Stephen;
<<It looks like a long (and I mean LONG) climb out for the Asian economies.>>
I tend to agree, the news of late just tends to pile up more and more evidence that suggests a full scale depression. (A fact that the tree bark eaters in Indonesia not interesting in the least). It is just this prolongation of negative news that bodes poorly for the world economy. There can be little doubt, IMO, that a region as broad and significant as Asia can slip ponderously into the abyss without deep ramifications for the world. The following from Stratford:
Japanese Cool to Summit, With Very Good Reasons
The Japanese are responding coolly to suggestions, now being made publicly, that a G-7 Summit be held to discuss the international financial crisis. British Prime Minister Tony Blair has suggested that such a summit be convened before the end of the year. However, Japanese Finance Minister Kiichi Miyazawa has now said that a meeting at the ministerial level ought to be held before the summit. AFX quotes Miyazawa as saying that “If Blair and Clinton are discussing the Bretton Woods system, and if they say that they have to create a new system, this is a major issue with considerable significance. In that case, a G7 finance ministers' meeting would not be able to reach any immediate conclusion. I discussed with Sakakibara (Vice Finance Minister) that it may be better to hold a G7 deputy minister's meeting first…If it is a major issue, then deputy ministers must consult.”
With rumors sweeping the world that a major G-7 summit will take place some time in November, the Japanese are responding that a meeting of deputy ministers should be held first. This is a very interesting response. Rather than leaping at the chance for a summit meeting, or asking for finance ministers meeting as a preparatory step, Miyazawa is lengthening the runway to include a deputy ministers meeting. In other words, where the Americans are saying that a summit is needed, the Japanese are coolly responding with “Well, that may be a good idea eventually, but a sub-minister level meeting is really what's needed.” What is going on?
Part of this may be positioning for bargaining. The summit is undoubtedly going to focus on Japan's inability to impose the kind of domestic programs needed to get the Japanese banking problem solved. Japan is going to come under a lot of pressure. Japan does not look forward to that sort of meeting with equanimity. Moreover, if the meeting is to be held, Japan is in the best position if it attends reluctantly, as a favor to the United States. It will not help Japan's bargaining position if it appears too eager and too hungry. Miyazawa is therefore shrewdly positioning Japan to maximum advantage.
But there appears more to this. One of the reasons given by Miyazawa for a deputy ministers meeting is that it is needed to discuss Brazil's economy as well as issues such as short-term fund transactions. Japan has never been overly concerned about Brazil, not really being in a position to provide meaningful assistance. So that brings our attention to his reference to short-term fund transactions. Miyazawa is clearly signaling that some sort of technical problems are going to hold up the summit.
It seems to us that the Japanese are telling the Americans that the re-architecture of Bretton Woods will have to wait until immediate crises are dealt with. The Americans are looking for a comprehensive solution like the savings and loan bailout in the United States that will take months to design, ratify by legislatures and implement. Japan is saying that the problem won't hold together that long. In pointing to Brazil, Japan is focusing attention on the pressing short-term issues that are affecting the international system. Obviously, these are not Brazil's alone. Indeed, they are not primarily Brazil's but Asia's and particularly Japan's.
The cash situation in Japanese banks is becoming untenable. Japanese banks are effectively being locked out of foreign capital markets. The end of the year is approaching. Japanese banks will need to refinance outstanding debts, as will many Japanese companies. These relatively short-term problems will not hold together until a comprehensive solution is unveiled. The American concession to Japan, an RTC type bailout, which may well not pass congress anyway, is being treated by the Japanese as irrelevant to the real problem: as an apparent concession that in fact solves nothing. From the Japanese point of view, they must have American help and they must have it now. For Japan to go to the summit, get hammered by the rest of the G-7, and walk away with a solution that may never be implemented and certainly won't be implemented until long after the life-threatening crisis is past, simply won't work. Miyazawa is clearly saying that if that is the best the G-7 has to offer Japan will pass.
Japan may not be simply worried about Japan and certainly it is not worried about Brazil. The news from China is increasingly ominous. First, while we have been predicting a Chinese meltdown for months, now the mainstream media is catching on. The Economist's cover this week is a case in point. What The Economist says is the conventional wisdom and the conventional wisdom in cases like this can rapidly become self-fulfilling reality.
In addition, GITC officially became the first Chinese company in modern history to default on a bond, when if failed to make a payment to Chase Manhattan Bank. More important, the Chinese are making it clear that foreigners should not expect the Chinese government to guarantee their investments in China. Finance Minister Xiang Huaicheng said in the London Times that foreigners take risks when they invest in China and, in effect, that they should have looked before they leapt. In other words, there will be no government-financed bailout in China. In addition, China is introducing new proposals for the further tightening of rules on foreign exchange. The purpose of these new rules is to limit the ability of foreigners to convert debt or investment in China into dollars prematurely. In other words, the Chinese are trying to lock foreigners into place legally rather than through the market.
With the end of the year approaching, the Chinese are in trouble. They are still claiming reserves in excess of $100 billion, but they are not acting as if this were the case. In fact, they are trying to squeeze every dollar possible out of dollars and into yuan, including massive reduction of dollar-denominated interest rates at banks and new regulations. The Chinese are acting very worried. The Japanese undoubtedly know more about China's condition than they are letting on.
We suspect that Japan is aware of emerging problems in China that will turn the U.S. plan into something even more irrelevant than it appears to them now. If China melts down, then the problem becomes orders of magnitude greater than it was and it makes the summit irrelevant as well. The Japanese are behaving as if they know that U.S. proposals will not do anything for them. We suspect that they expect events in China to overtake emerging plans, insufficient as they are anyway. |
