It would be comforting to portray the intense and speedy negotiations by which international commercial banks and Korean government officials staved off a default in that country as the turning point in the Asian crisis [see cover story, this issue: Korea stares into the abyss]. Indeed, there was much to note and praise in that effort, not least the way in which certain of the largest American banks lived up to the best traditions of leadership in such debt crises.
The US treasury, too, eventually played its hand well, identifying the crisis and forcing the G7 central banks to head it off. So, the US treasury recovered a position which it and the IMF had badly fumbled back in November, when they had wrongly assumed that the original $57 billion official aid package agreed for Korea would permit the country quickly to resume financing in the international bond markets. It didn’t. And make no mistake: Korea was on the brink last Christmas Eve.
Even today, should the agreement that has been hammered out between Korea and the 13 international banks somehow unravel, there is simply not enough foreign currency available in Korea to pay back the debts of its banks originally falling due in the first half of this year. The unspoken threat of a payments freeze hangs in the air.
Yet with the Korean crisis apparently resolved, the international financial community shows some signs of returning to the state of denial and complacency about Asia that prevailed during October and November last year. Stock markets in the region are roaring ahead. In some cases, credit ratings are gapping back up again. Standard & Poor’s seems happy now to move Korea’s rating in three-notch leaps.
Stabilizing Korea was important for the whole region. But before euphoria breaks out, it would be well to recognize two things. Resolving the problem of short-term debts is merely a first step. And more painful bad debt negotiations now loom.
The region faces years of fundamental restructuring of its corporations and its banks. Korea’s public finances were well managed. Its problems came when the sovereign had to assume responsibility for the debts of the country’s banks.
Merely to call for greater transparency and stronger supervision of Asian banks is superficial. For restructuring, reform and recapitalization of the sort needed by the region’s banks, read at the very least – change of ownership. Ultimately, widespread public share ownership might be best of all.
Somehow the link has to be broken between companies, governments and banks, otherwise lousy domestic bad debts will be an ever-present problem.
In the medium to near term, the credibility of Asian countries will depend on how quickly they can map out plans for reform of their banking sectors. For good measure, Japan, China and Russia should be grappling with the same questions.
Even more immediately, international banks must recognize that what was relatively straightforward in Korea will not be anywhere like so simple elsewhere in the region. There are plenty of painful and long-drawn-out debt negotiations to come. And at the end of them, provisions and write-offs.
Thailand’s banking system is in worse shape than Korea’s and its long-term borrowing ability is in graver doubt. The new government appears professional and seems at least to have grasped the need for a tough restructuring programme; but the country’s social problems are worse than Korea’s.
The contrast between Korea and Indonesia is particularly stark. Indonesia much more resembles a classic lesser developed country where economic and political worries cannot be separated. It faces short-term and long-term debt problems in both the public and private sectors. There is a mass of corporate debt of variable quality.
On top of that, anecdotal evidence suggests that international banks have got into much deeper trouble in Indonesia by lending to speculators in the equity swaps market, taking stock and cash collateral that is now worth next to nothing. Firms will have to write off much of those exposures soon, if they have not written them off already.
Banks have been much slower to move on Indonesia. As we went to press, a semi-official bank negotiating committee was still only just being formed. Many banks are talking to individual private-sector debtors but one banker privately despairs that his institution has $700 million at stake in Indonesia and no-one is yet doing much about it.
In this context, it might be well to heed another lesson from the Korean episode: communications between private commercial banks and multilateral institutions like the IMF and the World Bank should be much better. Over Korea, these eventually began to work well but only at the eleventh hour. A final word on Korea: even though everyone – governments, multilaterals, central banks and private lenders – could see the same problem, the most precious quality that emerged to sort it out was leadership.
