Staving off financial meltdown - three prescriptions
Geneva, 23 September 1998 - Japan's recovery is the key to staving off financial meltdowns that threaten a number of countries in Asia and Latin America, senior investment analysts said here today.<
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At a conference organized by the International Chamber of Commerce, the Swedish banker Jacob Wallenberg, Chair of the Board for Skandinaviska Enskilda Banken, told some 450 international organization and business leaders: "The Japanese situation is a key to the world situation. I would have to hold my breath on the Latin American situation."
Professor Steve H. Hanke of the Johns Hopkins University was even more pessimistic during a session on preventing financial meltdowns. He doubted US official confidence about the situation in Thailand and Korea, predicting that Asia could remain in crisis for five years. He thought Brazil could face severe problems in the next few months after elections.
Prof Hanke's prescription: developing countries should unify their currencies with stronger ones via fixed exchange rates, as Bulgaria and Bosnia had recently done.
They were addressing the first ICC Geneva Business Dialogue, called to build cooperation between business and governments in meeting the challenges of the global economy.
Prof Hanke criticised exchange controls as "a ring fence within which governments can expropriate their subjects' property", arguing that even the prospect turned settled money into hot money and produced capital flight. "Contrary to popular wisdom, restrictions on convertibility do not retard capital flight: they promote it."
The Professor of Applied Economics was particularly critical of the International Monetary Fund, whose loans produced "socialization of risk" at a time when rolling over credits cost much more than before. A country like Brazil would have to devote 7 percent of its GDP (Gross Domestic Product) to renew the loans coming due this year, he said.
As a result, investors - as in Russia - believed that the IMF would always step in to help the government out of difficulties. However, Japan had been trying unsuccessfully for five years to find a way out of its economic troubles through the currently fashionable methods.
Mr Wallenberg argued that companies and governments needed to learn to manage risk. Risk is not necessarily bad: this was the business of banks, and from this perspective, all sectors of society needed to learn to assess the amount of risk involved in operations. He noted: "Credit risk evaluation is both a science and an art."
In the only reference to the US political situation, Victor Chu, Chair of the First Eastern Investment Group, Hong Kong, said that his advice to prevent financial meltdowns was leadership, but "unfortunately all talk about political leadership today is probably the worst time" and the international community could not expect leadership from the quarter to which the world would normally look.
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