Maurice,
does this look like the Asian problem is over?
dougjn, that is kind of why I am very gun shy about adding to QCOM or any other positions for now.
Ramsey
Monday April 20 1998
Cost of finance-sector
bailouts double
forecasts, Barclays
warns
SHEEL KOHLI in London
Governments have severely underestimated the cost
of bailing out Asia's crippled financial systems,
and the true level of damage could be double
present forecasts, Barclays Capital, the debt
markets arm of Britain's Barclays Bank, warns in a
report today.
It said the economic turmoil in Indonesia in
particular had become so severe that a further
depreciation of the rupiah could not be ruled out.
Non-performing loans (NPLs) in the worst-hit Asian
economies could be up to half of gross domestic
product, according to Barclays Capital.
In stark comparison to Mexico's 1994-95 banking
crisis, where total fiscal, liquidity and foreign
exchange subsidy costs is at present 14 per cent of
gross domestic product, the true cost of
Indonesia's financial sector bailout is likely to be
at least double the 15 per cent of GDP now
expressed.
Barclays Capital said that during the Latin
American "tequila crisis" NPLs peaked at about 9
per cent of all loans in Brazil, 11 per cent in
Mexico, and 17 per cent in Venezuela. In the
Scandinavian banking crisis of the early 1990s,
NPLs peaked at 11 per cent in Sweden and 9 per
cent in Finland.
"In contrast, NPLs in Indonesia could peak around
75 per cent by the end of this year," Barclays said.
"In Korea, a level above 40 per cent is likely, while
in Thailand and Malaysia, a figure significantly
above 30 per cent is expected.
"Given the high degree of leverage in Asian
economies, these NPLs are even more sizeable
when seen as a percentage of GDP. In these four
Asian countries NPLs will conservatively peak at
between 35-50 per cent of GDP."
In Indonesia, Barclays Capital said the 80 trillion
rupiah (about HK$75.5 billion) already pumped
into the banking sector by the central bank
amounted to about 12.7 per cent of GDP, and more
support would be needed.
Extra funds to help recapitalise banks and reduce
NPLs would be required, which would take
liquidity and recapitalisation support easily above
30 per cent of GDP, without the potential sizeable
foreign exchange cost of guaranteeing foreign
loans.
The bank said such reasoning for Indonesia
implied pro-cyclical fiscal tightening for several
years, slowing growth, increasing corporate credit
risk, and depressed local asset markets.
"With domestic demand set to remain sluggish over
the coming years, a competitive currency policy
will inevitably have to be followed," it said.
Such trends equally applied to Malaysia, Thailand
and Korea, which meant the total cost of the
banking sector bailout would exceed 15 per cent
of GDP.
In Malaysia, official liquidity support to the
banking sector already accounts for 10 per cent of
GDP, while in Thailand it is 12 per cent of GDP.
The cost of a banking crisis is expressed most
obviously in foregone economic growth, where risk
aversion in banks coincides with domestic liquidity
tightening, which results in reduced lending.
Another cost is in fiscal and monetary terms as
authorities try to prevent systemic risk, through
direct liquidity injections, exchange-rate subsidies
on foreign debt repayments, and buying out NPLs.
Such measures were often inflationary, as they
meant creating extra liquidity. They also served to
destabilise the currency and create higher real
interest rates.
Methods to bail out a banking sector included
increasing government spending on bank support,
but would mean diverting spending from other
areas.
Such measures were usually insufficient, Barclays
said, and only increased budget deficits. |
