On Friday in Asia, markets were thrashed, bond sales pulled and a Japanese life insurer went belly-up, among various small events of the day.
We know Europe and America are burning, but devastation in Asia - a part of the world where, broadly speaking, there are still big pots of cash and banking systems are solvent - “speaks volumes for the power of fear”, as Lex notes on Friday:
Exposure to subprime, the genesis of the crisis, is tiny – 5 per cent of global bank write-offs, on HSBC’s reckoning. But just as greed always wins over rational behaviour on the upside, so fear calls the shots on the way down. Hence the Japanese stock market plunged 11 per cent in morning trading and now trades at less than book value. The Indonesian has been suspended indefinitely and questions swirl over the solvency of the archipelago’s richest family. Safe havens? Forget it. Japanese government bonds plunged almost 2 full points on Friday morning.
So if current account surpluses, robust capital adequacy ratios and still decent rates of economic growth (the IMF is pencilling in 8.4 per cent for developing Asia) count for nothing, just how safe is Asia? On the plus side, most governments have the fiscal firepower to spend their way out. Since large parts of the region still need more roads and bridges, this need not end up mimicking Japan’s preponderance of bridges to nowhere. Better, there is already a trend of increasing spending on soft infrastructure like healthcare and education.
But any regional solution, or even co-ordination, is simply pie in the sky. Asia is many times more diversified than Europe, with countries at all levels of political and economic development. Upcoming elections and a posse of new and untested governments further muddy the waters. Most economies are too undiversified and reliant on exports. It may have gone into the crisis as best in class, but if the whole ship goes down Asia could find it as hard as any to struggle back on.
Related links:
Asian pain: The ghosts of 1997-98 return - FT Alphaville
