Crises need not downgrade: IBCA<\/p>\n
JAKARTA (JP): The London-based rating agency IBCA said
\nyesterday that systemic banking crises do not of themselves
\nautomatically imply sovereign downgrades: much depends on the
\nscale of the problem, the manner in which governments bail out
\nbanks and the initial financial strength of the sovereign.<\/p>\n
The rating agency said in a statement released here that as
\nfar as the long-term foreign currency rating is concerned, if the
\ngovernment were to assume all the external debts of the banking
\nsystem, this would not amount to any change in the overall
\nsovereign debt burden, but simply a change of obligor.<\/p>\n
The following is the main points raised by IBCA in its latest
\nassessment of the banikng sectors in several Asian countries:<\/p>\n
Since IBCA looks at the total non-resident debt claims on a
\ncountry in assessing the sovereign rate, this in itself does not
\nimply a substantial difference in position.<\/p>\n
However, systemic banking crises invariably go further than
\nthis and often entail blanket provisions for non-performing local
\ncurrency lending and a recapitalization of banks. Simply printing
\nmoney to bail out banks may prove highly inflationary and risks
\ntriggering large-scale capital flight, as Venezuela discovered to
\nits cost.<\/p>\n
Timely infusions of liquidity through proper channels, coupled
\nwith a program to exchange non-performing loans for government
\npaper, are likely to prove much more satisfactory. It can also
\nallow the authorities to spread the cost of higher domestic debt
\nservice over time, particularly if existing levels of public
\nindebtedness are high. The cost of bailing out Mexico's banks has
\nbeen variously quoted at 8 percent to 12 percent of GDP but, to
\ndate, the government has spent a fraction of this.<\/p>\n
In the case of Korea, Bank of Korea was slow to respond to the
\nshock waves passing through the banking system following the
\ncollapse of Hanbo at the beginning of the year, preferring to
\nmaintain a hands-off approach. That approach has now been
\nsupplanted by a package of special loans to the worst affected
\nbanks, a state-administered fund to buy back problem loans and
\nassurances to foreign creditors that troubled financial
\ninstitutions' external liabilities will be honored.<\/p>\n
The assurance to foreign creditors is backed by Korea's
\ncautious foreign public debt policy.<\/p>\n
Likewise, Korea's long track record of budget surpluses,
\ncoupled with gross public indebtedness of less than 10 percent of
\nGDP, put the sovereign in a strong position to support the
\nbanking system. Even in IBCA's worst case scenario, the agency
\nbelieves the public debt\/GDP ratio would remain below 20 percent,
\nfar short of similarly and more highly rated sovereigns.<\/p>\n
The case of Indonesia is different. The conduct of fiscal
\npolicy has long been governed by the balanced budget rule which
\nrequires the authorities to match current expenditure to current
\nrevenue. To the extent that capital expenditure exceeds public
\nsaving this must be funded from external borrowing: there is no
\nprovision for the government to issue domestic debt and no
\nopportunity for it to monetize deficits. The scope for bailing
\nout the banking system using domestic resources is therefore very
\nlimited, necessitating additional foreign borrowing, hence the
\nrecent IMF package which has allowed the government to close 16
\nbanks.<\/p>\n
Thailand's case is similar to Korea's in the sense that it too
\nhas low gross public debt and the freedom to issue larger
\nquantities of domestic public debt. However, the scale of the
\nproblem is likely to be greater in Thailand in light of the
\nsharper depreciation of the local currency and the impact that
\nthis will have on the baht value of foreign currency debt
\nservice.<\/p>\n
Nevertheless, the main risk in Thailand remains the lack of
\npolitical will to take the necessary measures to restore
\nmacroeconomic balance and to reform the financial system. On
\nfinancing, official international support has been substantial.<\/p>\n
International bond issues are probably out of the question for
\nthe time being, but the sovereign's credit standing is probably
\nstill sufficiently good to raise medium- and long-term money from
\nforeign banks, while further regional help could be available.
\nHowever, public sector borrowing abroad to bail out ailing
\nfinancial systems without improved financial supervision and
\nregulation would put a severe strain on investor confidence.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/crises-need-not-downgrade-ibca-1447893297",
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