While the Fed chief sought to calm the world’s stock markets, Hong Kong took another drubbing, pointing to more turbulence ahead, write Madeleine Wackernagel, Mark Tran in New York and Paul Murphy in London
Asian stock markets took little comfort from the soothing words of Alan Greenspan, chair of the United States Federal Reserve Board on Wednesday, with Hong Kong the biggest loser once again by Thursday. The market opened lower and dipped further on news that Moody’s, the US ratings agency, had downgraded its outlook for Hong Kong banks from stable to negative.
The agency also launched a review of its assessments of the strength of Hong Kong’s two biggest banks, Hang Seng Bank and the Hong Kong and Shanghai Banking Corporation “for a possible downgrade”.
Moody’s said these actions reflect its concern regarding a potential deterioration in operating conditions, adding it “has concerns over the possible negative impact of currency pressures on the prospects for Hong Kong trade, especially in light of the significant currency depreciation experienced in South-East Asia.”
Bullish comments by Greenspan helped Wall Street to rebound but Asia wasn’t listening. In a carefully worded speech to a Congressional economics committee, Greenspan said the recent shock waves that have swept across the markets had to be viewed against a backdrop of “a continuing impressive performance of the US economy”.
The US central banker said that the whiplash in share prices, which led to trading being halted in New York on Monday, might even help prolong economic expansion.
“It is quite conceivable that a few years hence we will look back at this episode as we now look back at the 1987 crash as a salutary event in terms of its implications for the macro-economy,” he said.
Greenspan said that even after the sharp rebound around the world in the past 24 hours, declines in global markets have left investors less wealthy and business facing a higher cost of capital.
But that could favour the American economy, he argued. The economy – while exhibiting robust growth and low inflation — “has been drawing down unused labour resources at an unsustainable pace, spurred in part by a substantial wealth effect on demand” and the markets’ retrenchment of recent days “will tend to dampen that impetus, a development that should help to prolong our six- and-a-half-year business expansion”, he said.
Analysts immediately read this as evidence that the Fed now feels under no pressure to increase interest rates again when its monetary policy committee meets next month.
Commenting on the possible fallout from the Asian currency crisis, Greenspan said that declines in confidence in the region did have some direct effect on US corporate profits, but not enough to explain the recent behaviour of US financial markets.
If it had not been for developments in South-East Asia, the Fed chief declared, something else would have triggered a re- evaluation.
But he was less sanguine about the possible effect on Japan’s banks. “To the extent that Japanese banks are involved in lending to that region, it will have a more negative effect on them than on us,” he said.
And Greenspan admitted that resultant problems in Japan could have a knock-on effect on western economies: “As far as we are concerned it is not an issue that we are looking at without concern. We are interested and we are concerned and we would like to see the issue resolved as quickly as possible.”
The Fed chief said the US should be ready to lend temporary financial help. But giving the impression that the international authorities stand ready to guarantee failed domestic businesses “could ultimately unbalance the world financial system”, Greenspan warned.