World Bank gives nod to guarantee Asian govt debt

World Bank gives nod to guarantee Asian govt debt

TAIPEI (Dow Jones): The World Bank agrees "in principle" to the concept of guaranteeing sovereign borrowing in Asia as a way to help these countries access liquidity but only if it's paired with credible programs, a senior economist at the multilateral institution said Tuesday.

"But if we're not convinced about how the money would be used, that it would be part of a credible expenditure program, then we may not participate," Chad Leechor, senior economist at the Washington D.C.-based World Bank said in an interview with Dow Jones Newswires.

Moreover, drawing on his recent experience heading the research department of the Hong Kong Monetary Authority, Leechor noted that the strong concentration Hong Kong authorities have placed on the pegged exchange-rate system "is misplaced emphasis."

"Hong Kong can do equally well under a fixed-exchange rate or a flexible rate," Leechor said. "Hong Kong has a very streamlined, strong economy. How quickly will it recover - that depends on the rest of the region but I would say even if the rest of region doesn't recover, Hong Kong will."

However, the likelihood Hong Kong authorities will drop the peg is low, Leechor said. "If you were to ask me should they change it? Yes, they should."

Leechor spent most of 1997 and part of 1998 on leave from his 15 years at the World Bank to work with the HKMA. The monetary authority often draws upon the expertise of economists from multilateral institutions or foreign central banks to upgrade its knowledge of financial markets.

Though Leechor doesn't agree with Hong Kong's recent intervention in the stock market, it's understandable given the situation there has worsened beyond expectations.

"The slowdown in the economy is deeper than expected and the interest rates are higher than expected," Leechor said. "Actions of the HKMA are motivated by the need to deal with the shock."

Echoing similar statements made by other World Bank officials and academics, Leechor said capital controls can't be dismissed as a way to help Asian economies recuperate.

"To rule that out is irrational. It's like bankruptcy protection - it looks bad...but is needed to provide quick pain relief," Leechor said.

However, he stressed the World Bank isn't promoting the use of capital controls since in the long term, they allow large inefficiencies to creep into the markets.

Malaysia caused a stir in international markets last week after the government shut down offshore trading of the ringgit (MYR) and fixed the currency at 3.8 ringgit to the U.S. dollar. The move was aimed at keeping the exchange rate stable while loosening monetary policy in an effort to revive the economy.

Leechor said Indonesia and Thailand should have implemented capital controls a year ago when their currencies were wildly fluctuating.

"All of them should have done this a long time ago. Indonesia should have done it in August instead of playing around with their exchange rate band," Leechor said. "Thailand should have done it in January 1997. It would have made more sense then."

Leechor also said many Asian countries are approaching their lending ceilings, especially Indonesia, and it is unlikely they will get them raised.

"We can't jeopardize the benefits of others" by loaning more money to Asian countries, Leechor said. Indonesia has so far borrowed roughly US$15 billion from the World Bank which is right about where their cap is.

The World Bank's portfolio is near US$200 billion, Leechor said.

Indonesia is by far the sickest country in Asia, Leechor said. He noted the corporate debt restructuring is "under the best circumstances, extremely difficult."

"On top of the structural complexity, most of these companies and banks have no money to back their lenders," Leechor said.

He noted that debt restructuring may get so complicated that the only reasonable thing to do is to give up.

"The most rational thing for borrowers may be to just walk away," he said. Indonesia's foreign debt exposure is roughly US$80 billion. Companies are currently in negotiations to roll over or restructure this debt with foreign banks.