BUSINESSWEEK ONLINE : OCTOBER 30, 2000 ISSUE
INTERNATIONAL -- SPECIAL REPORT Asia's Liquidity Drought (int'l edition) With banks buried in bad debt, loans are scarce A $27 billion week. That's the dollar value on the debt that drove insurance giant Chiyoda Mutual Life into bankruptcy on one grim day in mid-October. No wonder bankruptcies are hitting an all-time high in Japan. And no wonder investors are starting to worry that another liquidity crunch is developing. The signs are there in Asia: Lending by banks, still scared stiff of losing any more funds to shaky firms, contracted by $6.6 billion across the region in the first quarter of the year, the last time the Bank of International Settlements counted, and it is doubtful things have improved much since then. For one euphoric stretch earlier this year, the equity markets provided fresh capital to Asian companies. But both domestic and foreign investors have been fleeing Asia's markets since March. That, in turn, is drying up the once-flowing spigot of venture capital for startups. Another good indicator of tight money: The gap between Asian corporate and government bond yields and U.S. Treasuries has nearly doubled since January. That means investors are demanding much higher premiums for what they see as much higher risk. Although the emergence of domestic corporate bond markets has come to the rescue in a handful of countries, such as Thailand, there are concerns that those markets aren't yet deep enough for this trend to be sustainable. FEARS ABOUND. The pessimism is contagious. In Southeast Asia, investors have been spooked by the growing political crisis in the Philippines, the upcoming elections and slow pace of corporate reform in Thailand, and the ongoing malaise in Indonesia. In Hong Kong, the popping of the Internet bubble is being compounded by growing skepticism over the ambitious telecom strategy on high-flying Pacific Century CyberWorks. Add to this the high price of oil and the specter of a technology slowdown in the U.S.--the export market that has been most responsible for Asia's recovery since 1998. ''If there is another 20% drop in U.S. stocks, and oil prices go over $40, we could be in for bigger trouble,'' says Standard & Poor's/DRI chief international economist Nariman Behravesh. Japan and Korea have been the biggest sources of anxiety. In Japan, bank lending has declined for 33 months in a row. And banks' balance sheets could worsen if they cave in to political pressure to forgive debts, now that bankruptcies are at a post-war record. Shinsei Bank President Masamoto Yashiro, for one, says if he cuts deadbeat borrowers any more slack, his bank, with $120 billion in assets, ''would be wiped out.'' Shinsei has already pulled the plug on Sogo, a major department store chain that slid into bankruptcy. The mass liquidation of equity holdings by bankrupt companies, meanwhile, has contributed to the 28% plunge in the Nikkei average since April. This, in turn, is further ravaging the balance sheets of corporations that keep many of their assets in stocks of other Japanese companies. PILE IT ON. To make matters worse, the Japanese government is competing for this thin pool of capital. In late October, Tokyo's Finance Ministry revealed that its balance sheet has a negative net worth of almost $7 trillion. Despite a budget deficit of nearly 10% of GDP, Prime Minister Yoshiro Mori's government is weighing another $40 billion public works spending package. That means more debt--and probably higher rates on bonds, where yields are still a benign 1.8%. Fiscal anxieties also threaten to unravel South Korea's recovery. It's bad enough that banks in South Korea are still sitting on about $100 billion in nonperforming loans, about 25% of total lending. But now the bond market is frozen as well, thanks to the collapse of the Daewoo and Hyundai Industrial groups earlier this year. That could spell a nasty shakeout for Corporate Korea, which must roll over about $30 billion in debt maturing by March. Then there's Korea's equity markets. Before March, anyone in Seoul with a startup idea ''could raise $1 million or $2 million extremely easily,'' says Locus Corp. CEO James Kim, who heads a startup group in Seoul. Now it's pure agony, following the blowout in Seoul's high-tech Kosdaq market, down 60% this year. Venture capital funds have dried up. Of course, there could be a miraculous recovery in U.S. tech stocks. And Arab oil ministers could inexplicably flood the world anew with oil. More realistically, though, Asia should listen to the markets and brace for a chilly 2001. By Brian Bremner in Tokyo, with bureau reports _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ BACK TO TOP					RELATED ITEMS Prosperity under Siege (int'l edition) The Big Squeeze in America (int'l edition) CHART: Triple Trouble Asia's Liquidity Drought (int'l edition) CHART: Risky Asia Europe: It's Time to Start Worrying (int'l edition) CHART: The Biggest Blow: Oil INTERACT E-Mail to Business Week Online

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