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Asia: Financial Crashes Indicate Contagiousness

  • Breffni O'Rourke

Prague, 11 November 1997 (RFE/RL) -- There is increasing concern among international finance experts that South East Asia's economic crisis is spreading to Japan. And if Japan's mighty economy plunges downwards, world recession could be on the horizon.

Japan is the world's second-largest economy, and is by far the biggest investor into South East Asia. Many Japanese banks which loaned out hundreds of millions of dollars to fuel the South East Asian building boom are now deeply exposed to bad debts, since Asian property prices have collapsed.

The banking sector is further under pressure from the continuing slide downward of the Tokyo Stock Exchange, which has lost almost 20 percent of its value since the start of the year. Many banks and insurance companies in Japan habitually have part of their asset reserves in the form of shares in large corporations, and as these shares have lost values on the stock exchange, their assets have been wiped out.

Experts say that if the stock market drops much further, many banks could only meet international capital requirements if they sell international assets -- including big holdings on the U.S. bond market. This would in turn have an impact on the U.S. and European markets. A further pressure point for Japan is the fact that almost half (44 percent) of Japan's total exports go to developing Asian countries, and the sudden downturn of some of the markets in that region has left many Japanese companies with big unsold stocks, and lay-offs of workers and short-time work has started.

Another Asian giant, South Korea, is already tottering, amid rumors that it has sharply reduced its foreign currency reserves in a futile attempt to defend its currency, the won. Despite Seoul's efforts, the won hit a record low against the dollar last week, worsening the problems of South Korean companies in repaying foreign debts. A series of major industrial groups have gone bankrupt in recent months, and South Korea is reported close to asking the International Monetary Fund for help.

Half a world away, Latin America's economic giant Brazil has taken steps to stabilize a perilous situation amid outflows of foreign capital and speculative attacks on its currency. Finance Minister Pedro Malan says the government's $18 billion austerity package is designed to help Brazil "face international turbulence that does not seem to be short-lived".

Russia too has moved to protect its ruble in view of the pressure on countries like Brazil and South Korea. The central Bank in Moscow says it will raise interest rates and adopt a more flexible exchange rate policy to shore up investor confidence.

As to the United States, the world's strongest economy, it's growth is expected to be slightly dampened by the South East Asian crisis as it stands, and that impact would be worsened by serious trouble in Japan. Alarming for the U.S. and other developed nations is the huge competitive price edge which products from South East Asia have gained as currencies there have fallen by up to 40 percent. In addition, experts say the huge swing which the New York Stock Exchange has experienced as a result of the Asian troubles seems out of proportion to the causes. If such mainly psychological factors were to bring a more prolonged downturn on Wall Street, consumer confidence could fail, causing an economic downturn.

Europe has been less directly affected by the Asian crash because of its relatively small trade ties with that region. But the same factor of investor confidence applies to its stock markets, as evidenced by the extreme volatility of markets east and west in recent weeks.

With all this in mind, the Chief economist in Germany of Japan's Industrial Bank, Adolf Rosenstock, told RFE/RL that an international recession is possible. But Rosenstock has some encouraging words for the transition economies of Eastern Europe. He says that like all developing markets, the east was driven by excess liquidity, in the form of investors who were searching for attractive investments, and who were not shy of risk.

But the crash in South East Asia, in economies which had formerly seen secure growth for years, has put an end to the spending spree mentality. Rosenstock said investors are now once again acutely aware that they could lose all their money through unwise or hasty investments. He said the result is a drying up of excess liquidity on all markets, and further corrections in over-valued stock markets can be expected. He says the timing of the Asian crash may have been lucky for East Europe, in that it has prevented the East developing its open speculative "bubble" which would inevitably burst later.