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Strategies & Market Trends : Asia Forum -- Ignore unavailable to you. Want to Upgrade?

To: Rational who wrote (377)	1/3/1998 11:38:00 PM
From: Shoe	Read Replies (2) \| Respond to of 9980

A different prescription: more bankruptcies, not more guarantees. An article in the latest Economist reports: "Taiwan has largely escaped the mauling many Asian economies have suffered. One reason may be that its companies are allowed to fail." The article cites a study by Bee Yan Aw and Mark J. Roberts of Pennsylvania State University and Xiaomin Chen of the World Bank, attributing Taiwan's relative success to the flexibility of it system, in which bankruptcy is apparently a much simpler and creditor-friendly process than in other nations in the region, including South Korea. Is it really feasible, or desirable, to impose the same degree of regulation and supervision on all borrowing enterprises in "participating countries", as well as those countries' governments, as is imposed on insured financial institutions in the United States? Absent such regulation, and standardization of capital structures, will the proposed system really be able to set accurate risk-based premiums so as to avoid the moral hazards that produced the S & L debacle, while not penalizing sound enterprises with excessive premiums? Can such a system operate free from political influence, and will its administrators be as diligent in underwriting as lenders risking their own money (or at least that of shareholders)? If the problem with allowing defaults to run their course is the impact on the solvency of particular lenders and a consequent chain reaction, then it seems those lenders require closer supervision or higher capital requirements -- while other lenders, such as private banks using uninsured deposits, whose failure would not have a ripple effect, could be allowed to take whatever risks they wanted. If the problem is that mechanisms in certain countries are inadequate to produce efficient reorganizations of companies that could still operate profitably if debt were converted to equity, or efficient liquidations of those insolvent companies whose resources would be better used by others, then international guaranties are not a solution, unless somehow a bureaucracy is able to set risk premiums for ineffective creditors' remedies better than creditors themselves competing in the marketplace. I doubt that any international guarantor organization will be more willing and able than private creditors to force the necessary remedies on a defaulted enterprise -- wiping out domestic shareholders and perhaps forcing employees to seek new jobs that the invisible hand deems more socially productive. Of course, one can always argue that guarantees must be made explicit because the expectation they will be provided has already created the adverse consequences of an insurance system without risk-based premiums. But this proves only that if guarantees are intended, they should be explicit and paid for. There remains the option, to disabuse lenders of the notion that they enjoy a taxpayer safety net. If private lenders were shown that they really do bear the risk of their own loans, then they and their rating agencies would consider the effectiveness of creditors' remedies in each country in which they lend, as well as other traditional underwriting factors. Then interest rates would reflect the differences in systems, and governments would have to decide whether access to international capital at better rates is important enough to justify systemic reforms. -- Shoe P.S. Incidentally, I do not understand how a current spread can be an ex post debt insurance premium. Surely it reflects lenders' perceptions of risk in current circumstances, and is not being paid to the insurer.