Above is another interesting segment aired last night on ABC’s The Business, examining whether Asia is on the brink of another financial crisis. According to the segment:
- $US85 billion of funds per month have been pumped into markets via the Federal Reserve’s quantitative easing (QE) program, and with markets now fearing that the Fed will wind-down QE (“tapering”), there has been a stampede of capital out of emerging markets, especially in Asia.
- India is arguably the biggest concern. It is the ninth biggest economy in the world and its economy is under siege on multiple fronts. It’s currency has crashed and its sovereign debt is on the brink of being downgraded to “junk” status.
But Stephen Schwartz, chief Asia economist for BBVA and a former IMF staffer covering the region, does not believe that history is repeating itself as Asian economies are in far better shape than in the lead-up to the 1997-98 crisis. From the Wall Street Journal:
So is this the 1997-98 Asian Financial Crisis redux?
For one economist who lived through the crisis, history isn’t repeating itself just yet.
“If the Asian financial crisis was a 10. I’d still be on a 3. My instinct is this is a short term portfolio adjustment that will pass,” says Stephen Schwartz, chief Asia economist for BBVA. He saw the Asian financial crisis up close as an International Monetary Fund staffer covering the region, and later lived in Indonesia working for the IMF as Asia licked its wounds during the 2000s.
“These episodes are comparable only in the sense that it was a period of big capital inflows and then outflows. But the underlying conditions are very different from 1997,” he says…
Here are several ways 2013 is different from 1997:
1. Floating exchange rates. Unlike 1997, economies in Asia for the most part don’t maintain currency pegs, which are hard to defend against speculators…
2. Foreign reserves. The war chests central banks hold are substantially larger than 1997…
3. Transparency. Back in 1997, Thai authorities didn’t disclose $30 billion in bets the country had made in currency forward markets… Today all these countries provide detailed data on reserves, on nonperforming loans in the banking system…
4. Current account balances. The current account measures whether a country needs to attract foreign capital to keep its financial system afloat. Things have deteriorated in this regard for India and Indonesia, and to a lesser extent Thailand and Malaysia. But compared to 1997, the problem is far less wide spread…
5. Foreign debt. This was the killer in the Asian crisis. Companies, banks and governments had borrowed vast sums in dollars, but their revenue was in local currencies. When currencies devalued, companies and banks were unable to pay back the debt. While debt levels have risen the past few years, most of it has been in local currency…
6. Banking reform. In the 1990s, banking supervision was primitive by today’s standards, with money being thrown around at dubious ventures… While there’s still bad lending decisions everywhere, the oversight is much tighter.
Hopefully, the events in Asia won’t have serious “knock on” effects on the global economy.
