Asian financial crisis: When the world started to melt
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Asian financial crisis: When the world started to melt

Following currency devaluations and stock-market crashes, Asia now faces its biggest challenge: a full-blown credit crunch. No big bond issues will be done for the rest of the year, spreads on outstanding bonds have gone haywire and trading has ground to a halt. Local sources of credit have also dried up. Corporate borrowers can expect little help from their bankers; devaluation has blasted a hole in many local banks' balance sheets and they have no money to lend even if they wanted to. Peter Lee reports on the likely shape of things to come.


What will go wrong next?

Asian banks: Now comes the real crisis

Asian research: Worth the paper it's printed on?

Peregrine's still flying

Hedge funds: You can run but you can't hide

Country Risk December 1997: It could be worse

Global Economic Projections: Overall Rankings

Investment bankers are a tough breed, more used to hard negotiations and aggressive trading than to dealing with delicate human emotions. So the Asian capital-markets chief of a western firm pitching to the Thai ministry of finance one Thursday in early November found it difficult to know how to handle the scene that confronted him. "These people were panicking," he says. "I had one senior official literally in tears. Hardly anyone is visiting them any more and they don't know what to do. They were saying 'please help us'."

After a few gruff words of encouragement, the banker came up with one interesting proposal: not for a new bond issue but for a more radical approach to Thailand's financial difficulties. He suggested that the ministry invite an advisory board of international firms - one European, one American and one Japanese - to negotiate with the international creditors of Thai borrowers. This group might offer to take Thai loans off the books of foreign banks at a sharp discount to par, hold them in some kind of fund and then either sell them on to new-money buyers, such as vulture-fund investors or more strongly capitalized foreign banks with less previous exposure in Asia, or somehow reschedule the interest and principal payments so as to keep the restructured loans current and the underlying borrowers solvent.

Only time will tell whether the Thais ever try to adopt this proposal. It may be too radical for them for two reasons. First, unlike the $18 billion IMF support package, it involves a market-led initiative. Secondly, it recognizes the true depth of the problem confronting Asia.

Rather than merely the pricking of a speculative bubble in currency, stock and property markets, this is truly a debt crisis in the making. It may lead to widespread corporate and bank defaults - no-one can yet quite bring themselves to talk about sovereign defaults - and will require something akin to a corporate bankruptcy work-out at the sovereign and regional level.

"Imagine it as a country or a region going into Chapter 11 [bankruptcy]," says the banker. "Countries will have to, as the IMF has suggested, close down certain entities like some of the worst-run banks. There may be a fire-sale of some assets. But even more importantly they must protect the core, viable companies and keep them going. If they feel they cannot, then in the end I couldn't blame them for telling the foreigners to get lost. They have to protect their own people now."

Keeping the viable companies afloat will be tough because in the coming weeks and months Asia faces a massive credit crunch. The international bond and equity markets have to all intents and purposes closed and will not reopen before the first quarter of next year. The only possible exceptions will be for small structured deals involving credit enhancement or securitization of hard-currency revenues.

"Prior to Hong Kong's dive, [when the Hang Seng Index fell 10.14% on October 22 it pushed out already wide credit spreads for Asian borrowers by another 100 basis points or more] there were a lot more options for many issuers in the region which need capital," says Paul Shang managing director at Lehman Brothers. "Following that, the situation as regards issuers' ability to do deals is completely different. The primary markets have been all but shut down. We are telling clients that for the rest of this year at least it is very unlikely that they will be able to go ahead and issue debt or equity on favourable terms." In every country there is a growing backlog of issuers that need to raise capital, some urgently, but simply cannot.

As well as uncertainty about the depth of the crisis in Asia, a year-end effect is holding investors back and exacerbating the problem. Portfolio managers don't want to take any risks between now and the year-end when they will have to mark their positions to market. Even if they think that, say, Korean bonds, with spreads of 250bp, are worth buying on a 12-month to 18-month view, they must also recognize the risk that - with occasionally wild intraday spread volatility of 50bp to 100bp - they may have to account large paper losses in the next few weeks. Even if Korean spreads tighten next year and the portfolio manager eventually locks in a profit, the damage will already have been done. A portfolio manager making a paper loss in new Asian positions is unlikely to receive generous treatment from either his bosses or his investing clients. Investors are more concerned about existing positions, which for the most part they cannot hedge or exit, than about taking new ones. And they are not even thinking about supporting new borrowing.

Spreads in Asia, in these extreme markets, have moved out of the range of any previously comprehensible relative-value analysis, not only against the rest of the world but also against each other. In early November, following the announcement of an IMF bail-out package for Indonesia, its debt traded 130bp tighter than Thailand's, even though Indonesia at BBB minus is rated a notch lower than Thailand at BBB. Spreads on Thai bonds, which had been widening all year from lows of 100bp at the end of 1996 to around 200bp following devaluation of the baht, hit more than 500bp over treasuries during October. That's a spread more in line with a single B rated corporate junk-bond issuer than an investment-grade sovereign borrower like Thailand.

Bankers may argue that with yields on long-dated US bonds at a historical low of around 6.2%, new deals could still be launched at attractive absolute borrowing levels, if only issuers would be realistic on spreads. The real problem, they say, is that borrowers are still hankering for the spreads they enjoyed before the crisis and are afraid of establishing new benchmarks for themselves at the new high spreads. "There is definitely capital out there ready to go to work," says Paul Smith, head of Asian debt capital markets for ING Baring. "But even since July, [when the Thai baht was devalued] borrowers have been trying to price new deals by adding a little bit of premium to the spreads at launch on their previous deals. They still haven't bitten the bullet and realized that investors will need to at least believe in the possibility of spread tightening on a new issue from present secondary levels."

Most of the talk about spreads is little more than sophistry. No-one really knows where Asian spreads are at the moment. Traders produce quotes for Thailand of 500bp one day, 400bp the next, then 500bp again. But there is no significant trading behind those figures, which may spring from a last trade of a mere $1 million-worth of bonds.

There is limited liquidity in one or two sovereign or quasi-sovereign 10-year bonds for each country, usually the global bonds or yankees. In everything else, trading is virtually suspended. Traders rely on guesswork when producing spreads, adding on a risk premium above the benchmark sovereign asset for corporate bonds that may, in reality, not see a single trade for days at a time. Bid-offer spreads are 25bp and more for benchmark bonds that used to trade on only 3bp. Dealing amounts are tiny, some brokers' screens have gone blank and traders seem to spend more time in the rest rooms than they do at their desks. There is no chance of meaningful price discovery for a new issue in such conditions.

The Philippines was the last sovereign borrower to explore the idea of a new bond financing, in early October, and it decided not to proceed. "They just wanted to say that they had some proposals on the table," claims one investment banker. "It was important for them to say that to appease a domestic audience. There was no real prospect for actually doing anything."

In early November, the last large corporate bond deal being marketed from the region, the 10-year $150 million 144A deal for Thai pulp and paper company Advance Agro, was completed at a huge spread of 911bp over treasuries. The company pays 75% of its costs in baht and receives 65% of its revenues in dollars. It is therefore the sort of Asian issuer for which the markets ought to be receptive. Its third-quarter earnings will show its margins improving as a result of currency devaluation.

The deal's low CCC+ rating from Standard & Poor's reflects concerns about liquidity in the Thai bank market and about the structural subordination of the unsecured bonds to the company's substantial secured bank debt (the company's implied senior-debt rating is single B). Advance Agro has paid a huge spread for an issue which, at $111.35 million, is smaller than intended. By issuing bonds with a 13% coupon at 89.8% of par, the issuer raised proceeds of just under $100 million after paying lead-manager Morgan Stanley Dean Witter its 4% fee. Half the proceeds will refinance existing debt, half will fund capital expenditure on its second plant. The company decided to forgo raising extra working capital at such high cost. Had it completed the deal before the recent market meltdown it would have paid at least 300bp less. The leading investors in the issue were US high-yield specialists, rather than emerging market investors. Some Asian issuers that previously relied on low-priced syndicated loans and regarded the US high-yield debt market with distaste, may follow Advance Agro into the junk bond market as bank funding dries up.

Don't give in to desperation

The danger for potential issuers is that the mere act of attempting to access such unpromising bond markets may be interpreted as a sign of desperation. Trying to raise long-term bond financing to appease short-term bank creditors - or to pay back a bridge loan to an underwriter - is no great marketing pitch for a new offer. Any corporate attempting to market a deal in the next few weeks would probably have to spend most of its time answering investors' questions about the sovereign credit. "What we're telling clients is: 'if you don't need to do it, don't do it,'" says Stephen Roberts, managing director of Salomon Brothers. Ultimately it will be up to the sovereign borrowers to reopen the markets and begin winning back new capital.

If the markets for Asian bonds are tough to read, it is tougher still to gain any true sense of what is happening to the loan portfolios of the local and international banks. The countries that have signed IMF packages - Thailand and Indonesia - have already offered some hint of what is in store. In Thailand, 58 finance companies have been suspended. Of 230 private sector banks in Indonesia, 16 have been closed.

But bank analysts in Indonesia say that for all its apparent political bravery, this is a token effort. The problems at those banks were well known and no-one was dealing with them much anyway. The Indonesian government might well close down at least the same number again.

With syndicated lending accounting for roughly 60% of new fund-raising by Asian entities, banks are at the heart of the problems in Asia. Unsustainable growth rates in the region have sucked all banks into excessive loan growth for most of this decade. That's particularly evident in Thailand where credit to the private sector as a proportion of GDP rose from 88% in 1991 to 135% at the end of 1996 and in Malaysia where it has risen from just over 100% to 158% over the same period. But worse than the growth in domestic lending is the increase in external debt. Between 1991 and 1996, Thailand's rose from $18.4 billion to $62.2 billion and that of the Philippines grew from $28.2 billion to $42.1 billion. Indonesia's increased from $64.1 billion to $91 billion. Worst of all has been the nature of much of this lending, which has financed not just excessive manufacturing capacity but also property and financial-market speculation. For these banks, currency devaluations are a potential killer.

Asia is suffering for its massive borrowing of short-term dollars which have been reinvested in local-currency assets of now doubtful quality. While currency pegs to the dollar remained in place and local interest rates were kept high to combat inflation, Asian governments underwrote and encouraged an irresponsible binge. Borrowers had no incentive to hedge their foreign-currency liabilities. Some companies borrowed short-term dollars and invested in local-currency instruments - not just conservative, liquid instruments like bank deposits but also higher-yielding commercial paper issued by other local companies. A number of companies used short-term dollar borrowing to finance long-term capital expenditure projects, directly contrary to normal good practice of matching maturity and currency of funding to assets and projects. The local banks were key intermediaries in all this, raising dollar debt and on-lending to local companies that could not raise the foreign-currency funding themselves.

The strongest go to the wall

"The irony of the situation in the Southeast Asian countries is that the companies who are now faced with the largest problems i.e. the ones who have the biggest FX losses, are the best credits, sine they were the ones that were able to borrow offshore," points out Avinder Bindra, managing director of Citicorp International. "The smaller companies stayed home and borrowed local currencies and are now probably in better shape." Large companies like Thailand's Siam Cement and Siam City Cement have billions of dollars-worth of unhedged foreign-currency exposure. Bankers are not sure how losses on these positions will be accounted for. Some countries may allow companies to amortize their losses over a number of years, because if they recognized all their losses up front many companies would be bankrupt. One banker says: "In Korea, the Korean banks and the government will take much of the pain. In Thailand, the foreign banks will share the pain. It will be every man for himself." Some Thai owners and managers are rumoured to be looting the transferable assets of their companies in the expectation that the banks will soon take control.

There is anecdotal evidence that some stronger international banks are seeking to upgrade their relationships with the better Asian companies during this crisis. Some foreign banks have benefited from a transfer of retail deposits out of local banks. As a result, their local-currency funding costs remain competitive. Singaporean banks are said to be making working-capital loans to stronger Indonesian companies at rates below prevailing levels on commercial paper. Meanwhile the local banks struggle. Some companies are trying to arrange short-term bilateral bank lines to keep themselves alive for the next few months. But it would be a brave bank - or perhaps one with no previous exposure to the region - that would start lending heavily now.

In Indonesia, companies were particularly fond of zaitech-type market arbitrage, borrowing dollars at 7% and investing in rupiah instruments for the 12 percentage point interest differential. "Some of these dollar borrowers now find that their local currency investments are not being paid off and the cost of carrying them is enormous," says Bindra. "However on an operating basis some of them are very good companies. The banks are now faced with a dilemna. They cannot let them all go." What the banks will do is the big and as yet unanswered question.

Lack of transparency, which has always been an issue for investors and lenders to the region, is now a major concern. There are fears that the full extent of bank and corporate unhedged foreign-currency exposure and of bad loans has yet to emerge. Figures are being bandied about for short-term dollar debt falling due within one year - $40 billion is often quoted for Indonesian borrowers - but their accuracy is uncertain. The region's central banks have little idea of the level of private-sector debt, the size of local commercial-paper markets, or of how holdings are split between local and offshore investors.

And more time bombs may be ticking away. Local accounting practices do not necessarily require banks or companies to revalue exposures on foreign-currency debt falling due in three or five years. No-one can be sure how close companies and banks are to the brink until banks refuse to roll over credit to the companies and the companies go into default, as has recently begun happening in Korea, for example with some of the retailers in the New Core chaebol (commercial conglomerate).

Funds dry up

"The biggest problem in the region now is liquidity," says Paul Shang, managing director at Lehman Brothers. "Under more normal circumstances, a bank would take a good look at a fundamentally sound operating business in Indonesia or Thailand with financial difficulties and decide to roll over its loans. But many banks don't have the luxury of making that decision, because they don't have the money themselves. Not only can the banks not raise tier-one and tier-two capital to pay for provisioning, in some cases they cannot even raise short-term interbank funding." He adds: "If a bank is looking at one company that's in trouble, it's easier to be creative in keeping it going. When it's a macro problem, it's much harder and much more frightening to keep putting money in."

Sources of funding are disappearing. Korean banks, which had been big buyers of high-yielding bonds from issuers in lesser-rated Asian countries, would now face a negative carry if they tried to buy, say, China's 10-year global bonds at credit spreads of 150bp.

It's not just local banks that face problems. Japanese banks are the largest foreign lenders to the region, with aggregate exposure according to the BIS of $94 billion at the end of 1996. Of this, $37.5 billion was to Thailand and $22 billion to Indonesia. Analysts reckon maybe half these exposures are backed by Japanese corporations and finance their local subsidiaries and affiliates. But with the Japanese banking system already hit by bad debts at home and its capital being eroded by falling domestic equity prices, it remains unclear whether Japanese banks will be rolling over credit lines to Asean borrowers or calling them in.

Asian financial markets have not yet bottomed out. Whenever markets briefly stabilize and stocks, currencies or bonds seem to recover, more bad news comes along and the sell-off continues. When Thai spreads widened from 90bp to 200bp in the summer, a few investors bought on the expectation they would rally, if not all the way back to 90bp, at least to 180bp. Instead they gapped out. Almost every investor that has bought Asian bonds this year believing they had been oversold way beyond fundamental value has lost money - except perhaps for the nimblest traders and hedge funds.

By mid-November, attention was beginning to focus on Korea, the world's eleventh-largest economy, much larger than its troubled neighbours to the south. It is the strongest-rated country in the region at A+/A1, even after downgrades at the end of October from AA/A1+, and is a member of the OECD to boot.

In late October, Korean state-owned borrowers outlined their hopes for capital-market fund raising in 1998 to a select group of foreign underwriters. They were looking for huge amounts. The Korean Development Bank (KDB) alone is hoping for $8 billion, Export-Import Bank of Korea (Kexim) wants just a little less and Korea Electric Power Co is seeking $2 billion. That's a total of $15-20 billion, or more that state-owned Korean borrowers hope to raise. Whether that is possible must remain in doubt. At the end of October, Kexim's $350 million Euro/144A deal mandated to Salomon Brothers and SBC Warburg Dillon Read was put on hold. "Spread on KDB 01s has jumped from the high 90s to around 320," says Chris van Niekerk, executive director responsible for debt capital markets at SBC Warburg Dillon Read. "That's clearly a huge spike-up. The volatility has been so great it's been difficult for people to digest the effects. Investors are left with some substantial mark-to-market losses and, as would be expected, many are taking a wait-and-see attitude before considering re-engaging."

On a relative-value basis, with KDB 10-year bonds trading in recent weeks anywhere from 200bp to 300bp over treasuries, it looks like the cheapest single A credit in the world. But no-one is looking at Korea on a relative-value basis any longer. To buy Korean debt, an investor must take a view on where Korea will be rated in six months' time - by then, its credit ratings may well have fallen further.

IMF to the rescue

At the end of October, just when the big Korean borrowers were discussing their funding plans with major investment banks, one or two voices were heard suggesting that the IMF would have to provide financial support for Korea before the year-end - a view many dismissed as alarmist. But by early November, previously scornful bankers were accepting the notion and busily calculating just how much might be needed. Most agreed a rescue package would have to be at least $70 billion, dwarfing those for Thailand, Indonesia and Mexico in 1995. The Korean government attacked some newspapers and analysts for speculating about an IMF bail-out. But rumours persist that there were informal talks between the IMF and the Korean government at the end of the first week in November.

Korea has suffered from a growing current-account deficit financed through external borrowing. Foreign-currency reserves have been depleted by an unspecified amount in a forlorn attempt to support the won. From September to mid-November the won fell from W890 to the dollar to W999, despite government intervention. Meanwhile evidence is emerging of financial mismanagement at banks and corporations, which may add to the burden on the public sector. In October the KDB estimated that non-performing loans at the eight large commercial banks were 14.7% of total loans. But it's a sure bet that, like almost every official estimate of the scale of bad debt in Asia, this will eventually prove to have been an understatement.

KDB itself has become a tool for bailing out the country's failing companies. The bank took a large equity stake in collapsing car maker Kia as part of a political effort to prevent Korean borrowers defaulting on loans to foreign banks. As a result, spreads on KDB bonds have risen as high as 300bp, up from 70bp earlier this year. That 300bp may look like a wide spread for a single A credit, but if KDB continues to act as a bail-out fund for junk Korean companies its bonds may end up yielding even higher spreads.

Some bankers are privately warning that Korea will be rated only just above investment grade before too long and that Thailand and Indonesia may be rated below investment grade before the crisis is over. Countries may yet resort to extreme measures. Because domestic borrowers are still threatened by currency exposure on their foreign debt, they may use up what liquidity remains in the financial system to buy dollars and sell local currency, thus exacerbating the problem. One foreign banker claims: "In Indonesia, for certain it was the local corporates suddenly selling rupiah to hedge their dollar borrowings that were behind most of the forex movements. They were far more of a factor than George Soros." He adds: "Some have now hedged but many haven't done anything yet." Capital controls may yet be imposed.

Trading mutual panic

Among the international commercial and investment banks in the region, the sense of panic is barely controlled. Most are trying desperately to unwind their own exposures. A system of crude financial barter has sprung up with the local banks. According to one foreign banker: "We might go to an Indonesian bank and say: 'We can raise $50 million of financing for you on a club-loan basis, but in return, you must spend $20 million of that buying some specific assets from us.'" It is a safe bet that these would not be top-notch assets, which raises questions over the quality of the loan to the Indonesian bank.

Many firms know they cannot reduce their bond inventory and much gossip focuses on the size of the paper losses at those firms still running large balance sheets. Peregrine, the largest player in local-currency debt markets, took out full-page adverts to deny rumours it was suffering financial difficulties. Bank lenders to the firm are, in the words of one, "monitoring exposure very carefully". Some firms may yet suffer for having sold protection in the credit-derivatives markets at spreads 200bp narrower than those now prevailing for Asian names. Other banks may pay for extending bridge loans to borrowers, a tactic some commercial and investment banks began using earlier this year as competition for capital-markets mandates intensified.

Jobs are certain to be cut. On November 4, NatWest Markets announced the closure of its Asian bond division and the loss of 55 jobs. At other firms job losses are already happening. In the Central district hotel bars and in Lang Kwai Fong, Hong Kong's bankers talk of little else. A saleswoman from a big American investment bank mentions that an analyst and two secretaries were let go last week; a broker from a British firm mentions sales heads being pulled back from an Asian country and asked to cover two countries from Hong Kong while other people are made redundant.

Even now, there is still some hope that conditions will improve next year. But this will require brave political leadership in Asian countries. Governments must confront problems, especially at financial institutions, and take credible measures to stamp out corruption and nepotism, and to restore confidence. If all these things happen, money will flow back into Asia.

Meanwhile a few borrowers may get deals away if they include credit clauses allowing for price step-ups in the event of rating downgrades or covenant breaches. Borrowers will give up flexibility to make financing acceptable. But even such credit structures must be used carefully. Put options may attract investors, but they can be a disaster for borrowers who find themselves having to repay deals just when their cashflow is weakest. Several Thai property companies, such as Bangkok Land, Hemaraj Land and Tanayong, have Euro-convertible bonds outstanding with put options exercisable in 1998 and 1999. Certain Thai property companies are already struggling to meet interest payments and those with puttable deals must now strive to restructure long-term debt to meet likely redemptions.

Flickerings in the gloom

There are some small bright spots in the gloom and signs that the capital markets might not close completely. On October 9, UBS priced a five-year $200 million zero-coupon credit-enhanced convertible bond for Taiwanese personal computer component maker First International Computer. The deal, following four similarly structured deals led by Goldman Sachs earlier in the year, enjoyed the rock-solid guarantee of a UBS letter of credit on the bond component. It was launched on a Monday, two weeks before the great Hang Seng meltdown but with north Asian currencies and markets just beginning to feel some pressure. It closed two days later. With no pre-marketing the deal was nine times oversubscribed, showing the strength of demand for the up-side in Asian equities where the credit-risk component is eliminated. Other issuers have benefited from the same structure. United Micro Electronics sold a letter of credit-backed convertible earlier in the year on a 20% premium at a time when rivals were issuing straight convertibles on 5% premiums.

At the height of Asian market volatility, Salomon Brothers completed a $178 million financing for Indonesian motorcycle-loan financer Putra Surya Multidana at 17bp over Libor. Investors took confidence from securitization of bike loans and a credit wrap from insurer FSA. That deal took months to prepare as the documentation had to be worked up from scratch. It shows the potential for securitization. The technique might be extended, most obviously to bank portfolios. Mandates are up for grabs from the Korean merchant banks for securitizations of lease contracts on capital equipment. Next year banks will try to sell collateralized loan obligations. "What borrowers have been tinkering with this year, they will now have to do out of absolute necessity," says Paul Smith, head of debt capital markets, Asia Pacific, at ING Barings.

Corporate borrowers will go down the same route. "In the past corporates were happy to keep expanding their balance sheets as they could borrow cheaply," says Citicorp's Bindra. "They must now realize they cannot continue doing that. Original-equipment-manufacturers in Taiwan, Korea, Malaysia etc. selling to multinationals on 90-day or 120-day credit should look at securitizing those receivables."

Commodity companies producing dollar earnings - from palm oil, nickel and oil for example - should also benefit. The largest equity deal from the Asean countries last year was the $471 million deal for oil company Gulf Indonesia which was listed in New York. "The equity capital markets may not be entirely shut, but rather be in a phase of extreme selectivity, open only to the right company at the right time and the right price," says Steven Wisch, managing director at Goldman Sachs. "For a company like Gulf Indonesia, which has dollar-denominated revenues, strong management, growth potential and is one of two pure oil and gas companies in Asia, American and Asian buyers stepped forward."

Despite declining confidence in much of south-east Asia all this year, both in secondary and primary markets, a record amount of equity was sold by Asian issuers in 1997. In the year to October, $25 billion was issued compared with $23.5 billion in the whole of 1996 and $11.3 billion in 1995. Fully 75% of the total for 1997 was from issuers in greater China - the People's Republic of China, Hong Kong and Taiwan.

That may presage a broader reordering of countries in the region as investors reassess growth rates, asset values and, above all, credit risks. When credit spreads have narrowed in the region during occasional rallies, beneficiaries have been China and Hong Kong first, followed by Malaysia, Indonesia, the Philippines, Korea and Thailand in that order. That's very different from their ranking by credit rating at the moment.

Six months ago, Korea was by far the top credit and China was the cause of most concern in the run-up to its takeover of Hong Kong. Now China, which went through currency devaluation in 1994, looks a more attractive story. The spread on China's five year global deal launched on October 22, just as the Hong Kong stock market crashed, widened from 68bp at launch to 85bp, event ally reaching 180bp before fluctuating back to between 100bp and 120bp. The China benc mark due in 2006 traded from 95bp to 250bp and back to around 150bp over the same period, a comparatively good performance for an Asian credit. China is one of the few Asian borrowers which, according to market rumour, had the market savvy and the resources to buy back its own debt as spreads widened.

New year, new structures

At the country and company level, 1998 will be a story of wholesale restructuring. "Companies will be forced into strategic re-evaluations of their businesses, their balance-sheet size and their structure, as it becomes clear that fundamental growth rates are unsustainable," says Roberts at Salomon. One obvious result will be more M&A activity as companies shed assets partly to raise capital, partly to adapt themselves to tougher operating and financing markets. Already foreign companies like Coca-Cola have seized the chance to buy up bottling plants in Korea.

Anyone in Asia with cash will be able to buy at bargain levels. Some investment banks are already thinking about shifting their emphasis away from heavily staffed capital-markets business towards principal investing operations. Others foresee the emergence of new patriarchal company owners among those Asian billionaires still able and willing to buy companies outright. Such private sources of capital may not replace the public bond and equity markets for Asian issuers, but they may at least tide some companies over.

If the better companies can survive the next few months some good may come out of all this, as long as the crooked and incompetent are flushed out. "You can say: 'Isn't it a pity what is happening to Asia.' But this is a classic day of reckoning," says Lehman's Shang. "A few of these companies have been engaging as a matter of everyday business in wrong-headed practices they should never have been allowed to get away with."

Eventually, Asian sovereign borrowers will return to bond markets, establish new benchmarks, lay the foundation of the country story and reopen the markets for other issuers. When they do so, they might be mindful of another long-term lesson of this crisis: the danger of overdependence on any one source of funding - in this case the international capital markets. There is plenty of capital within the region but it needs to be mobilized. Malaysian institutions tend to invest in Malaysia, Indonesian mutual funds in Indonesia. There have been Taiwanese dollar deals for the EBRD. Maybe it would be better for the Taiwan authorities to let other borrowers from the region sell Taiwanese dollar paper.

In coming years, these countries should foster better local capital markets with all the fixed-income infrastructure of liquid money markets, benchmark sovereign yield curves, strong regulators and credible rating agencies. "There's nothing bad about foreign portfolio investment per se, but it needs to be considered in conjunction with access to domestic capital," says Carlos Cordeiro, managing director at Goldman Sachs. "Indonesian companies should at least have a choice between term-rupiah financing and dollars. The responsibility for developing well-functining domestic capital markets is one that governments must take."

Hong Kong provides a positive example. It regularly runs a budget surplus, but began issuing treasury bills and notes at the start of the 1990s, added liquidity-adjusted facilities, made contributions to the provident fund compulsory and recently set up the Hong Kong Mortgage Corp. Bindra says: "One hopes all the domestic markets can develop on these lines, especially if central banks share the same spirit of cooperation with which they have tried to fight speculators."

Actions, not words

But before such grandiose schemes can get under way, Asia will have more short-term shocks to deal with. The crisis is not over and the pessimists - talking of widespread defaults, lasting recession, political upheaval, social disorder among the newly unemployed, possible ethnic violence against the Chinese in southern Asia - believe it may just be beginning. No-one knows where the bottom is. They only know that when the Hang Seng index crashed and pulled Wall Street and the rest of the world with it, the old financial order in Asia crumbled and its certainties were swept away. The new order is yet to be built. In such times it's perhaps wiser to watch what people do than to listen to much of what they say.

For western and Asian brokers, traders and analysts joining lunchtime queues at the larger bank branches around Central on October 23 and 24, it was a strange atmosphere. Some exchanged friendly greetings with old colleagues they had worked with in previous jobs but not seen for months, as if this were a big reunion party for the Hong Kong financial community. The air of unreality was understandable. Many would soon be returning to their Citibank Tower and Exchange Square offices to parrot to clients the official line that the Hong Kong dollar peg - Asia's last fixed exchange rate - would definitely hold and that the currency would never be allowed to devalue, no matter what devastation took place elsewhere in Asia. Many, perhaps more sheepish, remained grimly intent on the task they had all come to perform but few openly talked about: emptying Hong Kong dollar bank accounts and converting their cash assets into US dollars or European currencies.

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