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World: Economic Institute Developing Financial Crises Indicators




Washington, 2 December 1997 (RFE/RL) -- As the world watches while South Korea and the International Monetary Fund (IMF) work out a financial rescue package, a leading global economics institute says it is preparing a list of indicators to try to predict which other countries might be facing crises similar to the one sweeping Asia.

The Washington-based Institute for International Economics says it has undertaken a crash program to define and compile a set of indicators that will predict banking and currency crises.

Institute director C. Fred Bergsten says preparation of the test was spurred by the currency crisis which has hit Thailand, Indonesia, Taiwan and now South Korea.

The study is being directed by former IMF Deputy Director of Research Morris Goldstein who is now a senior fellow at the institute. Goldstein, who just returned from several months in Asia studying the current situation, says there are a number of signals which could help everyone -- authorities and investors -- realize when problems are beginning to become serious.

He told a luncheon seminar sponsored by the institute in Washington Monday that among the problems which brought these once-powerful Asian tiger economies into difficulty are things which are troubling other countries around the world, including emerging markets and nations in transition.

The biggest single factor in all the current crises, said Goldstein, is a series of long-standing weaknesses in banking practices and banking supervision.

These weaknesses, said Goldstein, included weak accounting procedures and standards, a poor legal framework, and very lax loan classification procedures which make it "too easy" to make a bad loan look good by giving the borrower more money.

Loan classifications should be done on a "forward looking basis," said Goldstein, not based on whether the borrower made the last payment due, but whether he is likely to make the next five or six payments.

It was discovered after the crisis began in Asia that Thailand reported a "bad loan" rate of under six percent while its actual problem loan rate was closer to 30 percent. It covered the problem by only defining as "non-performing" those loans that were overdue by at least one year.

A big part of the problem in these countries was far too much "connected lending -- that is loans to bank owners, managers, directors and their related businesses." That kind of insider lending is bad, said Goldstein, because it concentrates credit risk and leads to poorly considered loans and even outright fraud.

In all of these Asian countries, said Goldstein, there was also "excessive government involvement" in both the ownership and operations of banks. Especially in South Korea, he said, government and political decisions produced "policy-directed" lending which put little weight on credit worthiness of the borrowers.

On top of that, he said, most of these banks did not have adequate capital to cover the kinds of risks they were assuming at state direction and there were no rules in place to provide prompt corrective actions.

The weakness of the entire financial sector contributed to other aspects of the problem, said Goldstein. For example, the banks paid no attention to the foreign exchange exposure of their borrowers. Instead, they just took collateral to cover their loans. But the collateral of preference is property and in these Asian nations, the real estate market had become vastly overvalued, pushed along by vast amounts of private foreign investment.

The problem is, said Goldstein, when the property value shock hit these nations, it not only hurt the ability of borrowers to repay their loans, but devalued the collateral the banks held, pushing everything into a downward spiral.

Goldstein refused to name any countries facing similar difficulties until the institute completes its new set of indicators, but noted that there are a number of countries in the world with very weak banking systems -- including the nations in transition.
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