Economists Blame Short-Term Loans for Asian Crisis

Economists Blame Short-Term Loans for Asian Crisis

by Louis Uchitelle

CHICAGO -- Citing the rapid buildup in short-term foreign loans asthe major cause of the Asian crisis, U.S., South Korean and Japanese economists have called for new ways to curb such lending and borrowing.

In more than a dozen interviews at the three-day conference of the American Economic Association this week, a common theme emerged: that rules should be developed to discourage the sort of short-term borrowing that can suddenly leave a country like South Korea over indebted to the industrial nations.

Korea drew criticism for having gradually eliminated restrictions on such borrowing, contributing to the current crisis. But Japanese, European and U.S. banks were also faulted for eagerly making loans despite growing evidence of possible defaults.

"These were transactions that were willingly engaged in by willing lenders and willing borrowers, where each party should have recognized the attendant risks," said Joseph Stiglitz, chief economist at the World Bank.

A similar view came from Stanley Fischer, first deputy managing director of the International Monetary Fund, which is leading the bailout. Both men suggested ways to discourage short-term borrowing, saying, for example, that Chile had escaped a debt crisis for more than a decade in large part because that country had limited short-term foreign borrowing by making it more expensive than long-term loans from abroad.

Chilean borrowers are forced by government regulation to deposit a portion of foreign loans in a non interest-bearing account for six months or longer. A tax equal to 2 percent or 3 percent of each short-term foreign loan would also raise the cost to the borrower.

In another possible approach, Fischer suggested that governments in Korea and Thailand, for example, place ceilings on how much their banks could borrow in foreign currency.

Inhibiting lenders in the industrial countries is more difficult, and Stiglitz and Fischer were less precise on this point. The principal means of restraining the lenders, often big international banks, is to tell them, in advance, that in the next debt crisis they will lose their loans; that is, the IMF, the World Bank and their own governments will not put up the money for a bailout.

"There is a need for market discipline among lenders in the industrial countries to prevent this sort of crisis from happening again," Fischer said. But he stopped well short of suggesting that his organization would in fact enforce that discipline by refusing to lead a bailout if the next crisis were to threaten the global financial system, as the current one does.

Asian economists were not so reluctant. Chung Hoon Lee, president of the Korea America Economic Association, argued that the foreign banks should be forced to take losses on loans that go bad in countries like his own, rather than count on IMF and World Bank bailouts.

"That would be a market-based penalty that would make them more cautious," he said. Lee put the blame for the Korean crisis largely on Koreans: They took advantage of abundant foreign credit to build too many factories; their banking practices were inept and corrupt, and the Korean government gradually dismantled restrictions on short-term foreign borrowing. But he charged that Japanese, European and U.S. banks were far from blameless.

"These bankers weren't born yesterday," he said. "They knew about the Korean shortcomings. Blaming Koreans is a red herring. These bankers took the opportunity to make very risky, profitable loans, knowing that if the loans went bad, the IMF or the U.S. government would bail them out."

The Asian crisis stems in part from a lending syndrome that appears periodically, when interest rates vary markedly from country to country. The opportunity arises for a Japanese or European or U.S. bank to borrow yen or dollars at low interest rates, and relend the money at significantly higher rates for short periods to banks in, say, Korea or Thailand, which then relend the money for long periods at still higher rates to local companies.

The foreign banks roll over the yen or dollar loans as they expire, until the borrower's currency, such as the Korean won or the Thai baht, loses value. The foreign loans suddenly become more expensive to repay. The lenders, alarmed, refuse to roll over the short-term debt. The borrowers cannot repay fast enough, and a crisis erupts.

That story, in various forms, is common to most of the debt crises over the last 15 years. Pegged currencies -- in which a government will tie the won, for example, to the dollar's value -- encouraged the risk taking, and several economists argued that this practice should be discouraged by governments, even though pegging currencies has at times been condoned by the IMF as one way to fight inflation in developing countries.

"The Koreans and the Thais thought their miraculous economies could grow indefinitely at more than 7 percent a year, and they could earn enough to keep up payments on their excessive foreign borrowing," said Akira Kohsaka, an economist at Osaka University in Japan. "But suddenly they were hit with a slump in the sale of semiconductors, a major industry, and their good fortune unwound."