Limited impact

Lehman Brothers' name moves across a news ticker in New York's Times Square on September 15. REUTERS

A trader rests on the floor of the Philippine Stock Exchange. Asian stocks were dragged down by concerns Wall Street's upheaval will cause lasting damage to the global economy, sending investors fleeing to government debt. REUTERS

Asian policymakers see little risk their countries will be hit by a crisis similar to the economic meltdown of 1997, downplaying concern the US turmoil will infect the region's financial system.

"This is nothing" compared with 1997, Bank of Thailand Governor Tarisa Watanagase said on Bloomberg Television in Bangkok last Thursday. "The direct impact is very limited, although we may see some slowdown through the trade channel later on."

Central banks continued to pump money into their financial systems to ensure liquidity as investors sold shares of Australia's Macquarie Group Ltd and Kookmin Bank, South Korea's biggest lender. Asian banks have limited exposure to Lehman Brothers Holdings Inc, which filed for bankruptcy earlier last week, officials say.

"The risk to Asian banks is more from the impending economic slowdown and market turmoil than from direct exposure to the distressed US financial institutions," says Ritesh Maheshwari, a Standard & Poor's analyst in Singapore. Their "strengthened balance sheets as a result of healthy profits can withstand the impact of likely losses from direct exposure."

The Asian financial crisis, set off by plunging currencies, led to the collapse of companies as they buckled under billions of dollars of debt, forcing Indonesia, Thailand and South Korea to turn to the International Monetary Fund for bailouts. The region has since accumulated more than $3.3 trillion of reserves, about half of the global total.

BOJ's Shirakawa

"I don't think a financial crisis will take place in Asia," Bank of Japan Governor Masaaki Shirakawa said last Wednesday. "The situation of Asian economies is different from the time of the 1997-1998 crisis. They have plenty of foreign reserves."

The Japanese central bank last Thursday added 2.5 trillion yen ($23.9 billion) to its financial system in its third day of fund injections, while Reserve Bank of Australia pumped in A$3.015 billion ($2.4 billion).

"There is a credit crunch everywhere, even in Japan, but it's relatively better here as Japanese banks are still okay," says Susumu Kato, chief economist in Tokyo at Calyon Securities, a primary dealer required to bid at government debt sales. "Domestic institutions don't want to give money to foreign institutions, so the BOJ stepped in to stabilize the market."

Lehman's bankruptcy, the sale of Merrill Lynch & Co to Bank of America Corp. and the US government bailout of American International Group Inc last week has sparked concern of more financial failures, sending the cost of short-term credit higher in the US and Europe. In Asia, money market rates have remained relatively low.

Asia vs US

The difference between what the Japanese government and banks pay to borrow yen for three months reached its lowest in six months. By contrast, the so-called US TED spread expanded to the widest since Bloomberg began compiling the data in 1984.

The London interbank offered rate, or Libor, rose 19 basis points to 3.06 percent, the British Bankers' Association said last Thursday. The increase was the biggest since September 29, 1999.

Japan's banks and insurers, including Mitsubishi UFJ Financial Group Inc, have announced a combined 245 billion yen of potential losses tied to the collapse of Lehman, while lenders in China said they have about $384 million of exposure to the US securities firm.

Potential losses of Japanese banks "seem to be within the levels that can be covered by their profits", Bank of Japan's Shirakawa says. "There's no concern that the latest events will threaten the stability of Japan's financial system."

Thailand, which triggered the Asian financial crisis with the devaluation of its baht in July 1997, has no shortage of capital and the nation's lenders are "strong and resilient", Tarisa said last Thursday.

Thailand's Tarisa

The banking industry is "a lot more cautious and risk adverse ever since the 1997 crisis", she said. "We had learnt from the crisis. I don't think there is any chance at all that one of our banks will come into problems."

The exposure of local banks in the Philippines to Lehman is between 0.3 percent and 0.4 percent of their total assets, central bank Governor Amando Tetangco said in a Bloomberg Television interview last Thursday. Losses stemming from the holdings may hurt bank earnings though won't damage their capital, he said.

Australia's bank regulatory system is strong enough to give customers "certainty" about the state of their lenders, Prime Minister Kevin Rudd says even as he warned that it was a serious time for the nation's financial institutions.

IMF bailouts

During Asia's 1997 financial crisis, Indonesia, Thailand and South Korea spent most of their currency reserves attempting to prop up their exchange rates after investors abandoned them. The IMF arranged more than $100 billion of loans to the three countries after their currencies collapsed.

"Emerging Asia should be relieved that, unlike the 2001 tech bubble burst and the 1997-98 financial crisis, the 'action' has started elsewhere for a change," says Paul Gruenwald, an economist at Australia & New Zealand Banking Group Ltd in Singapore. "As a result, the region seems likely to pass through the current credit crisis relatively well."

Agencies

(China Daily 09/22/2008 page11)