IMF-led bank closures fuel Asia woes

IMF-led bank closures fuel Asia woes

SINGAPORE (Reuters): Harvard economist Jeffrey Sachs said yesterday the International Monetary Fund's (IMF) efforts to reform Asia's stricken economies had worsened the crisis by triggering a banking sector collapse.

He said the fund's requirement that Thailand, Indonesia and South Korea shut down ailing financial institutions in return for massive IMF-sponsored loans had only intensified the crisis in those countries.

"The credit and banking system has broken down deeply in Thailand, Indonesia and Korea," Sachs told students and academics in Singapore.

"The banks in these three countries can no longer open letters of credit with international banks," he said. This was gradually undermining industry and trade, he charged.

Their banking systems were flawed but functioning and moves to restructure them in a very short time frame, against a backdrop of credit rating downgrades, had tipped their jittery financial markets over the edge, Sachs said.

"Unless there is a direct approach to restoring banking services within weeks, the economic decline is going to be calamitous," he said.

The sharp depreciations of the Thai baht, Indonesian rupiah and Korean won had wiped out banks' capital and contributed to a ferocious credit squeeze, exacerbated by withdrawals of foreign credit and funds, he said.

High interest rates had done little to stabilize currencies amid a deepening loss of investor confidence, he added.

Sachs said there were few warning signals in the Asian crisis as most of the region's economies had strong foreign reserves, high savings rates and consistent budget surpluses.

"Right up to the last moment, in each country there was a considerable sense of calm... These were investible economies with great growth prospects."

Sachs said the markets had been unfairly harsh in their reaction to Indonesia's 1998/99 budget, unveiled last week and viewed by analysts as unrealistic.

Jakarta's projections of four percent economic growth, inflation at nine percent, the rupiah at 4,000 to the U.S. dollar and an increase in tax revenue sent the rupiah crashing through the 10,000 level and sparked shockwaves across Asia.

"Nobody looked at the budget. Why did it go up 32 percent in nominal terms? Because the exchange rate had collapsed, so the interest payments on debt went up sharply," Sachs said.

Indonesia needed a program to get its banks functioning in the short term and enough international support to bring the rupiah back to 4,000 against the dollar, he said.

"I don't think the banking sector should be allowed to go into full default. There needs to be a reasonable monetary policy. Interest rates need to come down to more normal levels."

He said Malaysia was likely to fare better than its neighbors, despite facing some similar problems, because its banking system was still functioning.