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To: Les H who wrote (133273)	11/7/2001 12:26:27 PM
From: patron_anejo_por_favor	Read Replies (1) \| Respond to of 436258

Interesting article Les, and it makes sense...if a bank is lending at next to zero, it can barely make money (even if money is free). So lending activity should slow further, accelerating liquidity trapping. We'll see how it plays out.

To: Les H who wrote (133273)	11/7/2001 12:32:43 PM
From: Les H	Respond to of 436258

Deja vu all over again. US trying to buy its way out of a downturn. Asia's Public Sector Debt Nightmare By Christopher Lingle, AsiaWise 2 Nov 2001 11:27 (GMT +08:00) Ironically, the policies designed to weather the "crises" of 1997 may have sown the seeds of the ongoing cyclical downturn. It is worth remembering that the turmoil that began in 1997 can be traced to pegged exchange rates that encouraged unsustainable debt burdens and large current account deficits. When investors finally understood the nature of these misalignments, their reassessments and subsequent capital flight helped precipitate the economic turmoil that swept the region. Now, the trigger for the correction that spoils the party is going to be the growing imbalances in public-sector deficits and debts throughout East Asia. In the aftermath of their recent economic nightmares, the attempts to buy their way out of economic setbacks has already resulted in many East Asian governments facing large and increasing debt burden. China and Japan are running large public-sector budget deficits to reverse deflationary conditions and to boost economic growth. They have also joined other governments in the region in issuing debt to cover restructuring costs of their financial systems. Now, many Asian economies have announced large fiscal stimulus packages to cope with the current downturn in global economic conditions. Malaysia has unveiled a stimulus package of $7 billion will be in its budget for next year, resulting in a budget deficit of 5% of GDP. Singapore has announced that it will make $6.2 billion available stimulate its economy while Hong Kong will have a package worth $1.9 billion. A proposed supplementary budget for South Korea would put an additional $1.45 billion of public funds into the economy. During the 1990s, Japan's government launched almost a dozen economic stimulus packages. Over 112 trillion yen was spent on public-works projects for developing infrastructure, much of it considered superfluous. Alas, this flurry of spending did not restore economic growth. Japan's government debt, in excess of 600 trillion yen, is the highest among advanced industrialized economies and accounts for nearly 130% of GDP. Official claims for China's debt-to-GDP ratio put it at only about 10%. However, state-owned banks have as much as 1 trillion renminbi ($121 billion) worth of bad debts. Assuming a the normal recovery rate of about 30%, as is observed in other countries, then China's effective debt-to-GDP ratio would be closer to 80% or higher. According to Credit Suisse First Boston, about 44% of Beijing's total tax revenue was used to service debt in 2000, nearly four times the debt-service ratio in 1994. Thailand's government debt is growing due to the costs of recapitalizing the financial sector. Although the level of debt is at a manageable level of 40% of GDP, it could rise to as high as 60% if the debts are not cleared more expeditiously and efficiently. Indonesia's public-sector debt has risen from a pre-crisis level of 24%, to over 90% of GDP ($147 billion). Interest payments on the debt will absorb 45% of government revenues in the current fiscal year. A recent report by the United Nations Economic and Social Commission for Asia and the Pacific indicates that Korea's bad loans equal 14% of its GDP. A significant portion of current and future tax revenues must be used to cover interest payments. Indonesia's has the most severe debt and deficit problems with carrying costs equal to around 17% of GDP. Others have a mixed record, but the heavy interest burden will mean that total government debt throughout the region will continue to rise. How much additional debt there will be depends on the final costs of bank restructuring that will be determined by the recovery rate on bad loans. The Bank of Thailand estimates that losses to the financial system arising from the crisis are between $20 billion and $31 billion. Although these numbers are quite large, they do not include almost $13 billion transferred to the state budget two years ago through the issue of bonds. As of mid-2000, Thai public-sector debt had risen to $48 billion. Should the government shift the costs of financial sector restructuring onto the state budget, the national debt would be in excess of 60% of GDP. Attempts to stimulate economies with boosts in government spending will come to grief eventually. The only thing worse than a deficit spending package not working is a package that does work since it leads to rising interest rates and/or inflation. In all events, deficit spending is normally meant to address cyclical problems. It does little or noting to remedy the structural difficulties apparent in East Asia's economies. Dealing with these problems places many of East Asian governments in new territory since many previously ran surpluses and had relatively low levels of public sector debt. Steps should be made to increase tax efficiency by eliminating those that introduce distortions while replacing them with taxes that provide incentives for capital formation and investment. Most of these countries could benefit from radical reform of the tax structure whereby permanent cuts in marginal tax rates could set off a supply-side economic boom. As elsewhere, privatizing public assets could increase revenues from sales today and tax receipts in the future. It would also cut costs by providing incentives to raise public-sector efficiency and allow cuts in the number of government employees. Much of the existing public-sector debt is the result of insufficient political will to carry out needed reforms. The new excuse for public-sector profligacy is to combat an economic slump. Whatever the stated reason, large public-sector debts can be imposed on the future generations that will bear the burden of repaying debts arising from today's growing deficits because they have political no voice. This is a gross violation of the creed that taxation should be not imposed without representation. In all events, growing deficits and debts cannot promote long-term growth and prosperity. And worse, these imbalances will do nothing to change the fundamental causes of the current economic slowdown.