July 20, 2001	atimes.com

Editorials ASIAN CRISIS DIARY, Vol II One, two, many (Asian) Argentinas By Uwe Parpart, Editor Opinions on the impact of Argentina's latest austerity measures vary. But the betting on Wall Street is that - without massive additional foreign rescue funds - there's a 90 percent chance that the country will default on its public debt before the end of this year. Well, that's Argentina, that's Latin America, would have been the refrain in Asian financial centers just a few short years ago - and with some justification: Prior to the Asian crisis few if any regional economies ran budget deficits; public debt was low, external public debt lower (the "Latin" Philippines being the exception). The Achilles heel of the Asian economies proved to be large amounts of unhedged private foreign debt, grossly misallocated for political reasons, as the result of corrupt practices, or just plain old bad business sense. But now, four years to the month after the Asian crisis hit, it's a different picture. From Korea down to Thailand, Malaysia and Indonesia, huge amounts of public money have been spent in as yet at best partially successful attempts at bailing out and rehabilitating financial institutions on the verge of collapse; comparable amounts of public funds have been spent in largely futile attempts to revive domestic demand; budget deficits of 5 percent of GDP have become common throughout the region. As the result of - in effect - shifting large portions of private debt to the public ledger and engaging in negative-return-on-investment deficit spending to hold together fraying social fabrics, Korea and the Southeast Asian crisis economies now show public debt levels from 60 (Thailand) to over 100 percent (Indonesia) of GDP - higher on average than Argentina's. One problem the new Asian Argentinas don't share with the Latin American nation is currency pegs to the strong dollar. Its currency board system (instituted in 1991 and similar to Hong Kong's) binds the Argentine peso tightly to the greenback, and as the latter appreciated, so did the peso - to the detriment of the country's exports and the - at least temporary - glee and advantage of competitor Brazil. The ensuing recession caused the present crisis, which now, of course, also engulfs Brazil. But what the dollar peg did to Argentina's exports, collapsing US demand has done to Asia's - in spades. Consequently, debt service ratios (debt service as percent of exports of goods and services) are increasing. Simultaneously, as GDP and revenue growth decline and higher risk pushes up the cost of debt, budget deficits make debt grow faster than the economy. It is a minor miracle that with such debt traps well in the making everywhere, an Argentine-style crisis of confidence has yet to hit Asia full force. Will it hit? As net capital outflows increase and the risk premium on all emerging market debt now averages well over 500 basis points, there can be little doubt about it. Can anything be done about it? No, we'd say - although David Hale, chief global economist at Zurich Financial Services, writing in the Financial Times on Wednesday, thinks he has a solution. He observes that, "one of the distinguishing features of all the financial crises of the modern era in developing countries has been that the US intervenes aggressively when it has a military relationship with a country". Thus, "In the case of South Korea [in 1997-98], the US government both supported an IMF loan and requested American commercial banks to reschedule their loans. It did not provide similar help for Indonesia or Thailand because it did not perceive that it had the same strategic interest there." Hale concludes that, therefore, "Argentina's position is not totally without hope. The Argentine government could probably cut its borrowing costs in half if it could persuade the US department of defense to locate some kind of military base there ... The only man who can ... lessen the risk of emerging market financial contagion ... is Donald Rumsfeld, the US defense secretary." By simple extension of such logic, Thailand should re-open US bases it closed in 1991; the Philippines should reassign Subic Bay to the US Navy (as it is a flop as a special export zone anyway); Indonesia might offer Lombok which controls one of Asia's major sea lanes. But just what Malaysia could put up, we are a bit at a loss to see. Ughh! ((c)2001 Asia Times Online Co, Ltd. All rights reserved. Please contact content@atimes.com for information on our sales and syndication policies.)

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