Merrill Lynch sees no fast end to Asian crisis

Merrill Lynch sees no fast end to Asian crisis

FRANKFURT (Reuters): There are no signs of the Asian currency crisis abating as the region's businesses and households shun local units in favor of the U.S. dollar, Merrill Lynch chief global currency strategist said on Monday.

At a presentation of Merrill's annual global currency and debt outlook, Michael Rosenberg said the economies in the region were trapped in a vicious circle of currency and debt crises.

"What we've had in Asia was a huge debt build-up which led to a currency crisis which in turn led to a debt run and as the debt crisis gets worse it adds to the currency crisis," he said.

He said that even though some currencies could appear undervalued after the recent steep falls, investors should avoid them until the situation stabilizes.

William Belchere, Asian fixed income strategist, who attended the presentation, said a currency to watch in 1998 was the Hong Kong dollar. It so far has managed to defend its U.S. dollar peg, but could still come under renewed speculative attack, he said.

He also said that while current rescue efforts focused on restoring liquidity in the region by rolling-over short term debts and debt restructuring, a necessary overhaul of the region's financial systems would take years.

As the immediate fallout of the crisis, Merrill Lynch expects a significant slow-down in growth with some economies already falling into a recession.

Belchere said that even though the countries of the region should contribute to a global deflation trend by trying to export their way out of the crisis, steep depreciation will drive domestic inflation rates sharply higher.

He said costly bailouts would worsen fiscal balances in the region. Also further credit rating downgrades should be expected.

Such downgrades were still possible for Indonesia, Malaysia, Thailand, Korea, India and Pakistan, Merrill Lynch said in its report.

It rated Philippines, Singapore, China, Hong Kong and Taiwan as stable.