Shockwaves from the global financial turbulence threaten Asia.

The passage by the US Congress of the US$700-billion bailout package in an unprecedented bid to rescue struggling American financial institutions and avert an economic meltdown has failed to calm global markets as doubts grew about whether the rescue package will stem the financial crisis.

Stock markets fell sharply across Asia on October 6 as investors took scant comfort from Washington’s passage of the bailout bill and focused instead on the escalating financial turmoil in Europe, after one of Germany’s biggest banks had to be rescued over the weekend, the latest sign that the US crisis is spreading.

Six more banks collapsed in Europe last week and several other banks are in a precarious situation. Governments across Europe are rushing to prop up failing banks.

With the crisis spreading to Europe, Asian countries are now bracing for the fallout which they fear could be worse than the financial crisis which engulfed the region in mid-1997.

A dismal report on the US job market also added to the gloom, raising concerns about weakening US consumer demand for Asian exports.
From South Korea to Singapore, governments in the region are putting in place counter measures to shield their financial sectors from the fallout which could threaten vital industries and put millions of jobs at risk.

The establishment of an Asian Monetary Fund—first proposed at the height of the 1997 financial crisis and has been in the back-burner— is being revived.

The South Korean government is pushing hard for the creation of an $80-billion Asian fund to better cope with the global financial turmoil.

It is seeking the cooperation of Japan and China to accelerate the establishment of the fund, which will be created based on currency swap contracts. China and Japan are the world’s top two foreign reserve holders, having $1.81 trillion and $1 trillion in foreign exchange reserves as of August, respectively.

To prevent a recurrence of the 1997 Asian financial crisis, finance ministers of the Asean member states and the three East Asian nations — Korea, China and Japan — agreed in Spain in May to set up the fund to help provide emergency liquidity to financially-troubled nations from next year.

Korea, China and Japan have agreed to contribute 80 per cent of the fund, while 10 Asean nations were expected to provide the rest.
Seoul also seeks to establish a surveillance system within the Asian region to prevent financial crises in other regions from affecting the Asian markets.

Chinese Premier Wen Jiabao said China has taken “precautions and active measures” to deal with the crisis that has snowballed out of Wall Street.

The country’s financial market is safe and stable with generally adequate liquidity, he added.

To minimise the impact of the US financial crisis, China’s central bank has strengthened “prudent supervision” of its banks and ask them to enhance their own risk management.

With capital flows between China and the world still heavily controlled, Chinese banks have had relatively little direct exposure to the turbulence rocking the world economy.

In South Korea, the government has called on banks to sell their foreign assets and stock holdings to stem any shortfalls in liquidity.
“The government plans to help facilitate liquidity flows but financial institutions need to do their part,” finance minister Kang Man-soo told a meeting with the heads of local banks.

Kang also called on banks to transfer foreign currency deposits held in overseas banks back into the country to increase foreign currency reserves.

Korea’s finance ministry said it would inject a total of $10 billion into the nation’s won-dollar swap market to provide liquidity amid tightening credit conditions.

Singapore expects an economic slowdown that could last ‘several quarters’, not just one or two quarters, due to its heavy exposure to the global economy.

Finance minister Tharman Shanmugaratnam said that with its strong fundamentals, Singapore will ride out the crisis and emerge better than most countries.

But Tharman said the rescue package is “not a full solution” in addressing the real malaise: shortage of capital in the banks.
And because the problems are “deep and extensive:, it will take “a year or two” before the world emerges from the crisis, he said.
Singaporean banks are now dangling attractive fixed deposit rates to lure depositors.

With the tighter credit conditions, banks are unwilling to lend money to each other. Singaporean banks see term deposits as alternative source of funds.

In Thailand, the government is being urged to help exporters find new markets because demand in the US was dropping and having a spillover effect on Europe and Japan.

“Thai exports will suffer hugely next year, and this is critical given that exports generate 70 per cent of the gross domestic product,” said Dusit Nontanakorn, vice-chairman of Thailand’s Board of Trade.

Dr Tawatchai Yongkittikul, secretary-general of the Thai Bankers’ Association, said the financial crisis would hurt the real sector despite the limited direct impact on Thai financial institutions.

He said the finance ministry and Bank of Thailand should work closely to monitor liquidity.

In the Philippines, officials said banks are in a much better position to withstand a global financial storm and are in no need of a lifeline, like the US.

“The issue there (in the US and Europe) is deterioration in solvency. In the Philippines, we have no solvency issue here as we learned our lesson in 1997,” said Nestor Espenilla Jr, central bank deputy governor.

Espenilla said Philippine banks were resilient and even those with exposure to distressed foreign institutions such as bankrupt investment bank Lehman Brothers could very well manage the hit.

Seven banks in the Philippines had a total exposure of $386 million in Lehman, equivalent to around one per cent of their total assets.

The central bank said it would keep providing ample liquidity to banks to limit the fallout from the US financial turmoil.

But economic planning secretary Ralph Recto noted that the Philippines might experience some slowdown in exports in the event of US recession.

In Indonesia, vice-president Jusuf Kalla said the country could well absorb the impact of the US woes on the back of strong exports of commodities in high global demand, regardless of any shakeup in the global economy.

“It’s impossible that the world does not need our commodities,” Kalla said. “Regardless of the degree of the crisis in the US, the world still needs oil, coal, textiles and palm oil.”

Raden Pardede, chairman of the Indonesian Financial System Stability Forum, said the financial turmoil would not extend far into the Indonesian financial system because of the relative unavailability of complicated securities products in Indonesia.

“Derivative products packaged similar to the US subprime mortgages, now known as toxic assets, are not that developed here. We are grateful our financial institutions were not lured into issuing such products,” he said.

In Japan, its central bank has been pumping emergency funds into the short-term money market for two weeks in an effort to keep credit flowing.

The US bailout plan, which is intended to reinvigorate the credit markets, has stirred fierce criticism from those who resent the idea that Wall Street is being ‘bailed out’ at taxpayer expense.

Under the deal, the US government would buy the ‘toxic assets’ held by banks in the hope of restoring confidence and unfreezing credit markets.

But market experts warn that the rescue package is not a cure-all and does not guarantee that banks would start lending again.

Some banks may just hoard the cash they receive, making the lending logjam worse.

“Worries remain over the global economic outlook so financial markets are unlikely to stabilise,” said Masamichi Adachi, senior economist at JPMorgan in Tokyo.

The near certainty of a recession is also making it too risky for the thousands of small- and medium-sized banks across the country to lend to people. (By NOEL ADLAI O VELASCO In Bangkok/ ANN/ AsiaNews)

With reports from ANN members.