Sunday, November 11, 2007

Asia Meltdown

Reading this book Asia Meltdown - The End of the Miracle? by Leo Gough, published in 1998. This book chronicles the sequence of events of the 1997-98 Asian financial crisis, the crisis I personally experienced 10 years ago. The memory is still vivid, just as if it happened yesterday.

The book puts the blame on the unsound banking systems in the South-East Asian countries, especially Thailand, the country that triggered the collapse. First, it was a property boom. Then Thai banks borrowed from foreign lenders loans in dollars terms, then lent to domestic borrowers in baht. High-rise buildings mushroomed in Bangkok, without knowing who would buy those buildings, until one day, they find the buildings are there standing empty, no tenant, no buyer. The companies that built them became insolvent. Borrowers defaulted on their loans, banks accumulated mounting 'non-performing' loans. When the news spread to the outside world, foreign investors lost their faith in the Thai financial system, lost faith in Thai baht. Nobody wanted to be the last person holding the Thai baht, which triggered the heavy devaluation of the Thai currency in a couple of months. Easy credit vanished over night. Even the 'lender of last resort', the Thai central bank, ran out of US dollars. Following Thailand's footstep, Indonesia, the Philippines, Malaysia, Hong Kong, South Korea & Japan fell one by one. The mighty tigers, dragons lost their financial power, the wealth accumulated over the past 10-20 years evaporated. Money just disappeared.

Does that sound very familiar? Change the name of the country from Thailand to the United States of America. First that was a property boom, easy credit was available to people who previously was not qualified for any mortgage loans. Then suddenly there is an increase in 'non-performing' loans, a credit crunch ensued. Well, the Americans are a lot smarter, they packaged the 'non-performing' loans to be CDOs and sold them to the unsuspecting investors, who naively thought those were AAA rating investment grade debts. The US dollar is very much like the Thai baht 10 years ago, people avoid it like a plague. When the Asian Financial Crisis happened, IMF was called in to bailout the nations. If a financial crisis of the same scale, of the same nature happens to the Americans, will IMF be able to bail it out? Or would America be willing to let IMF bail itself out?

If the US does not want to take the bitter pill to clean up the mortgage industry, as well as the banking industry, the problem will continue. The burst of the bubble will not be avoided, it is only delayed. The pain will be more unbearable for a delayed burst.

Events unfolding in the next couple of months will be very interesting to watch. I bet a 75% chance of a crisis or a recession in the US by the end of 2008. Ah Ben is now between a rock and a hard place. No matter what policy he implements he will 'die', it is just a matter of whether he puts the national interest above the Wall Street interest or vice versa.

Now I am more interested to know what would happen to Asia if there is a financial crisis in the US. Would Asia fall together with the US? or ???

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