Letters

Asian crisis

Some of the issues raised in "The Asian Crisis: Causes and Cures" (Finance & Development, June 1998) need greater emphasis. On both a macro and a micro (corporate) basis, there were currency and maturity mismatches between borrowings and loans. Because of the availability of cheap capital and overly optimistic estimates of growth prospects, East Asian banks borrowed large sums in foreign currency and liberally made loans in domestic currency largely for speculative investments. While the banks' foreign borrowings tended to be short term, their loans were largely for long-term investment.

Between 1993 and June 1997, Thailand's external debt escalated from $20 billion to $69 billion, and almost three-fourths of the debt had a maturity of one year. The volume of foreign bank debt amounted to about 45 percent of GDP. Banks made a large number of long-term loans to the property and real estate sectors. When real estate and share values plunged, banks were left with a large volume of nonperforming assets. Financial disasters, bank failures, and bankruptcies occurred. As it became obvious that loans might not be repaid, foreign banks ceased to make fresh credits available and recalled old loans, aggravating the crisis.

Developing countries may learn a number of lessons from the East Asian debacle. The magnitude of external borrowing must be limited to a country's capacity to use the loans productively and generate surpluses to repay and service them in foreign currency. Mismatches between short-term borrowing and long-term lending must be avoided. The financial and banking sector must be properly regulated, and capital-adequacy standards and prudential lending norms observed by banks and other financial institutions. Foreign portfolio investment should be monitored and excessive inflows checked. Such investments are the first to be withdrawn, and sudden capital outflows can destabilize a currency. IMF packages incorporating structural reforms and stabilization measures are often tough to implement and may result in recession and unemployment. Prevention is therefore better than a cure, and developing countries would do well to avoid currency crises.

S. S. Kothari

Calcutta, India

"The Asian Crisis: Causes and Cures" (Finance & Development, June 1998) provides an analytic overview of the financial turmoil that has engulfed several Asian countries since July 1997.

The article...