THIS MAKES MY DAY!!!
Foreword: Note throughout that for banks and governments, unless specificied as foreign or domestic, they intend both -- "counterparties." Paren's are mine, of course.
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Wednesday August 26, 11:51 pm Eastern Time
Banks Urged to Share Some of Asia's Pain
By Sarah Davison
HONG KONG, Aug 27 (Reuters) - Asia will remain a source of global market instability until commercial banks accept responsibility for bad lending decisions and agree to write down the region's debt burden, financial analysts said.
"The counterparties that need to admit culpability here are the banks," said Chris Tinker, head of regional economics at ING Barings. "You have to have writedowns. It's a question of accepted responsibility by the banks."
(I'm not certain Tinker intends both domestic and foreign, but they do after quoting Sachs, further down.)
By failing to write down debt, commercial banks are keeping risk premiums high throughout Asia to reflect the outstanding risk of default, Tinker said. This is making it difficult for Asian nations to attract the funding needed to recapitalise their banking and corporate bases, and spur recovery.
A debt resolution plan involving writedowns and forgiveness would help Asia stabilise and prepare the ground for recovery, he said. This would provide some positive impetus for other emerging markets that followed Asia into financial chaos
Russia continues to grapple with its own crisis and some Latin American currencies are starting to look vulnerable as the Asian contagion spreads through global emerging markets.
(Oh, my dear!)
The exact size of Asia's debt burden is impossible to estimate. Foreign debt levels are now widely known, and much of the short-term foreign debt has been rolled over into longer-dated maturities. But domestic debt levels remain obscure due to opaque financial systems and weak regulation.
Despite this vagueness -- and perhaps partly because of it -- Asia's debt burden has become a prime source of uncertainty for global markets. Analysts said rollovers were no solution to Asia's debt problem, with the outstanding risk of default threatening a substantial implosion in global liquidity.
Prominent U.S. economist Jeffrey Sachs recently said writedowns were a normal method of managing debt crises.
"... previous debt crises have usually ended in some forgiveness. A compromise is typically reached in which the debtors service some, but not all, of the debt that is due. A partial writedown of the debt is the norm, not the exception."
Despite the tradition of writedowns to solve debt crises, Asia's foreign creditors have demanded and received full guarantees for much of the outstanding debt owed by Asia -- and the International Monetary Fund has supported these demands.
(Say it ain't so!)
This has confused analysts, (I'll bet.) who argue that forgiveness and writedowns are a crucial component of any Asian recovery plan.
In this month's edition of its Asian Adviser, Warburg Dillon Read called the banks "rent-seekers" unwilling to accept responsibility for their contribution to the Asian crisis.
"The experience of Latin America in the 1980s is that full repayment, although good for quickly repairing the balance sheets of the international creditor banks, prolonged the agony of the debtor countries," Warburg wrote.
"Indeed, the inability to generate sufficient cash flow from weak economies ultimately led to economic stagnation and in some cases, hyperinflation."
Unemployment is rising quickly in Asia, which has little in the way of social assistance, and high inflation has raised the spectre of starvation in Indonesia.
(Some may forget that those people don't have the social safety nets that are more common here in the U.S. and elsewhere.)
"It is not inconceivable that we will also see increasing tensions between neighbours that have not had a strong tradition of getting along with one another," Warburg said.
Parallels are increasingly being drawn between Asia's situation and the Latin American debt crisis of the 1980s, which led to a "lost decade" of economic development.
After years of stalemated negotiations between banks and governments in Latin America, the United States stepped in to force a resolution. The end result was Brady bonds, recycled Latin American sovereign debt backed by the United States.
Asia will need something similar, said analysts, because foreign banks will refuse to accept writedowns or forgiveness without a third party guarantee on similar, recycled loans.
(Well, it's about time someone makes them swallow the medicine.)
The United States is the only country with sufficient resources to back an Asian debt rescheduling plan now that Asia's traditional sponsor, Japan, is in recession.
But U.S. policymakers are opposed to further funding for Asia following IMF rescue packages for Thailand, South Korea and Indonesia, together worth over $100 billion.
"(U.S. support) will probably require contagion spreading to the U.S.A., and also probably a rather stronger bear market than we have at the moment, directly linked to Asia," said Ken Davies, economist at the Economist Intelligence Unit.
In other words, a U.S. stock market crash sparked by Asia could work to this region's advantage by impressing upon the developed world the seriousness of the crisis in emerging markets, where 80 percent of the world's population lives.
Opposition is also likely due to fears of "moral hazard," the risk that borrowers and lenders relieved of responsiblity for bad decisions will repeat them.
Don Hanna, economist at Goldman Sachs, said commercial banks' habit of dumping bad debt onto the public sector -- the taxpayer -- is such a well-trodden route that banks should pay some sort of tax for the option, perhaps in the form of a so-called "Tobin" tax on all foreign exchange transations.
"Usually governments agree to assume debt because they don't want the banking system to go under, but the governments have never taken in any revenue for what amounts to an option for all these private sector borrowers to put their debt to the government in bad times," Hanna said.
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Gee! I like my 2157 much better. I used fewer words to convey exactly the same solution, and was able to insert inflammatory rhetoric in the process. Tantamount to walking and chewing gum at the same time;) |
