A summit engulfed by crisis
Alarm grows over Asia's worsening financial turmoil
The new containers are sprouting all over South Korea, from government offices in the highrise capital of Seoul to factory floors in industrial centres like Pusan. Boxes, tins, jars—they all have one purpose: to collect spare change in foreign currency to help rescue the country from its financial crisis, one cent at a time. “Let’s collect pennies, dimes and quarters abandoned in desk drawers,” reads the sign in one Seoul municipal office. A two-day rally in Seoul’s Tapkol Park collected $850 from passers-by in spare change. “My uncles used to give me U.S. coins whenever they returned from overseas trips on business, and I collected them,” explained 14-year-old Pae Min Bom, as he emptied a paper sack of currency into a collection box.
The outpouring reflected a sense of crisis spreading through much of Asia. Last week, it was felt nearly as strongly in neighboring Japan, the world’s second-richest nation. There, TV viewers watched in shock on Nov. 24 as the president of Yamaichi Securities broke down in tears while announcing that his 100-year-old institution, Japan’s fourthlargest stock brokerage, was bust. Coming on the heels of the failure of another securities firm and two banks earlier in the month, Yamaichi’s collapse devastated confidence. The next day, the Nikkei share index lost five per cent of its value and the yen fell to a five-year low against the U.S. dollar; by week’s end, stocks had recovered, but the yen remained shaky. “I would like to make clear,” declared Prime Minister Ryutaro Hashimoto, in Vancouver for the summit of leaders of the Asia-Pacific Economic Cooperation forum, “that Japan’s prob-
lems are separate from those of the so-called Asian currency crisis.” But money managers saw only too much in common with the spreading Asian malaise, and promptly began reading the negative implications for Canada’s economy. The dollar lurched downward and interest rates ticked unsettlingly up on forecasts of fewer Canadian exports to Asia (page 44). Grimly, an American banker working in Tokyo agreed with Hashimoto that Japan is different. “The world’s second-biggest economy is not just another domino,” he said. “If Japan fails, it would be like the main wall of the house collapsing.”
The mere spectre of such a collapse was enough to hijack the annual APEC summit. The $50-million reception that Ottawa had prepared was meant to showcase Canadian diplomacy and export products. Instead, events on and off the APEC agenda commanded more attention—and irritation. Rain drenched Prime Minister Jean Chrétien and U.S. President Bill Clinton during a golf game with Singapore Prime Minister Goh Chok Tong. More serious were charges that the RCMP used heavy-handed tactics to subdue anti-APEC protesters. And far from focusing on the forum’s goal of free trade, the summit’s centre-
piece private meeting of leaders turned instead into a seminar on crisis management. In public, however, Chrétien stuck to what clearly was the summit mantra: that the fundamentals of Asian economies remain healthy. “The prospects for economic growth in the region are strong,” the Prime Minister intoned as he read the closing communiqué.
Within hours, continuing financial tremors across the Pacific called that judgment into question. On Wednesday, Tokuyo City Bank, another medium-sized Japanese institution folded. The same day, Moody’s financial rating agency, which had contributed to Yamaichi’s demise by downgrading its bonds to junk status on Nov. 21, gave five other Japanese banks notice that their paper could be next. Shaken, Japan’s finance minister and the governor of the Bank of Japan issued a joint plea for calm, insisting: “There will be no further turmoil.”
Few shared their confidence. The government officially admits that Japanese banks hold $305 billion in worthless loans. Making good that amount alone directly from the Bank of Japan would almost exhaust its foreign currency reserves of $314 billion. But unofficial estimates place the real load of bad debt at up to twice that—a staggering half a
% trillion dollars or more. “They’ve hidden the extent of the 3 problem,” said John McCallum, chief economist of the I Royal Bank of Canada, noting that the failed Yamaichi 3 brokerage had concealed $2.8 billion in trading losses. “If g there were hidden losses with Yamaichi, how do we know t; there aren’t hidden losses everywhere?”
Not only losses, but in many cases larceny as well. Last week, Japanese newspapers detailed how executives at Dai-Ichi Kangyo, one of the country’s top banks, siphoned off millions of dollars in illegal payments to racketeers, known as sokaiya, who disrupt shareholders’ meetings. The executives were among more than a dozen arrested this year in a spreading corporate extortion scandal.
The crisis in the rest of the region will only worsen I things for Japan. An estimated forty cents of every dollar 1 owed by the four faltering Southeast Asian “tiger” I economies—Thailand, Indonesia, Malaysia and the 1 Philippines—is lent by Japan. As borrowers in those coun° tries go under in the months ahead, the bad-loan burden on Japan’s banks will only get heavier. At the same time, the free fall in South Korea’s won will price many of that nation’s exports—including cars and consumer electronics—well below competing goods made in Japan. That will put new pressure on the only robust sector of Japan’s otherwise stagnant economy.
None of this appears to faze Japan’s government. In Vancouver, Japanese officials said their wealthy country was well able to deal with its woes. “The non-performing loan problem is being disposed of,” Hashimoto told a news conference. Japan’s bloated finance industry, he added, will be forced to restructure itself on more competitive lines when deregulation exposes it to wider competition beginning next April.
Official sangfroid was the rule among South Korean leaders as well—in Vancouver and in Seoul. At the APEC summit, Korean spokesmen played down the country’s decision to call in the International Monetary Fund (IMF) on Nov. 21—one day after Finance Minister Lim Chang Yuel denied the need for a bailout. “The Korean economy’s fundamentals are very sound,” argued spokesman Kim Ki Whan.
That sunny view was not what Father Chu Kyo Yoon saw last week when he looked out over his congregation at Chongpa-dong Cathedral in Seoul. The modest place of worship is within sight of the headquarters
of some of South Korea’s largest conglomerates, the industrial giants known as chaebol. The soaring office towers belie the chaebol's humbled stature: so far this year, seven have announced they are insolvent. Most analysts believe the same is true of half the 30 leading banks. And last week, Korea’s biggest department store chain sought court protection—the ninth big retailer to go broke this year. Companies that have survived are ordering layoffs by the thousands. “I’m worried about my people losing their jobs,” said Chu. “My own father has already lost his,” added the 38-year-old priest, “and I fear we’ll see more and more people saddened by unemployment next year.”
It is a humiliating climb-down for a country
whose leaders only last year celebrated South Korea’s acceptance into the Organization for Economic Co-operation and Development— the so-called rich countries’ club. But the problems had been brewing for years. Following the Japanese model of a state-managed, export-driven economy, South Korean governments for years directed banks to lend vast sums to the mainly family-owned industrial chaebol—meaning they did not have to rely on public share issues for financing. “Crony capitalism,” is how economist Sylvia Ostry describes it. “There was no shareholder pressure,” says Ostry, chairwoman of the Centre for International Studies at the University of Toronto. “And there was a built-in propensity to over-invest.” Now, many of the chaebol are struggling under massive debts and profitless overcapacity.
Still, South Korean officials tried to minimize the significance of Seoul’s initial request for $28 billion in aid from the IMF. “By international standards, that hardly amounts to anything big,” joked spokesman Kim. But most independent analysts predict Korea will eventually need two to three times that. Ko-
rea owes international creditors $154 billion—with $25 billion of it due before the end of the year.
The Asian contagion cast a pall over the APEC summit nearly as dark as Vancouver’s seasonally overcast skies. Under a grey drizzle, South Korea’s President Kim Young Sam, Japan’s Hashimoto, Chrétien, Clinton and 14 other APEC leaders drove to the University of British Columbia campus in separate motorcades and identical chocolate-brown leather jackets (the gift, valued at $710 each, of leathermaker Roots Canada, which has outlets in Asia). There they held a daylong private meeting in the airy cement-and-glass setting of the Museum of Anthropology. Casting aside the agenda that Canadian officials had spent
months preparing, Chrétien reflected his guests’ wishes by raising the Asian financial crisis to the top of the order-paper.
According to senior Canadian officials who debriefed Chrétien later, the subject brought sharply differing points of view from several of the leaders. In a 20-minute lecture, Malaysia’s maverick prime minister, Mahathir Mohamad, renewed his attack on international currency speculators, whom he blames for a 30-per-cent drop in the value of Malaysia’s ringgit, and called for controls on international capital flows.
But other Asian leaders acknowledged that the region has contributed to its own woes. “We’re seeing cronyism, graft and corruption, and the dependence on foreign capital for risky ventures like property development,” Philippine President Fidel Ramos told Maclean’s while visiting Toronto later. Ramos, who has been credited with reducing such problems in his own country, pointed to examples in Thailand, Indonesia, South Korea and Japan. In dealing with those issues at the APEC summit, he said, “we just talked about ‘internal reform’—but I think it was
understood by everybody.” And even Mahathir listened closely while Mexican President Ernesto Zedillo recounted his country’s wrenching passage through a credit and currency crisis of its own in 1994 and 1995. Zedillo’s message was unequivocal, said a Canadian official: “It was ‘Do the right thing domestically. Pay the short-term pain for the long-term gain.’ ”
In the end, the leaders emerged to declare that they would proceed with a few modest tariff reductions—but offered little in the way of assistance to Asia’s troubled economies. Instead, they endorsed an agreement reached a week earlier by officials meeting in Manila. That plan would institute an ill-defined new system to monitor finances in the region and offer backup funding to the IMF. In a nod to Mahathir, the leaders also agreed to examine an IMF report on the role of what they called “market participants”—code for currency speculators—in the crisis. Chrétien insisted it was enough. “In my conversations with the leaders,” he told reporters, “they all see growth in the Pacific region despite the recent turbulence. They don’t see that it will cause recessions in their individual countries.”
But others saw a far different and more frightening outlook. “People are talking brave,” observed Gordon Ritchie, a veteran former Canadian trade negotiator and now an Ottawa-based consultant. “But I wouldn’t buy the public line that this is no big deal. This economic crisis carries quite serious implications for Canada, and for North America’s relationship with Asia.” That is already clear in British Columbia, where layoffs in the forest industry, blamed largely on slumping sales to Japan, reached 11,600 people last week—12 per cent of the sector’s entire workforce. Nationwide, the number of jobs at risk to lost export sales in Asia could reach four times that number.
Much will depend on where Japan turns for funds to bail out its sinking banks. The rescue effort required is herculean. “This is going to be a lot bigger proportionally than the savings and loan thing was in the United States,” says Ritchie. “An order of magnitude bigger.” One source of funds is the vast public deposits in Japanese post office savings accounts. The accounts, which pay a miserly 0.25 per cent in-
terest, hold reserves worth roughly $560 billion. But touching the hoard is politically risky for Hashimoto’s government: Japanese voters reacted angrily when Tokyo tapped their accounts for just $7.6 billion last year to rescue troubled mortgage lenders. Another, far more alarming option is for Japan to begin cashing in some of its $1.4 trillion in foreign assets, nearly a third of them U.S. Treasury bills—a step that would likely trigger soaring U.S. interest rates. “The Armageddon scenario,” says Ostry, “is that the Japanese will drop the American shares and American government securities they hold.” Ostry, however, sees that prospect as unlikely.
Far more probable—virtually inevitable, in fact—is a surge in Japanese exports, fuelled by a devalued yen and North American consumers eager to snap up bargains on madein-Japan Hondas and Toyotas. That would further aggravate Japan’s trade surplus with the United States, already running at $127 billion a year, on the eve of 1998 midterm congressional elections. “Congress is already in an ugly mood on protectionist issues,” notes the Royal’s McCallum. “As this trade surplus gets bigger and bigger, they are probably going to go ballistic. And if they go ballistic, Canada gets caught in the crossfire.”
Politics could intervene elsewhere, too. Korea faces a presidential election later this month in which the economy will be virtually the only issue. Japan’s parties must defend their handling of the banks in elections next summer. With the crisis far from over, few were willing to make sanguine predictions that far ahead. “We are holding our breath,” admitted Takahide Shioya, director general of Japan’s Economic Planning Agency last week. Like Korean schoolboy Pae Min Bom, he might also have been wise to take a close, hard look at his pennies.