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Strategies & Market Trends : Asia Forum

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To: Jay Scott who wrote (6552)	9/21/1998 8:07:00 PM
From: Henry Volquardsen	Read Replies (1) of 9980

Jay, Having managed a regional treasury for a money center bank, I think the banks would be happy lend in local currency if in exchange they get the ability to raise local currency deposits. Give them the ability to run matched funding books and they will very happy. What the real question here is how do you develop a local currency capital market in these countries. A structure that will provide flexibility in maturities and structures for both lenders and borrowers. The money center banks would have no problem with that, free capital markets are their natural environment and they will function very well as long as they have freedom to move and manage. Big insurance companies will also be allies. Give them the ability to offer local currency product and they will have a natural interest in being long term lenders. The problem, interestingly enough, is getting the local borrowers to help with this development. The biggest hurdle is getting the local businesses to borrow at long term fixed rates in their own currency. The resistance centers around the fact that local rates are generally higher than dollar rates. I have personally tried to get this side of the market developed. I've tried to convince local borrowers that borrowing term money at high local rates made sense because they couldn't tolerate the risk of having dollar debt should the currency devalue. They never bit. They resist for two reasons. 1) during the period in which the government is holding the exchange rates fixed they are at a big competitive disadvantage if they have high rate local debt. 2) they all think they are clued in enough to jump out of dollars if there is a risk of devaluation (they almost never are). I believe you won't get them to exercise this kind of prudence until it is very clear that the exchange rate is freely floating and the government will not interfere. Either that or completely abandon a local currency and use a currency board to substitute the discipline of a larger more developed economy. That is the peg that makes more sense to me than gold. Henry

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