Perspective on Asian financial crisis

The following article is excerpted from a presentation by Deputy Prime Minister and Minister for Foreign Affairs of the Netherlands Hans van Mierlo before the Indonesian-Netherlands Association and the Forum Indonesia-Netherlands on Feb. 11, 1998 in Jakarta. This is the first of two articles.

JAKARTA: The seriousness of the Asian crisis and its possible consequences, especially in the social field, have attracted enormous media attention in the Netherlands. It would probably be hard to find a Dutchman who has no knowledge of the financial and economic crisis in Asia and its likely consequences in other fields. In my country Indonesia occupies a special position, both because there are so many Dutch citizens with Indonesian roots and because of the immense popularity of this beautiful country as a tourist destination. We feel in a sense emotionally involved in any adverse effects on the living conditions of ordinary Indonesians.

For quite a few years this part of the world has been recognized as an engine of global economic growth. Now this "engine" has suddenly started to shudder. Sometimes it may even seem as if it could come to a halt at any time.

In July last year, when the Asian financial crisis started, nobody could have predicted that it would, within a short period, affect so many people in so many countries. Prestigious international organizations, such as the International Monetary Fund, the World Bank and the Asian Development Bank were -- on the whole -- positive in their comments on the economies of the Asian tigers and the sound macro-economic policies of their governments.

Only a few critical voices argued that the Asian tigers were bound to suffer diminishing returns eventually. They pointed out that the current account-deficits of the tigers were as high as the deficits of the countries in Latin America that suffered a crisis in 1994. However, even they expected a more or less conventional currency crisis that would be followed by a modest downturn. They did not foresee that domestic asset markets would collapse, nor that widespread bankruptcies and bank failures would occur. Nevertheless, this is what we have seen, not only in the most affected countries like Indonesia, South Korea and Thailand, but to some extent elsewhere in Asia too.

Experts and analysts see a common thread in the origins of the crisis, although it affected different countries in different ways. This common thread is that inefficient banking systems allowed their customers to build up excessive credit, creating bubbles which caused serious damage as they burst. Of course, in this respect it is important to note here, that there has been an enormous influx of foreign loans. To a certain extend, the international financial sector has a shared responsibility for supplying credits without sufficient surveillance.

Loans were used to invest in real estate markets, or to allow companies to expand. The collapse in real estate and share prices resulted in a considerable deterioration in the position of the banking sector. As national currencies were mainly pegged to the U.S. dollar, it had been quite profitable to attract short-term loans in foreign currency, because interest rates for U.S. dollar loans were considerably lower than for loans in national currencies. When the direct link between the national currency and the U.S. dollar had to be abandoned, and national currencies devalued, repayments of loans and interest payments in foreign currency became an intolerable burden. Governments tried to alleviate the crisis by using their foreign currency reserves, but he only effect was to deplete those reserves.

To overcome the crisis some governments, in Thailand, South Korea and Indonesia, had to ask for international assistance. These countries were promised substantial financial support. However, their governments were obliged to accept the conditions attached to IMF-support, such as measures to restructure the financial sector, liberalize the capital market and tighten up monetary and budgetary policies. This should help restore the confidence of the international financial markets.

Experts from international financial institutions conducted a fierce debate on whether the IMF medicine was the appropriate way to address the crisis. The question was: Is the IMF-medicine killing the patients instead of healing them? Some experts feared that tighter budgetary and monetary policies would negatively affect the private sector's capacity to recover.

I think that -- in the circumstances -- restoring confidence in the market and promoting monetary stability have the greatest priority. Tightening up monetary policy is in such cases unavoidable, though in the short term it may cause problems for the financial position of the banks and private sector. Taking this into account, there should be confidence in the appropriateness of the IMF medicine, bitter as it may be.

A second point of criticism was that public funds should not be used to compensate foreign investors. Investors could afford to disregard every risk if they knew that governments all over the world would be prepared to assist in bail-out operations in the event of a financial crisis.

Although we share this concern, the Netherlands was in favor of and has agreed to substantial financial support to Indonesia, Thailand and South Korea. Lack of such support might result in a deepening of the crisis and it spreading to other parts of the world.

To address the question of using public funds for bail-outs, the Netherlands government has -- from the very beginning of the crisis -- advocated in international fora the idea that commercial backs (I already talked about shared responsibility) should be involved in the solution and, therefore, should help bear the costs of the crisis. We appreciate that in South Korea and in Indonesia commercial banks have accepted their responsibility. This will, we expect, lead to a perception in financial markets that foreign investors have to pay a price in financial crises. Furthermore, we have emphasized that further study is needed on ways of achieving more equitable burden- sharing among international financial institutions, bilateral governments and commercial creditors. We will follow this issue up in the IMF.

Although it is not possible to prevent financial crises altogether, we do see possibilities of reducing the risks. IMF supervision can be enhanced, for instance by paying more attention to the financial sectors and to debt management. In this context I am in favor of making IMF surveillance reports public. We have advocated these ideas in the IMF and will continue to do so.

Window: Although we share this concern, the Netherlands was in favor of and has agreed to substantial financial support to Indonesia, Thailand and South Korea.