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To: Sarmad Y. Hermiz who wrote (42983)	2/27/1999 9:41:00 PM
From: GST	Read Replies (1) \| Respond to of 164684

Yes. I figure they will read the tea leaves better than others.

To: Sarmad Y. Hermiz who wrote (42983)	2/27/1999 9:51:00 PM
From: GST	Respond to of 164684

Saturday February 27, 9:10 pm Eastern Time FEATURE-US current account gap - bad news for Asia By Phil Smith SINGAPORE, Feb 28 (Reuters) - The Asia crisis has brought dire problems for the region's economies but the silver lining has been a dramatic improvement in current account surpluses, even though it has come mainly through a collapse in imports. Not so elsewhere, and economists around the world are increasingly worrying about the growing deficits and imbalances, particularly the sizeable shortfall in the United States and its imbalances with both Japan and Europe. This could be good news for the regional currencies if the growing U.S. deficit proved to be bad news for the dollar. But in a global deflationary environment that could well give Asian governments a major headache as they try to keep their currencies down to make exports competitive. The last thing they need is sharply firming currencies when deflation, not inflation, is the problem. The drive for exports, against the background of a huge output gap, is the bedrock for a regional recovery. But with Europe and Japan both moribund in terms of absorbing imports, the United States is at the moment the Asian exporters' saviour. WHOM TO SELL TO? But U.S. policy makers have recently made clear that current account trends among the Group of Three (G3) were unsustainable. The G3 groups the United States, Japan and Germany. Treasury Secretary Robert Rubin has said the United States could not continue to be the ''importer of last resort.'' ''With the global financial environment still highly fragile there is little scope for U.S. policy makers to slam the brakes on the U.S. economy,'' said James McCormick, currency analyst at J.P Morgan in New York. ''Instead, the U.S. is increasingly looking to Japan, and now Europe, to absorb the sizeable current account surpluses being created by the recession in much of the developing world.'' Struggling Asian companies with tattered balance sheets already beset by outstanding debt and pathetically low domestic demand are relying heavily on overseas markets. MARKETS MORE AWARE OF TRADE GAPS The problem for Asia could come via a sell-off in U.S. asset markets because of the growing external deficit there, which is attracting more and more attention. ''We feel that a large, and growing trade deficit would raise fears about the sustainability of the strong dollar and that, while foreigners were happy to finance the deficit as long as asset markets kept rising, any sign of falling bond prices would weigh quickly and heavily on the dollar,'' said Nick Parsons, strategist at Paribas in London. The last time the U.S. current account deficit reached similar levels as a percentage of gross domestic product was in 1987, the year of the global stock market collapse. Then, it was not the deficit itself that caused the dollar to fall but an exodus of foreign investment in U.S. assets as the danger of the macroeconomic imbalances became clear. ''Barring a huge improvement in domestic demand conditions in Japan and Europe, some adjustment to U.S. growth, asset prices, or the dollar will be necessary,'' Morgan's McCormick said. THINGS ARE GETTING WORSE NOT BETTER In terms of the G3 nations, the wider downtrend of the euro and yen can only make things worse. Morgan's McCormick reckons a shift in domestic demand would have to be huge to have anything more than a negligible impact on the current account imbalance. ''A one percent change in domestic demand in both Japan and Europe would result in only a $20 billion swing in their combined trade surplus, barely enough to absorb the expected increase in the surplus from the developing world this year,'' he said. ''And nowhere near the amount needed to turn the trend in the U.S. current account.'' This gloomy scenario must be worrying Asian governments. With Japan and European markets torpid to say the least, and the threat of a U.S. slowdown, the outlook is far from rosy. Add to that the need to fund the orgy of fiscal stimulus that is going on in Asia at the moment and things look even more dire. EVEN GREENSPAN IS WORRIED It is hard to project ''how far into the future this particular type of current account deficit can continue without impacting on the exchange rate,'' Federal Reserve Chairman Alan Greenspan said last week. The optimistic outlook is that domestic demand recovers sharply in both Japan and Europe, more possible is that demand increases modestly, but the disaster for Asia would be a collapse in the U.S. asset markets. Asian finance ministers have called for a resumption of domestic demand but seem to be whistling in the wind given rising unemployment, increased savings ratios and sharp lack of any ''feel-good'' factor among the general public. WATCH THE DOLLAR, IT'S THE KEY Again, the U.S. dollar's moves could be the key for Asia. If the markets are thinking in terms of what happened in 1987 the dangers are clear. A slowdown in the United States for whatever reason, but most probably via a sell-off of asset markets there, will have global implications for trade. History, remembering what happened in the late 1980s, does have a nasty habit of repeating itself. ''Bear in mind that we are entering 'overshoot' territory on the downside here,'' said Paribas' Parsons, referring to the euro's fall since it's inception. ''Though the first person to wear platforms looks pretty stupid, six months later they suddenly become 'style gurus'.''