Perspective on Asian financial crisis

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.