This is from this week's AsiaWeek:
Indiscriminate Slaughter
The cash crunch must not be allowed to sink sound Asian firms
IMAGINE AN INDONESIAN COMPANY with attractive products, steady customers and well-trained
workers. Following the rupiah's 65% collapse against the dollar, it suddenly finds that its debts have ballooned and bank
credit has dried up. If it cannot cope, market logic dictates that it should fail. Result: jobs will be lost, customers
orphaned, and creditors not repaid.
Certainly, East Asia needs to shake out its crippled financial systems, clean up its huge bad debts and give up on its
hopeless companies. Businesses, banks and governments must also untangle the murky links among them that fed the
crisis and allowed it to fester unnoticed for so long. And the International Monetary Fund and the global financial
community need to help ensure that painful but necessary reforms are carried through. But all the cleaners must also
remember that the purpose of the whole exercise is to create economies where healthy, well-run companies can thrive.
No one benefits when such enterprises are squashed during the mopping up.
A liquidity crisis is threatening to undermine even Asia's best-run businesses. Liquidity is simply the availability of money
to buy goods and services, finance imports and exports, pay wages and so on -- all the myriad things businesses do
every day. It requires a functioning banking system. But now banks are afraid to lend or may not have the cash,
especially foreign currency. So all those things that businesses do are starting to grind to a halt. Thai and Indonesian
executives complain that even profitable ventures cannot obtain financing, threatening their existence. In South Korea,
Finance Minister Lim Chang Yuel estimates that 100 companies have close encounters with insolvency each day because
credit has been reduced to a trickle.
While shaking out Asian financial systems, banks, governments and the IMF should seek ways to ease the effect of the
liquidity crunch so that sound businesses are not swept away with the bad. Ideas have begun to emerge. The decision by
Japanese and Western banks in late December to roll over short-term obligations in Korea for a month prevented
liquidity there from drying up -- at least this month. More rollovers and extensions are needed, not just for Korea but
elsewhere.
A stumbling block has been the way Asia's problem debts are spread across thousands of companies, unlike the 1995
Mexican crisis that was centered on government debt. That makes any initiative harder to implement. One way around
the problem would be to consolidate the private obligations under governments. U.S. bank J.P. Morgan recently
suggested that Seoul buy Korean bank debts using funds from bond issues, turning a slew of short-term debts into a
unified long-term obligation. While other creditors have resisted such an idea, something along those lines must be
worked out soon to keep the weak but viable alive.
After all, the ultimate resolution of the debt problem requires debtor companies to generate income in order to pay back
what they borrowed. As in the past, international lenders are using their clout to make countries adopt IMF austerity
policies designed to conserve foreign exchange needed to pay for imports and loans. But that approach can work against
the lenders by choking off the economic growth needed to generate income. In the scramble among lenders to call in
their chits, a few here and there may get their money back. But the great majority of the debt will be cast in doubt if an
economy slips into depression due to a fatal liquidity drought.
Care must be taken, however, not to bail out failed debtors. Resources are limited and governments should adopt a
three-pronged approach -- asking the walking wounded to take care of themselves, letting the terminally ill go, and
assisting those capable of surviving. That will not be easy, since many of the most-indebted companies got that way while
exploiting official ties or corrupt practices to expand. They must not be allowed to use the same means to gain a new
lease on life. Letting the failures go under pays the additional bonus of conserving precious foreign exchange. After all,
the bankrupt by definition do not repay all their loans.
That leads to a difficult question: Should the foreign creditors of Asian bankrupts be repaid by governments? It should be
remembered that the loans were market transactions at interest rates taking account of all risks, including default. If
currency markets had not been roiled, neither governments nor the IMF would have intervened. Now, because the IMF
is involved and nations are worried about market confidence, foreign creditors who lent money to bankrupt borrowers
stand a good chance of repayment in full if governments take over the debt. This could be a mistake. Like banks in Asia,
foreign creditors should live by the rules of the market. The IMF, Asian governments and the world financial community
should decide how best that lesson can be taught.
Meanwhile, all efforts should be made to help solid companies in Asia operate through the cash crunch. Lenders as well
as borrowers will have to display some flexibility and yield a little. But the sooner businesses and economies are growing
again, the sooner everybody -- borrowers and lenders -- will be back to making money. |
