Alex Brummer
As we know from the dramas at Barings and Bank of Credit and Commerce International, financial collapses in globalised financial markets are no longer national affairs. The collapse of Japan’s Yamaichi, one of the world’s top 10 investment houses, is a problem for the whole global financial system. It could not have come at a worse time or in a worse part of the world.
The timing, just as South Korea opens its negotiations on a $20-billion package from the International Monetary Fund (IMF), means that world financial officials will need to focus on twin problems at the same time: the implosion at one of the fattest tigers and cracks in the Japanese banking system. The two are not unconnected.
All the indications are that the South Korean banking system is close to bankruptcy, too. Under more normal circumstances, as a matter of Asian pride, Japan as the second largest economy in the world might have been expected to apply the balm by making available large lines of credit from its own financial system. But it is in no condition to do so. With the potential for a domino reaction within its own banking structure, following the Yamaichi catastrophe, the Bank of Japan will have enough to do looking after its own, without becoming too deeply embroiled in the Korean tangle.
As the IMF said in its updated October 1997 World Economic Outlook report, Asia has become the region of highest risk. The fund makes clear that the large swing in asset prices seen in Japan and South-East Asia poses threats to the “soundness of financial systems” and a more broadly based problem for stock markets and economic confidence.
That is not all. The fund, which is now having to sort this mess out, also noted that the flow of capital from the West to the emerging markets – $244-billion last year – is determined “by global cyclical conditions and vulnerable to higher interest rates”.
The question is how do the national authorities and the international policemen deal with this. Japan itself, whatever the short-term domestic risks, has to learn the Barings/BCCI lesson. That is that no single institution, whatever its pedigree, should be propped up.
The Bank of Japan has a duty to step in and assist in the orderly unwinding of positions, in which the main risk takers, the shareholders and bondholders, pay the price even if that depresses the equity markets.
The concern of the Bank of Japan has to be contagion and systemic risk, not the protection of a single interest group, however strong its political connections. One of the enduring lessons of events in SouthEast Asia is that bankers and economic officials make a historic error when they ignore the political context of their loans.
The most reassuring aspect of the seismic shifts in the global economy is that the United States has been alert to events. It also can claim virtue: its Budget deficit has been all but eliminated; growth is solid but not spectacular; inflation and interest rates are subdued; and the banking system looks well capitalised and better able to take the shocks than it was seven years ago.
If there is a problem it is on Capitol Hill, where fast-track trade negotiations have been stymied and funding for the fund, international rescues and global institutions is seen as waste.
The challenge for President Bill Clinton, the treasury secretary, Robert Rubin, and the Federal Reserve chair, Alan Greenspan, is to take on these attitudes and win through.
The twin problems of South Korea and the Japanese banking system are an economic security danger: they must be approached with the same speed and leadership qualities seen at the time of the Mexico crisis in 1994/95. If necessary, the Western exchequers will need to open their coffers after laying down specific reform conditions: this is too destabilising a series of events to do anything else.