Howard’s End: Avoiding Another Asian Crisis

The Australian Bureau of Agriculture and Resource Economics predicted today that economic growth in the US will ease but it expects this to be partially offset by growth in Asia. But Asia still has real problems. John Howard writes.

The overriding concern among Asian nations, including China, is to avoid version two of the 1997 Asia crisis which has now led to a pervasive sense of protecting themselves against future financial shocks.

Asia is beginning to discuss a path towards a new and independent Asian Monetary Fund which could ultimately mean dumping the IMF.

After the IMF's actions in the last financial crisis there are broad feelings that any future financial problems are best handled by Asians themselves.

The real problem is how to do it - what kind of system and which form would it take.

Malaysia's Prime Minister, Dr Mahathir bin Mohamed, seems to want to cut Asian ties to the IMF as soon as possible. While China has reservations about contributing to an Asian lending fund for fear that it would be dominated too much by Japan.

As a G-7 nation, Japan just can't disrupt world markets and so Japan is not yet ready to junk the IMF. They have made it known, however, that they are very unhappy with the current situation.

The most fearful economic issues throughout Asia is the more than $2 trillion in bad loans crippling the banks in the region, the fact that most East Asian nations depend on selling exports to the US to survive and that at any moment some the region's currencies could go up in smoke.

On the other hand, given a united and ruthless resolve, and their $700 billion in foreign exchange reserves - including the world's largest chunk of US Treasury debt - the Association of South East Asian Nations plus China, South Korea and Japan (ASEAN+3) could certainly walk away from the IMF and set up their own system.

The IMF, Wall Street and the so-called "Washington Consensus" would be pretty much powerless to stop them.

Also a fear within Asia is the deep-seated historical and cultural frictions which could make the required level of unity next to impossible - in which case the IMF and western financiers will still be laughing all the way to the bank.

Asia's first big problem is the more than $2 trillion in non-performing loans (NPL's), unpayable debts held by commercial banks in the ASEAN+3 region, of which around $1 trillion is held by Japanese banks.

They began as loans to real estate and related quasi-speculative ventures in the 1980's which have gone sour.

It is now snowballing through the accumulated debts of the thousands of legitimate industrial companies bankrupted by the IMF's so-called Asian crisis in 1997.

To this must be added the worry about the around $15 trillion of derivatives held by Japanese banks.

Bad derivative bets so dwarf real trade and production that unless they are re-organised soon they will trigger a global crash.

The Bank for International Settlements says that European banks alone have more than $90 trillion in derivatives.

On the non-performing loans front it is estimated that globally there are $4.5 trillion, with China's banks holding $500 billion, Korean banks $250 billion and the banks of Thailand, Indonesia and the rest of Asia not far behind.

The IMF is talking about the problems of debts held by the poorer countries but the bad loan problem is as serious for the world economy as a whole.

Moreover, in Asia the danger of a deflation shock still exists because Japanese companies still hold major non-performing assets, so this balance sheet problem cannot be solved until there is a long period of growth in the real economy.

Yet if Asia moves first to squarely address the financial problems issue, it could have a comparative advantage if they dispose of bad loans first and also point out the problems in the West - in which case it would be London and New York's turn to panic.

Since 20-40% of exports from any given Asian country are sold in the US, the ASEAN+3 nations would also be vulnerable to a serious blackmail trade cutoff by Washington if they moved openly to break with the IMF.

The stability of the world's floating currencies is another problem. Without stable exchange rates industry and business can't properly price production and exports - including New Zealand.

Floating currencies do not have a firm value based on the productive potential, capacity, resources and actual gross product of a nation.

A floating currency derives its value from how many 'betting slips" punters, gamblers, speculators and funds who are betting against the rise or fall of the currency are prepared to put up.

We have sown the financial wind and now we are about to reap the whirlwind - what a way to run a world!

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