VIKAS BAJAJ and KEITH BRADSHER
Asia sails smoothly through debt traps

2010/02/09

While Asia is showing resilience in the face of recession, investors are alarmed about Greek, Spanish and Portuguese indebtedness, which highlights the fundamental weakness of the European monetary union, write VIKAS BAJAJ and KEITH BRADSHER WHILE rising government debt is a growing concern in Europe and the United States, Asia's economies remain remarkably resilient, even buoyant, underscoring how economic might is shifting from West to East.

China has been repaying some of what little foreign debt it owes, even as economists wonder whether Greece will require an international bailout and ask how long the US can sustain record budget deficits.

"We took a pass on the economic crisis," said Philip S. Carmichael, president of Asian operations at Haier, China's biggest appliance maker.

Even the Asian economies that have shrunk during the recession, like Malaysia and Cambodia, escaped the worst ravages -- with the notable exception of Japan, Asia's first industrialised country. Because of the Asian financial crisis of 1997, many Asian countries have been more conservative about borrowing and spending over the last decade than Western nations, which went on a debt binge during the good times and continued to increase their borrowing during the recession to try to turn around their economies.

Many economists say countries have to spend during recessions, increasing deficits and debts. But investors and economists alike worry about the long-term effect of mammoth debt on the vitality of Europe and the US. The longer it takes Western capitals to confront their overspending, the higher and more rapid Asia's rise will be, many economists say.

Even though Asian stock markets fell last week, analysts say there is no obvious Asian equivalent to, say, Greece. Investors see little risk of default among even heavily indebted countries like India and Japan.

In India, the government's debt is nearly 80 per cent of gross domestic product (GDP), but it owes more than 90 per cent of that money to its own citizens. Of the rest, a big chunk is held by agencies like the World Bank, which are not likely to press for quick repayment.

Compared to Greece, "the threat of these two defaulting is nowhere close, and the reason is that, thanks to high domestic savings rates, their debt is almost all domestically financed," said Kim Eng Tan, a sovereign debt analyst in the Singapore office of Standard and Poor's.

"If you sell bonds to your own citizens, and you do it in your own currency, you don't have much of a problem," said Ajay Kapur, the chief global strategist for Mirae Asset, a big South Korean financial services company.

China has been repaying some of its small external debt as it comes due, a luxury that a country with more than US$2 trillion (RM6.9 trillion) in foreign reserves can afford.

China showed a government budget surplus for the first 11 months of last year, but Western economists still expect a small deficit for the entire year because agencies tend to go on spending binges every December to avoid returning unspent money.

A few smaller Asian nations have had difficulties in the last year and a half. But they have been hurt more often by political strains than by economic troubles. Like Greece, Pakistan and Sri Lanka have relied heavily over the years on overseas borrowing. That started to dry up in late 2008, as fighting with insurgents in both countries began to scare off foreign lenders. Both ended up receiving assistance from the International Monetary Fund, and that has shored up their finances, at least for now.

Thailand and the Fiji Islands both had rating downgrades last year because of civil unrest as well, although neither required IMF assistance.

The Asian country hurt the most by the global financial crisis was arguably Mongolia, where a steep but temporary decline in world copper prices prompted the government to obtain a US$224 million IMF loan in March.

Though the risk of a full-blown sovereign debt crisis in Asia may seem remote, economists say there are other reasons that investors and policymakers should be concerned about high deficits.

In India, the growing fiscal deficit -- which reached eight per cent of GDP last year, up from 3.3 per cent in 2008 -- could damp growth by making it harder and more expensive for corporations and individuals to borrow money, said Ila Patniak, a senior fellow at the National Institute of Public Finance and Policy in New Delhi.

India's policymakers have signalled that they intend to pare the deficit by selling stakes in government-owned companies and reducing subsidies on fuel and fertilisers. Analysts point out that Indian governments have long promised those reforms but have struggled to deliver them due to internal political pressures.

China, too, has internal conflicts -- between rural and urban populations and between Beijing and the disparate governments in the provinces -- that make fiscal policy more difficult.

But the debt problems faced by Asian nations are neither as immediate nor as far-reaching as the growing debt in Europe and the US.

As investor alarm about Greek, Spanish and Portuguese indebtedness increases, the crisis has highlighted the fundamental weakness of the European monetary union. With no strong political arm to ensure that members observe debt limits set by treaty, the responsibility falls on European Central Bank (ECB) president Jean-Claude Trichet to try to resolve the crisis.

Last week, Trichet lectured European governments on the need to swiftly pare their budget deficits. "When you share a single currency with others, the counterpart is that you have to have a sound fiscal policy," he said during a briefing in conjunction with the bank's monthly policy meeting.

But then, in a gesture that did little initially to calm nervous investors, Trichet pointed out that the overall deficit level among the 16 euro countries, at about six per cent of GDP, was still well below that of the US and Japan, which are each set to borrow more than 10 per cent of their GDP's this year.

The lack of a strong central government to back up the euro is the most obvious difference between the ECB and its counterparts in the US and Japan.

If the crisis worsens, it would fall on European governments to arrange a rescue of Greece or any other ailing country, like Portugal.

While wanting to avoid anything that encourages further reckless borrowing and excessive government spending, they have indicated they will do whatever it takes to prevent a sovereign default of a euro member. -- NYT

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