Wall Street Journal - 10/07/98
By JATHON SAPSFORD and DARREN MCDERMOTT Staff Reporters of THE WALL STREET JOURNAL
The U.S. is only now getting a little taste of the credit shortage that has soured business in Asia for a year.
But while the credit crunches in the West and the East share some common roots, Asia's may eventually prove more intractable.
For one thing, a recovery in Asia could take longer because of the low levels of capital at Japanese banks, the region's biggest. For
another, Asia's crunch may feel more acute to its victims: Borrowers are hurting now because they were used to getting more loans
at easier terms than businesses in other regions, particularly the West.
The effects of the Asian credit crunch are everywhere. Last week, the Electricity Generating Authority of Thailand, the state-owned
operator of the national power grid, had trouble raising funds through a syndicated borrowing to be announced Wednesday -- even
though the Thai government and the World Bank offered to guarantee the bond. In Malaysia this summer, communications company
Time Engineering Bhd. and financial-services firm MBF Holdings Bhd. filed for bankruptcy protection from creditors who are
demanding the companies return money or cough up collateral. In Indonesia, the central bank had to spend $11.7 billion to keep the
banking system functioning, but now can't get its money back. Meanwhile, in Japan, 532 businesses have gone bust so far this
year because of the credit squeeze.
Easy Lending Stops
A lack of credit has hammered stock and property markets from Seoul to Singapore. Companies like Hanbo Steel Industry Co. and
Kia Motors Corp., once virtually guaranteed by the South Korean government, sought protection from creditors after banks were
forced to cut them off.
As credit squeezes go, economists say, Asia's is the worst-case scenario. "It's a massive credit crunch," said Richard Koo, senior
economist at Nomura Research Institute in Tokyo. "It's affecting Japan, and it's affecting Asia very, very badly."
Only two years ago, Asia was awash in credit. Outstanding bank loans in South Korea, for example, were double the country's
annual economic output in 1996 -- three times the level of lending typical in Western countries. Banks were competing fiercely to
lend to businesses in Thailand and Indonesia. Lending competition was so stiff that by the time the region's currency crisis and
financial turmoil hit in mid-1997, loan margins in Southeast Asia were often 0.2 percentage point above funding costs -- only
one-tenth of what they were in 1993.
"It was like continuously pumping hot air into a balloon," said Singapore's prime minister, Goh Chok Tong, in a recent speech.
"When creditors and investors realized that profitability margins and returns weren't forthcoming, the panic started. The balloon
burst."
Japan as Destabilizing Factor
It has only gotten worse. Asian countries tend to rely heavily on international lending. But that money is drying up fast. The Bank for
International Settlements said that in the first three months of 1998, cross-border lending to Asian countries, excluding Japan, fell
by $121 billion, or 10%. At that pace, nearly half of the $1 trillion in Asia's outstanding cross-border lending will disappear by the
end of 1998.
The depth of the funding shortage varies from country to country. But the borrowers of Asia share one element: They say the sudden
withdrawal of Japanese funding over the past year has been the biggest destabilizing factor. Japan is the one Asian country rich
enough to get by without foreign money. But the collapse of Japan's real-estate market in the early 1990s left at least $600 billion in
bad loans on bank books.
Constant write-offs of bad loans over the past six years have eroded Japanese bank capital. Regulators were forced to allow banks
to switch to an easier accounting method this year, allowing banks to count more stock holdings toward capital. ING Barings
Securities figures that had regulators not done so only two of Japan's top 19 banks would have met international rules, which require
banks to hold capital equal to 8% of their loans, when the fiscal half year closed on Sept. 30.
Japan's Global Lending Falls
But Japan's lenders are still calling in their loans, not only from Asia but from the entire world. BIS statistics show that Japanese
banks reduced global lending by $244.3 billion in the first quarter of 1998. And that was before the worst of Japan's financial turmoil
hit. The Nikkei 225 stock index has since lost more than a quarter of its value, and each further fall in the Nikkei puts more pressure
on banks to slow lending both at home and abroad.
"The nightmare of a global financial panic, emanating from Japan, is becoming a reality," warned the nation's leading economic
journal, the Nihon Keizai Shimbun, in an extremely rare editorial at the top of its front page Wednesday.
A plan to recapitalize Japan's banks with public money collapsed when the opposition demanded the government put tougher
conditions on its use. The two sides have yet to compromise. Meantime, a government fund of loans for small businesses is slow to
get to those who need it. "They give away loans in a lottery." said Yoshie Moriie, the owner of Joy Kikaku KK, a property company,
to whom private banks won't lend anymore. "I've gone twice now, and drawn the short straw each time."
Not all of Asia is suffering from a credit crunch. China, hoping to reflate its economy and steer clear of the economic crisis creeping
across the globe, has embarked on a spending spree financed through government bonds, bank loans and equity sales. The
government has also cut interest rates five times since April 1996. So far, banks are still lending.
But with bankers elsewhere extending few new loans, governments don't have many solutions. Some countries, such as Indonesia
and Thailand, have effectively nationalized large portions of the banking system, while others, such as Malaysia, have exercised
credit controls to keep money from flowing out of the system. But the greatest hopes for recovery hinge on Japan's reviving its own
banking system and its economy.
--Erik Guyot in Hong Kong and Craig S. Smith in Shanghai contributed to this article. |
