts from foreign banks (mainly Japanese) and loaned into the local markets. Debt was around 150% of GDP in many "tigers".
The banks, in the era of growth, lent recklessly to firms investing in industries which had no future, in firms that had poor earnings and a poor export outlook, and in property and share market speculation. Poor lending and investment decisions were being forgiven by booming growth and inflation.
When growth slowed, these banks, particularly in Korea and Thailand, did not have sufficient reserves to weather the bad loans on their books. As a result, many banks became insolvent and had either to be shut down or bailed out by the government.
Bad loans in the region are estimated to be around 15-20% of total loan books, compared to about 1% in the US. Thailand and Korea are estimated by Jardine Fleming to have non-performing loans of around 20% of GDP.
Vicious circles
All banks will have some bad loans. As this hits their profitability, they will squeeze their remaining customers for repayments and increased interest.
This may force more bankruptcies. Bank failures and large bankruptcies can spread throughout the economy, throwing it into recession. Corporate collapses worsen the plight for banks, which in turn worsens the plight for corporations.
Dropping pegged exchange rates and letting the currency depreciate makes foreign debt larger in local currency terms and servicing that debt more difficult, further exacerbating the crisis. The loans, because of the peg, were unhedged: there was no insurance against a depreciation. UBS Securities estimates that an additional ¥5 trillion could be owed to Japan due to the depreciations.
Meanwhile, the outflow of portfolio investment leads to increased selling pressure on the currency, exacerbating depreciation.
The crash of speculative assets such as overvalued property and shares makes it harder to repay loans and may force more into bankruptcy.
The government, to stem the depreciation, may raise domestic interest rates, but this further decreases the value of property and shares.
Ultimately, the currency crisis and stock market collapses represent investors making an assessment about the poor state of these economies and acting accordingly. The cause is economic, not subjective. The crisis has its origins in the weak place of these economies in the world economy and overproduction in the world economy.
Japan
Japan was the source of 60% of the whole region's finance; it has invested over US$200 billion in Asia. Japan accounts for US$37.5 billion of Thailand's debt of US$70 billion, and for US$22 of Indonesia's US$55 billion foreign debt.
Japan's economy is also highly geared to the crisis countries. Over 44% of Japan's exports rely on south-east Asia, and exports have been the only source of growth for Japan.
Nomura Securities forecasts 0-0.2% growth for Japan next year. Japan's exposure to bad debts caused the collapse of Yamaichi Securities and Sanyo Securities, the fourth and seventh largest brokers. Hokkaido Tokushoku, the 11th largest bank, also collapsed last year.
The government stated that loans of ¥30 trillion (A$350 billion) are non-performing. Moody's believes that at least nine of 49 major banks will need some form of government assistance.
Reserves of the banks have been almost wiped out. Between March and November 1997 the reserves of the top 20 banks were reduced from ¥80.3 trillion to ¥19.2 trillion.
A severe banking and financial crisis in Japan would have much more severe effects for the global economy than the immediate fallout from the NICs.
[Excerpted from a talk to the "150 Years of the Communist Manifesto" conference held in Sydney in early January.]