Sunday September 27, 2:35 am Eastern Time
(copied and circulated for educational purposes only...
By Sarah Davison
HONG KONG, Sept 25 (Reuters) - A huge U.S. bank bailout for a major U.S.
hedge fund threw salt in Asia's
financial wounds on Friday, where economies continue to collapse due to
lack of cash.
``There's no denying the system works in favour of the advantaged,'' said
Peter Perkins, strategist at Daiwa Research
Institute. ``At the end of the day, the big boys get to say what the rules
are.''
At the behest of the Federal Reserve Bank of New York, a group of mainly
Wall Street banks coughed up $3.5 billion
for Long-Term Capital Management after a bet went badly wrong.
LTCM is believed to have borrowed as much as US$100 billion, threatening
losses exceeding the entire foreign debt of
Thailand or nearly two-thirds of that of South Korea, once the world's
11th largest economy.
The banks agreed to recapitalise LTCM, a hedge fund typical of those that
fuelled the Asian crisis, while Asia struggles
to negotiate debt writedowns from many of the same banks.
``Merrill Lynch or Citibank, they have more flexibility because not many
of those guys can go before the whole system
crumbles,'' said Perkins. ``But the further out on the periphery you are,
the most expendible you are, and places like
Thailand are out on the periphery.''
LTCM is already being called a watershed for its dramatic reminder of the
force of the global financial crisis, and the
severity of the global credit crunch it portends.
Once burned by LTCM, banks will be twice shy about investing in hedge
funds -- or anything else, for that matter.
And the fears of another ticking timebomb a la LTCM will add to that
reluctance to lend, fuelling an already critical
credit squeeze in those parts of the world worst affected by this global
financial crisis.
``Banks will begin to look (more warily) at hedge funds again and we'll
have a contraction in global liquidity. We were
going to have that anyway, but this will speed it up,'' said another
strategist, who declined to be identified.
Andy Xie, economist at Morgan Stanley Dean Witter, estimates at least 20
percent of $380 billion in total foreign loans
to Asia will go bad, and Europe is especially exposed.
So far, banks are rolling over foreign debt and refusing to accept
writedowns, but soon writedowns will become
inevitable.
``These companies just cannot pay back these loans,'' Xie told Reuters
Television. ``As soon as you recognise this, that
you are not going to be paid back, you have to write it down. It will take
a huge bite out of your capital.''
But the unnamed strategist argued that while credit will certainly become
even more scarce in Asia, this region now has
less to lose than other regions and could, therefore, benefit.
``Bizarrely, Asia one of better places to be because how can you contract
credit any further here? We don't even have
a banking system,'' he said. ``The only thing that can happen from here is
to rebuild capital and the lending process from
here.''
Using Bank for International Settlement figures, this strategist estimated
that the world's biggest banks lent more than
129 percent of their capital to global emerging markets, and so far about
30 percent of those loans are non-performing.
``If it's 30 percent, we've just wiped out half the world's bank
capital,'' he said, to stress the severity of the impending
credit crunch.
Asian analysts said U.S. banks bailed out LTCM because they were told to
by the Federal Reserve Bank of New
York, which abides by a strictly domestic mandate.
There is no-one capable of forcing a similar recapitalisation in Asia.
``What the Federal Reserve coordinated was sensible from a U.S. point of
view,'' said Dong Tao, economist at Credit
Suisse First Boston. ``And the banks have to listen to the Fed.''
-- Hong Kong Newsroom (852) 2843 6441; Fax 2845 0636
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