Global Investing

Could Asia be headed for a debt crisis?

The very thought may seem ludicrous given the region’s mighty current account surpluses and brimming central bank coffers.  But a note from RBS analysts Drew Brick and Rob Ryan raises some interesting concerns.

Historically speaking, most EM crises have been borne on the back of excessive capital inflows, Brick and Ryan write. And in many Asian countries, the consequence of these flows has been over-easy monetary policy that has left citizens and companies addicted to cheap money. Personal and corporate indebtedness levels have spiralled even higher in the past five years as governments across the continent responded to the 2008 credit crunch by unleashing billions of dollars in stimulus.

First, some numbers and graphics:

a) Asia’s current account surplus stands now around $250 billion, less than half its 2007 peak as exports have slumped.

b) The 10 biggest Asian economies have a hard currency war chest of around $5 trillion. Sounds great. But the following graphic demonstrates the slowdown in the pace of reserve accumulation.

What worries the RBS analysts is that the decline in reserve growth and surpluses coincides with a debt issuance boom.  JP Morgan’s EM debt indices, where Asia accounts now for 20 percent of the listed dollar and local currency bonds, reflects this explosive growth. A few years ago, Asia’s share was close to zero.

With the ECB’s second cheap money flood in three months coursing through European banks and financial markets and the possibility at least of a further interest rate cut in offing, the relief in Europe’s austerity-wracked periphery is palpable. But what of the impact on the relatively buoyant “core” in Germany, the bloc’s largest economy and super-competitive export engine? Darren Williams at money managers Alliance Bernstein reckons  German inflation is being cooked up by this super-easy ECB money, coming as it does against a backdrop of  relatively brisk German credit growth and house price inflation there of some 5.5% last year which is “positively explosive by German standards”.

This is the flipside of pre-crisis euro zone problem with “one-size-fits-all” monetary policy. Before 2007,  sluggish  German growth meant ECB policy was kept far too loose for the faster-growing  peripheral economies who then generated credit and inflation-fueled booms that boosted real-estate prices, private and public sector debts and eroded competitiveness.  Now, monetary policy appropriate to a euro-wide slowdown fueled by the hobbled periphery looks far too too loose for Germany.

However, Williams posits that if Germany can tolerate an effront to its anti-inflation psyche then this move could help rebalance skewed intra-euro current accounts by boosting German domestic demand for the exports of its troubled euro neighbours while curbing the super-competiveness of German exports flooding other euro economies and undermining producers there. That’s not the way many in Germany want the rebalancing to happen clearly. But even the most ardent hawks in Berlin probably now acknowledge that endless austerity and economic contraction in its nearest neighbours or the sort of financial implosion likely from a euro collapse would not be in Germany’s best interests either. So, a little compromise perhaps.