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Greetings from Coolum, Australia, where Apec finance
ministers just wrapped up a most illuminating meeting.
Apec
refers to the Asia-Pacific Economic Consternation forum,
errr, the Asia-Pacific Economic Cooperation forum. While
it really does mean the latter, the former name better
represents what the 21-member group has become.
Asia-Pacific nations like to think they work together.
Yet, if this year’s finance ministers’ meeting
highlighted anything, it’s that as much as Asia-Pacific
nations say they’re cooperating, they’re standing very
much alone.
It
illuminated how the US still blames Asia for saving too
much and holding down currencies. Asians blame the US
for saving too little and relying too much on Asia’s
money. Japan criticizes China for an undervalued
currency, while South Korea is stepping up criticism of
Japan for the same reason. China is perturbed that it’s
being criticized at all.
Apec’s
gathering unfolded amid increasing volatility in global
markets. One heard more consternation over who’s to
blame for imbalances than how to fix things. And Henry
Paulson’s decision to blow off the event was a bigger
problem than the US Treasury secretary may realize.
“A lot
of this market volatility is about subprime-mortgage-market
contagion from the US,” Diwa Guinigundo, deputy governor
of the Philippine central bank, told me in Coolum.
Asian
irony
It has
to be one of the biggest ironies in global finance. Ten
years ago, it was a contagion from Asia imperiling the
global economy. For months after
Thailand
devalued its currency in July 1997, US officials
reassured markets that
Asia’s woes were containable. Once the Dow Jones Industrial
Average began plunging several hundred points in a day,
investors knew better.
Eerily
familiar noises are coming from Paulson these days. In
Beijing last week, he said the US economy is “healthy”
enough to weather ongoing market declines. One hears
similar reassurances from top economic officials near
and far.
Yet,
Paulson’s confidence in an economy facing the worst
housing recession in 16 years and massive
current-account and budget deficits isn’t reassuring. It
smacks of deepening denial at a time when policymakers
like Guinigundo say “the risks of contagion can’t be
downplayed.”
Asia has
come a long way since 1997, as Asian Development Bank
president Haruhiko Kuroda explained in Coolum. Banks are
far more stable, currency reserves have been amassed,
and governments are modernizing and integrating
financial systems.
Decoupling from US
“There
are many risks to consider, but
Asia seems able to handle it,” Kuroda said.
Asia’s
postcrisis recovery is a work in progress, though, and
one shouldn’t overstate the extent to which Asia has
decoupled from the US economy. While Asia’s rapid growth
and booms in both China and India mean it’s less reliant
on the US, the region isn’t ready to live without US
demand.
The
hedge-fund angle also offers another bit of irony. In
1997, they were blamed for the speculative attacks on
Asian currencies.
By 1998,
the resulting volatility even claimed a weighty
casualty: John Meriwether’s Long-Term Capital
Management. Yet, memories are short in the age of
financial globalization, and the years to follow were
banner ones for aggressive investors. Asia alone has
seen an exponential increase in the number of hedge
funds since 2002. Now that trend is being tripped up not
by events in
Asia, but the
US.
A new
contagion
Australia
is on the front lines of how problems in the
US
are spreading to Asia. On August 2, shares in Macquarie
Bank Ltd. fell the most in five years after Australia’s
largest securities firm said investors in some of its
funds may lose as much as 25 percent of their money.
Taiwan Life Insurance Co. stock had its worst week in
over three years amid hedge-fund losses.
It’s one
thing for Bear Stearns Co.’s hedge funds to get slammed
by the subprime mess; it’s another for casualties to
begin piling up a world away. The Morgan Stanley Capital
International Asia-Pacific Index plunged 3.9 percent in
the five days ended July 27, the worst weekly drop since
July 2006.
“The
correction is coming about because of weakness in the
US,” said Australian Treasurer Peter Costello. “It
illustrates how interconnected the world is.”
It’s a
breathtaking role reversal. Just as
Asia downplayed the odds of its 1997 contagion oozing around the
globe, the
US
claims its problems are containable. While that’s
possible, the concerns of investors like Jeremy
Grantham, chairman of Grantham, Mayo, Van Otterloo &
Co., and Jim Rogers, chairman of Beeland Interests Inc.,
are worth noting.
Consternation or cooperation
Only now
are investors waking up to how global risk has been
mispriced in recent years. Markets became too greedy in
selling collateralized debt obligations and financing
leveraged buyouts, and investors underappreciated the
hazards.
Costello
said Apec talked about “what can be put in place to
ensure that these imbalances don’t work out in an even
more radical readjustment.” That would be reassuring if
Apec had come up with something concrete. Instead, we
got boilerplate—and hollow—calls for flexible exchange
rates.
There
was no demand for
Japan
to reduce incentives for the so-called yen-carry trade.
Borrowing cheaply in Japan and investing the funds in
higher-returning assets elsewhere has fueled many of
today’s riskiest hedge-fund trades. Yet Japan is
reluctant to let the yen rise, and global policymakers
continue to wimp out on demanding it.
Amid so
many risks, it would be comforting to get a bit more
cooperation than consternation out of Apec officials.
William Pesek is a Bloomberg News columnist. The
opinions expressed are his own. |
