August 17, 2001

Debt crisis alert

As Argentina is engaged in frantic negotiations with the International Monetary Fund in Washington, DC, to obtain emergency funds to stave off default on its foreign debt, bad news is coming in from different corners of East Asia clearly showing that the Argentine problem is just the tip of the iceberg. A new emerging markets debt crisis on a similar scale to 1997-98 is looming. What's worse, unlike then, the world's major economies of the United States, the European Union and Japan are now in synchronized economic downturn and cannot be counted on as relieving pressure through fast-expanding imports from the crisis countries.

In a report on the financial and money market situations in emerging economies, the state-run Korea Center for International Finance (KCIF) said on Thursday that declining trade surpluses are a key factor in determining the fate of emerging economies in Asia and elsewhere. It warned that while South Korea, Mexico and Malaysia had continued inflows of foreign direct investment and at present maintained stable financial indicators despite the financial crisis in Argentina, financial indicators in the Philippines, Taiwan, Poland, Brazil and Turkey were unstable - in less polite language, those places are ready to blow.

The KCIF left at least one other country off its critical list which, however, also on Thursday, saw fit to itself put its endangered condition into the limelight. New Indonesian President Megawati Sukarnoputri appealed to donor countries and other creditors to give Indonesia "breathing space" during her first state of the nation speech: "I would be grateful if the donor countries and creditors gave us breathing space so that we can fix our national life during this very hard transition period," she said in a nationally televised address to the Lower House of parliament. Indonesia is struggling under a US$140 billion public and private foreign debt burden that is roughly equivalent to its annual gross domestic product. An IMF team is due next week to discuss Indonesia's progress in meeting fiscal reform targets before deciding whether to unfreeze a $400 million installment of a $5 billion loan program, and the Paris Club of creditors is due to meet next month to discuss further rescheduling of Indonesia's massive foreign liabilities.

But the most alarming report we have come across is an August 16 "Market Insight" piece by Wall Street analysts Leto Research. Commenting on the Argentine situation, the report says: "For Argentina, the foreign debt repayments falling due between now and the end of Q1 2003 amount to $75.3 billion. This represents 27 percent of Argentina's annual GDP and 322 percent of its annual export earnings. For Argentina to avoid being considered insolvent, it must triple its exports, stop all imports and divert one-quarter of its GDP away from domestic consumption and investment to foreign creditors. It cannot be done." The report continues by detailing the debt situation of 12 other nations (in Asia including not only Indonesia and the Philippines, but also Malaysia and Thailand) which must pay some $330 billion over the coming 18 months and concludes flat out that under current global economic conditions such payments cannot be made.

What if anything can be done to head off debilitating East Asian and global emerging markets debt crisis in the months just ahead? For - undoubtedly unintentional - comic relief, President Megawati revealed in her speech to the nation that she had summoned her close family and instructed them against practicing any form of corruption. That may save a few dollars here and there. But meanwhile, the broader problem will just have to be faced and the new hardships it will bring will have to be ridden out - hopefully at long last to the effect of making the economic reforms left unfinished after 1997-98.

((c)2001 Asia Times Online Co, Ltd. All rights

http://atimes.com/editor/CH17Ba01.html

-- Martin Thompson (mthom1927@aol.com), August 16, 2001

Answers

Globalization...

If you thought it was a thrill on the way up...experience it on the way down!!

-- lael (lael@bb.net), August 17, 2001.