Asian bailout might be sillier than default

The Economy

January 05, 1998|By Jay Hancock

HERE'S A 1998 financial forecast you can bank on: a bull market in taxpayer rescues of unlucky, incompetent and stupid lenders.

Communism is dead. President Clinton says big government is obsolete. Tony Blair, Britain's Labor prime minister, sounds like a Rockefeller. No-pads, no-foul capitalism, U.S. style, is the world's epitome.

Yet, the planet wades ever deeper into one especially sticky, big-government, socialist swamp. And get this: The capitalists are applauding. The socialists, if there are any left, are probably rending their garments.

In the next few days, billions in rotten loans made to South Korea will likely be dusted off, plumped up, repackaged and guaranteed by the South Korean government.

The world's banks dangle on the meat hook for more than $30 billion in South Korean loans that are now coming due, month by month, billions at a time. The South Koreans don't have the money. Their currency is worth half what it was in August, and so their debts are twice as big.

The bank loans are maturing. The money is missing.

Can you say, "default"?

U.S. and European banking regulators can't. Strict accounting rules notwithstanding, they're strapping on blinders and pretending the Korean loans are still performing.

The ardent hope of everybody -- regulators, bankers, South Koreans -- is that the short-term loans will soon get renovated into long-term bonds or even stock and that Korean borrowers will be more able to pay off debt that falls due in 2007 than on Jan. 31.

They may or may not.

"You're getting Ponzi financing here," said Johns Hopkins economist Steve Hanke. "No prudent banker loans money to a client so the client can pay back the interest they owe on the old debt with the new money. This is very bad banking."

This wouldn't just be private restructuring among consenting capitalists, however.

Besides bending their banking standards, the world's governments are floating Exxon Valdez-size shipments of cash to South Korea.

Through the International Monetary Fund, they have committed some $100 billion in loans to drive the bilge pumps not only in Korea but in Thailand, Malaysia, Indonesia and their neighbors, all the subjects of currency trauma and insolvency. And South Korea's government is expected to guarantee the refurbished debt in that country.

The hemispheric bailout comes with the finest intentions: Keep Asia out of recession. Maintain Asian standards of living. Prime -- markets for U.S. exports. Prevent 1930s-style political implosion, trade barriers and worldwide depression.

But it comes with an unavoidable side effect. J. P. Morgan, Citibank, Dai Ichi Kangyo and everybody else who lent money to the region are now escaping the consequences of their business practices.

"The socialization of risk," economic historian Jim Grant calls it.

But this kind of socialization is actually corporate welfare on a grand scale.

Its roots descend to 1933, when the Federal Deposit Insurance Corp. guaranteed deposits in U.S. banking institutions.

The history of taxpayers rescuing investors now covers the 1980s, when the U.S. government spent $150 billion to reimburse people who put money in savings and loans run by frauds and fools; 1990, when the Japanese government tried to prop up amazingly lofty Tokyo stock prices; and 1995, when a $40 billion bailout of Mexico helped extend banker welfare across national borders.

And now? The estimated price of the Asian bailout, $100 billion as of Friday, grows by the week.

Many analysts believe that the world can afford to rescue Asia, and can't afford not to.

But as 1933 recedes into time, the bailout packages it spawned seem to be getting bigger and bigger.

And the lesson it teaches lenders soaks deeper and deeper: Don't worry too much about credit quality.

What will a Korea-type rescue a decade from now look like?

"Maybe," Hanke said, "we'd be better off with an old-fashioned default, like we used to have."

Pub Date: 1/05/98

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