Not trying to be alarmist — and in the broader scheme of UK, US and European mega bank rescues, it may look like a peripheral event, for now. But veterans of the 1997-98 Asian crisis might be on heightened alert after Indonesia’s stock exchange on Wednesday halted share-market trading for the first time in eight years.
The benchmark index plunged 10 per cent, the biggest decline since the 1997 crisis.
The circumstances, of course, are different to the chaotic days when Indonesia’s markets and currency imploded virtually overnight and the country became one of the first victims of the regional financial and economic meltdown.
But throughout Asia this week, there have been some eery echoes of the crisis, including tanking stock markets, ballooning credit costs, and frantic attempts in South Korea to shore up its currency. One of the key differences, however, is that this time around, Western countries and financial institutions may not have the inclination or ability to help.
Before its Wednesday suspension, Indonesia’s benchmark stock index was down 21 per cent this week, the worst weekly fall since at least April 1983, while the rupiah declined a further 0.7 per cent to 9,635 per dollar, near its lowest level in three years, reported Bloomberg on Wednesday.
Credit-default swap contracts on Indonesia meanwhile jumped 80bp to 560 on Wednesday afternoon, meaning it costs $80,000 more a year to protect $10m of the country’s debt from default for five years.
“Too much of the Indonesian market is tied to commodities,'’ Kim Yong Tae, of Yurie Asset Management in Seoul told Bloomberg. “Also, the currency is very weak, suggesting that a lot of speculative money is pulling out of the market.'’
And that is precisely what happened in 1997.
The Asian financial crisis began in regional currency markets in the summer of 1997 and, as Wikipedia neatly sums up, started in Thailand with the collapse of the baht following the government’s decision to abandon efforts to support the currency and float the currency, cutting its dollar peg after exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven.
At the time, Thailand had accumulated a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt.
As the Thai baht weakened, so, too, did other currencies in the region, particularly the Philippine peso, Malaysian ringgit, and Indonesian rupiah. Stock markets throughout the region posted sharp declines and credit began to evaporate. In a second round of currency depreciation, South Korea - along with Singapore, Taiwan and Hong Kong - was drawn into the turmoil when it spent much of its foreign currency reserves to protect the value of the won.
In January, attention turned to Indonesia, which had agreed to implement some stringent economic reforms in order to continue receiving IMF assistance.
In March 1998, the Thai baht and South Korean won began to firm as investor confidence crept back into the markets. But by May, riots in Indonesia left Jakarta in ruins, the currency collapsed and President Suharto resigned after 32 years in office. Currencies in other emerging markets also began to weaken in a fresh bout of what became known as Asian contagion.
So consider some of the events today:
Asian money market rates climbed, reflecting the growing reluctance among banks to lend amid speculation that more financial institutions will fail. Hong Kong’s three-month interbank offered rate rose 29bp to 4.15 per cent, even as Hong Kong’s central bank slashed its key cash rate by a full percentage point. Australia meanwhile, offered longer-term funding a day after its central bank took the lead and cut the key interest rate by a full percentage point to 6 per cent as central banks across Asia tried to stem a surge in borrowing costs that they fear is starting to choke the region’s economic growth.
In addition, the Japanese and Australian central banks pumped almost $22bn into the financial system following news of the UK government’s plan to bail out the country’s biggest banks and Iceland’s deal to seek loans from Russia.
Shares in Tokyo, meanwhile, plunged more than nine percent, the biggest decline since the 1987 stock market crash, on growing fears that the chaos in credit markets will foster a global economic recession.
This time, however, the yen is surging - breaking Y100 to the dollar on Wednesday amid a concerted push by investors to unwind yen-dollar carry trades. Foreign-exchange volatility implied by dollar-yen options rose to the highest in almost a decade as European and Asian stocks and US futures sank on concerns about the spreading credit crisis. But, as Bloomberg notes, the yen’s gains came as costs rose of borrowing on Asian money markets.
Alongside Indonesia, the biggest regional victim for now appears to be South Korea, where the currency fell to its lowest level since the Asian financial crisis on fears about the growing problems facing South Korean banks and the economy.
For the umpteenth time in recent days, Korean President Lee Myung-bak dismissed suggestions that his country faced a repeat of the Asian financial crisis that pushed South Korea to the edge of sovereign default, and government officials repeatedly tried to reassure investors that the banking system can withstand the credit upheaval.
But, as Reuters reports on Wednesday, investors remain unconvinced - not least because of Lee’s urgent call this week for a regional summit with the Asian economic powers, Japan and China. And his government’s exhortations to local banks to sell foreign assets to raise dollars that other banks are not willing to lend them.
As Lex noted recently, Asia’s pain is only just starting:
Asia has always been more than an interested bystander… an external slowdown swiftly feeds through to the export-intensive region. Even without a co-ordinated global effort, Asian monetary policy will switch to easing; receding inflationary pressures have already enabled China to move. Further fiscal expansion looks inevitable.
Among the vulnerable sectors are Australian and Korean banks, which lend more than they take in deposits and rely on overseas markets for funding – to the tune of one-third of the loan book in the case of Aussie lenders. Frothy property markets, especially in the financial centres of Hong Kong and Singapore, are another case in point, especially as banks slash staff and, with them, home rental allowances.
And there could be further to go: as Citigroup points out, residential prices were 33 per cent lower in 1998 during the Asian financial crisis. Meanwhile, China, notwithstanding its rhetoric about learning from the US crisis, is merrily ploughing a similar path – seeking to galvanise the property market by loosening loan to value requirements on new home purchases. Asia’s pain is just starting.
Related posts
How to say ‘pre-emption’ in Korean
