Asia Times: La vida loca


	July 13, 2001	atimes.com

Editorials

La vida loca
A situation perfect for global contagion

On Friday, July 6, Bear, Stearns & Co published a report on Argentina's US$130 billion debt woes. "We see default or a forced debt restructuring as a likely outcome," was the punchline. The report went little noticed in East Asia, but that changed when interest rates on Argentine sovereign bonds hit highs not seen since Russia's September 1998 debt default on Wednesday (July 11), amid fears of a similar debt nightmare in Latin America's third largest economy.

What triggered the interest rate spike was a relatively routine affair: On Tuesday, Buenos Aires auctioned off three-month Treasury bills to raise money to service its short-term debt. What was anything but routine was that the average yield on the bills turned out to be 14.01 percent, almost twice that of a month earlier. With such extravagant and clearly unsustainable enticements needed to lure investors, Argentina knew it was in deep trouble - and so, of course, quickly did the rest of the world. Brazilian bonds hit record lows almost immediately and interest rate spreads on all emerging market debt measured by the J P Morgan Emerging Markets Bond Index Plus swelled 51 basis points to 880 points over comparable US Treasurys.

Such renewed Argentine debt troubles just a month after the country gained some temporary debt relief by persuading investors to swap about $30 billion in short-term bonds for longer-term debt could not come at a worse time for the world economy. The US, EU, and Japanese economies are in a synchronized slowdown phase. Slumping exports to those major markets have put most of East Asia into a tailspin. It's a near-perfect situation for global financial crisis contagion spreading from Latin America outward as emerging market currencies and stock markets are getting pounded and with few defenses available.

To get an idea of just how bad things are, take a look at Singapore. The city state's economy is not large. But Singapore is Southeast Asia's financial and commercial hub and a bellwether. Thus, when it said on Tuesday its first half 2001 data show it's in a recession and officials slashed their growth forecast for the second time this year to 0.5 -1.5 percent from the 3.5-5.5 percent projection in April, how much better off could be Thailand, Malaysia, Indonesia or the Philippines?

They aren't, of course, brave predictions of 2 to 5 percent growth (varying by country) notwithstanding. As troubled are the economies of Taiwan and Korea, and as foreign assets flee to safer shores (the Swiss franc is doing real well right now), things can only get worse throughout the region - China included. Would you buy Philippine bonds right now? Well, the country is trying to sell $500 million worth of debt paper right now to keep its treasury afloat. Or would you push ahead with investment in China when the country may need to devalue not far down the road?

A few months back, foreign investors were still evaluating Asian investment destinations country-by-country, assessing relative political and financial risk. Now, as Argentina is teetering on the brink and a renewed world-wide liquidity crunch can hardly be ruled out, East Asia had better batten down the hatches. No foreign money will flow anywhere - except out.

Will 2001-02 turn into another 1997-98? That's difficult to predict. By some counts, things could get worse than that. But minimally, regional growth will come to a standstill - and any government still diddling and hesitating to push through reforms abandoned when the good times seemed to be back in 1999-2000 needs to have its collective head examined - if it doesn't first get ripped off by rioting mobs.

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