Speculating on who is really behind economic woes in Asia, Russia

August 20, 1998|By Floyd Norris

FINANCIAL MARKETS are again under stress in Asia and Russia, and local authorities know whom to blame. It's the speculators.

"Speculators have been deploying a whole host of improper measures," said Donald Tsang, Hong Kong's financial secretary, as he disclosed that the Hong Kong government had bought millions of dollars in stock. Among them were the "spreading of vicious rumors" that Hong Kong's currency might be devalued.

Hong Kong's stocks rallied, and the idea of government intervention is spreading. Malaysian Prime Minister Mahathir Mohamed said he might try the same tactic.

The S-word was also used in Russia, where a central bank official complained that Russian banks were speculating against the ruble by buying dollars. The central bank set out to squelch that speculation by barring such purchases by some banks.

It is not hard to sympathize with the officials involved. They think their economies and markets are going to get over a rough spot, and along comes somebody -- often identified as the dreaded hedge funds run mostly by American investors -- betting that things will fall apart.

If those speculators can just be defeated, then all will be well.

In Hong Kong, the government says speculators were trying to drive the currency and the stock market down, and interest rates up, to make money in all three markets. To block such manipulation a little government intervention was necessary, authorities say. So they bought the local currency and shares in all major Hong Kong companies.

So far, it has worked. But a final verdict is not in. In the early summer of 1997, Thailand routed hedge funds that were borrowing the Thai baht and selling it, betting it would fall. Big purchases by the Thai government temporarily raised the value of the baht. But then a funny thing happened. Ordinary Thai citizens and companies began to wonder whether a currency that needed such extraordinary intervention to protect its value was really fundamentally sound. Companies that owed dollars realized they would be in trouble if the baht were devalued, so they bought dollars.

A few weeks later the baht plunged, beginning the Asian crisis.

Similarly, what the Russian central bank saw as speculation was in fact the reasonable response of Russian banks that were being pressed to repay loans they had taken out in dollars, and that were seeking to accumulate dollars as protection in case the ruble was devalued. When it became clear the government was afraid of such protection, devaluation became inevitable.

In Hong Kong now, investors may be asking themselves whether share prices really are reasonable if they can be maintained only by government buying. Perhaps many will decide it would be safer to reduce their positions. If so, the government will have accomplished little, other than to lose a lot of public money.

All this is not to deny that speculators had a lot to do with the current problems. But when the real speculation was taking place, governments were looking on with glee. That was in 1996, when foreigners were pouring in money. They invested in Indonesian companies thinking that the fact the companies were tied to President Suharto's family was enough to assure profits.

They poured money into Russia thinking it was the next emerging market, and lent money to Korean banks that were financing shaky conglomerates.

Now those who foolishly risked money in years past want to salvage what they can. Companies that owe dollars fear being bankrupted if the local currencies collapse. Both groups want to cut their losses. Is that speculation? Or prudence?

Floyd Norris is a syndicated columnist.

Pub Date: 8/20/98

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