BT: Rising rates create risk of Asian crisis: experts (11 Jun 2007)

Rising rates create risk of Asian crisis: experts

Unwinding of yen carry trades may trigger financial storm

By ANTHONY ROWLEY
IN TOKYO

ANOTHER emerging market debt crisis similar to the one that hit Asia and other developing regions 10 years ago may be brewing as global interest rates begin to rise, experts say.

At the centre of this threatened financial storm are Asian and other emerging market companies that are borrowing heavily in foreign currencies and at shortening maturities, threatening a repeat of the 1997 crisis as interest rates rise. This time, the yen could be at the centre of any crisis because emerging market companies, attracted by ultra-low Japanese interests rates, appear to be piling up yen debt.

These dangers were spelt out at a seminar held last Friday in Tokyo by the World Bank and the Japan Centre for International Finance against a backdrop of financial market alarm over soaring long-term bond rates.

Yen borrowing by non-Japanese companies is one aspect of the so-called carry trades, under which companies invest the funds borrowed cheaply in higher-yielding assets or projects.

'There is a very poor understanding of these trades,' World Bank senior economist Douglas Hostland said.

'If emerging market companies are borrowing yen and converting them into local currencies, that could be a source of real market confusion,' added Masaharu Takenaka of the Institute for International Monetary Affairs in Tokyo.

'We are very concerned about this,' Mr Takenaka said, recalling that it was the corporate sector's over-borrowing in foreign currencies and at short maturities that plunged companies and economies into deep distress in 1997. Evidence of this 'double mismatch' in currency and borrowing maturities appears to be rising again now after a five-year period of easy credit in global financial markets, the seminar heard.

The amount of money raised by firms from developing nations through syndicated loans and international bond issues surged from US$88 billion in 2002 to US$333 billion last year, as banks, investment banks and mutual funds in major markets poured funds across borders. The biggest borrowers in recent times have been Russia, China, Brazil, Mexico, India, Central Asia and Turkey.

'This new landscape of development finance - particularly the shift from sovereign to private borrowers - alters the conventional assessment of risks and is likely to have important implications for growth and financial stability,' the World Bank said in its recently-published Global Development Finance report, which provided the backdrop for the Tokyo seminar last week.

Net private capital flows to developing countries as a whole hit an all-time record of US$646 billion in 2006. But as growth in the global economy slows under the impact of rising interest rates, it 'cannot be taken for granted' that developing countries will achieve a soft landing, the World Bank's Development Prospects Group director Uri Dadush warned in the report.

Apart from a surge in international syndicated bank lending to emerging market firms and a similar rise in global bond issues by these companies, those in Asia and elsewhere have been able to raise huge amounts of money through initial public offerings of stocks. 'The need for a more coherent global approach to regulating cross-border public offerings and listing of securities has become more urgent,' the World Bank said.

Officials say that they cannot easily quantify what part of cross-border financing has been linked to yen carry trades. Foreign bond purchases and short-term currency speculation by Japanese residents are easy to track but the situation is much more opaque with regard to yen borrowing by foreign companies. The OECD has estimated that yen carry trades may be as large as US$4 trillion.

Japan's vice-finance minister for international affairs, Hiroshi Watanabe, claimed last week that there is no immediate risk of an unwinding of yen carry trades, so long as financial markets remain stable. But analysts say that last week's volatility in bond and equity markets could be a bad sign. Authorities need to keep monitoring developments in financial markets, and market participants need to be aware of risks, he added.

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