R.Lui:
If you may like to hear my understanding of the Asian problem, you may read the following!
Asian countries leveraged too much. A typical company in SE Asia has a leverage of 4:1 (debt:equity) as compared to a typical American company's leverage of 1:1. The companies (especially Japanese, Korean and Taiwanese) wanted to get market share at any cost, i.e., without looking at profitability or how to pay back the debt. Banks borrowed heavily and lent to these companies, who ultimately could not pay back the loans as promised. Banks, who had borrowed overseas and lent to these companies, lost their capital while protecting their domestic customeres under the governmental influence. As soon as this was recognized, SE Asian banks sold as much of their local currencies for US$ as possible to not default overseas. This resulted in a fall in the value of local currencies. In other words, there was a panic and run on local currencies, precipitating a slump in their values. The SE Asian Central Banks are hardly independent of their governments and have no rational policy in place to circumvent such runs or to control banks' borrowing for excessively leveraged companies. The cheap foreign capital made everything look easy and no one had an inkling that such a run could take place. Quite frankly, what is missing in the SE Asian countries is: competent professional financial managers manning independently operating banks, supervised by a thoroughly independent and competent Central Bank.
Sankar |
