Econ meltdown in Asia, 3/15/98 (3/3) (fwd)

[Robert Weissman <rob@essential.org>]

INTERNATIONAL MONETARY FUND (IMF)

"The International Monetary Fund Managing Director, Michel Camdessus,
warned today that the crisis in Indonesia would undermine efforts to combat
financial turmoil in Asia unless the problems are solved soon.   ***
[para]  Mr. Camdessus repeated earlier comments that the IMF board would
not be able to discuss additional money for Indonesia before April, and he
said a long list of structural changes is still needed in Indonesia under
the terms of a reform program revised at the start of the year.  [para]  A
faster than expected deterioration in the economic situation meant some
parts of the plan would need to be redesigned, he said.  [para]  He also
made clear that the IMF considered efforts to introduce 'the surrealistic
proposal' for a currency board for Indonesia a waste of time.  [para]  'We
are a little bit frustrated', he said, calling the debate surrounding the
proposal a 'diversion' from 'important things' like reform of Indonesia's
banking system and the restructuring of corporate debt."  Reuters, "IMF
Chief Warns Asia," NYT, March 10, 1998:  A-9.

INTERNATIONAL MONETARY FUND (IMF)

"House Republican leaders said today taht they would hold up financing for
the International Monetary Fund and back dues owed to the United Nations
until the White House agreed to an anti-abortion provision.  [para]
Republican leaders said they would attach a ban on financing international
groups that promote abortions overseas to an emergency spending bill that
includes $18 billion for the IMF and nearly $1 billion that the United
States owes the United Nations.

[para]  The White House and its Democratic allies on Capitol Hill rejected
the Republican proposal.  They suggested that President Clinton would veto
the spending bill, despite furious lobbying by his foreign policy advisers
to secure the funding it contains, rather than buckle to Republican
demands.  ***

[para]  The impasse threatens to derail financing that the Administration
says the IMF badly needs to cope with the financial crisis in Asia, and
that the United Nations has been demanding from Washington at a time when
Secretary General Kofi Annan has played a central role in calming the
latest crisis with Iraq.    [para]  Last year Republicans blocked financing
to the IMF by linking it to the abortion provision.  But that was before
the financial problems in Asia.  If they pursue the same course now,
Republicans will risk the wrath of Wall Street and corporate America, which
last month began a lobbying campaign for approval of the IMF financing.
***  [para]  Neither side shows any sign of softening its position; each
believes it holds the best political cards.  But the risk of not acting
during the Asian crisis and offending women also bring perils to both
sides.  [para]  Even though the Administration has been urging prompt
action on the IMF refunding, the House and Senate may not vote on the money
until after their April recess.  ***

[para]  Last month, an array of powerful business groups began a lobbying
campaign in support of the IMF payments.  Business leaders and their
Congressional allies are concerned that American companies could lose
billions of dollars in exports because of the Asian currency crisis.  ****"
Eric Schmitt, "House GOP Puts Brakes on IMF Funds:  Abortion Restriction
Threatens Clinto Veto and Another Standoff", NYT, March 12, 1998: A-10.


HONG KONG

"The stock of Cathay Pacific Airways Ltd. plunged yesterday as analysts
slashed their 1998 profit forecasts because last year's earnings fell 55.5
percent.  An analyst at Merrill Lynch & Company, Wendy Wong, slashed this
year's forecast by 82 percent....  ***  [para]  The stock is down 60
percent since June--traffic has fallen every month since then."  Bloomberg
News, "Cathay Pacific Shares Plunge on Forecasts", NYT, March 13, 1998: C-2.


JAPAN

"Bowing to pressure from Washington and other Western governments,
officials in Japan's rulling party strongly suggested this week that they
are putting together a package of $80 billion or more to stimulate the
nation's economy.  [para]  Only sketchy pictures of the package have
emerged, but it appears that a tax cut, as favored in the West and by some
Japanese business leaders, will not be a substantial part of it.  Its size
is uncertain, too, with amounts ranging from $48 billion to nearly $160
billion having been floated by Liberal Democratic Party leaders.  [para]
Politicians hope that such a stimulus can revive business confidence and
prevent the stagnating economy from getting worse.  But many critics are
worried  that the money will instead be spend on pet projects or doled out
in port-barrel fashion.  [para]  And economists say that unless the
Government takes giant steps to deregulate various industries as well, any
long-term recovery is doubtful.  ***

[para]  While officials in Washington and Western Europe have stepped up
calls for Japan to stimulate its economy, the Government here [Tokyo] has
been almost stubborn, offering a trickle of economic measures.  [para]
Even an $80 billion package would represent only about 2 percent of Japan's
annual econmic output, and most of the money is likely to be spent on
traditional public works, rather than returned in the form of tax cuts that
would leave corporations and citizens with extra after-tax money to invest
or use to buy goods.  ***

[para]  The Government has been sticking to a policy of fiscal austerity,
partly because of a law passed in November that commits it to reduce the
budget deficit to less than 3 percent of the gross domestic product by the
year 2003.  The deficit is projected to be 5.9 percent at the end of the
current fiscal year, which ends on March 31, and economic growth is
expected to be near zero for th year, so economists say that the economy
needs more fuel, not less.  ***

[para]  Recent figures show that wages and wholesale prices are down
slighttly from their levels of a year ago, and corporate profits are also
expected to be lower.  The Cabinet concedes that the economy is 'still
stagnating'.  [para]  Blut Finance Ministry officials, who essentially draw
up economic policy in Japan, point out that 40 trillion yen in spending
over the last three years, or about $320 billion, has not led to a
recovery.  So they say, why throw good money after bad?  [para]  'Our
primary concern is to stop the rising debt', said Masakazu Sakaguchi, chief
of the Budget Bureau's research division.  'Our position is very strong,
very firm'.  ****"  Sheryl WuDunn, "Japanese Map A Plan to Aid An Ill
Economy", NYT, March 11, 1998: C-1, C-4.

JAPAN

"The evaporation of markets in Southeast Asia and increased frugality by
consumers at home forced the Mitsubishi Motors Corporation to sharply lower
sales estimates today and project its first annual loss in 24 years.
[para]  Mitsubishi also announced that it would close a plant in Thailand
and a plant in New Zealand, reduce the work force by 12 percent, cut
executive pay, halve capital investment and suspend the shareholder
dividend payable at the end of the fiscal year March 31.

[para]  The announcement by the No. 4 Japanese auto maker starkly
illustrated the predicament confronting Japan's automotive industry, which
has suffered sharply reduced sales because of Asia's financial crisis and
the prolonged economic slump at home.  Weaker demand has forced auto makers
to cut production.  [para]  The Japan Automobile Dealers Association has
said that domestic vehicle sales last year fell nearly 5 percent to 5.11
million, while in the first two months of this yeaar, they were down 22.8
percent from the corresponding period last year.  ***

[para]  The Japanese auto industry has been especially hurt by the economic
collapse in Southeast Asia, home to its most dynamic new markets and many
new production facilities.  [para]  Weak domestic demand has aggravated the
problem.  Consumption fell by almost 6 percent in January alone.
Mitsubishi's sales in Japan dropped 21 percent, and since then, four of the
five biggest auto manufacturers have said they will cut production in Japan
between 5 and 20 percent.  [para]  Mitsubishi has been further hurt because
of its large heavy-truck business, an economically sensitive business under
any circumstances, whose only export market is Asia.  [para[  What is more,
most analysts do not see an end to the problem.  'Southeast Asian demand
will remain depressed for the rest of 1998 at least, and in Japan, if you
look at labor market conditions, there a deteriorating outlook for domestic
output', Edward Brogan, an auto analyst at Salomon Smith Barney in Tokyo
said."  Stephanie Strom, "Mitsubishi Sees First Loss Since 1974-75:  Auto
Maker Lowers 1997 Sales Estimate", NYT, March 11, 1998: C-4.

JAPAN

"The Government agreed to pump 1.42 trillion yen, or nearly $11 billion,
into 17 Japanese banks as part of a program to replenish their capital and
try to restore public confidence in the debt-burdened financial system.
***  [para]  The money will be drawn from 13 trillion yen set aside last
month by Parliament to increase banks' capital, which has been drained by
the write-off of trillions of yen in bad loans and by stock losses.  In
return, the banks issue bonds, with interest rates depending on the
condition of the issuer, to the Government."  Bloomberg New, "Japan to Give
Sick Banks $11 Billion More", NYT, March 13, 1998: C-2.

JAPAN

"Japan is about to implement a sweeping plan to deregulate its financial
industry that will unleash the forces of global capitalism there to an
unprecedented level.  The changes could irrevocably alter the way this
nation does business with the world.  [para]  Instead of coming out of a
nasty and protracted negotiating session, the changes appear to have been
embraced out of self-interest by Japan's government.  After nearly a decade
in economic doldrums, Tokyo is so desperate to reignite growth that it is
willing to set aside traditional practices and introduce a strong measure
of free-market capitalism.  [para]  The deregulation plan ... is designed
to increase Japan's financial muscle by encouraging international
competition.

[para]  If this plan works, Japan could find its traditional tight controls
on the economy swept away by a tidal wave of money rushing into and out of
the country.  Americans could find themselves challenging the Japanese for
dominance in investment banking and high finance, the linchpin of the
economy.  ***  [para]  As banks there are forced to compete against global
capital markets and profitability becomes key, the standards for lending
will tighten.  The result should be a shake-out, with strong players
getting bigger and weaker ones failing.  ***  [para]  If financial
deregulation works, there would appear to be no retreat, and other
industries might also move to be freed from government restraint.

[para]  Japan built its wealth--the world's second largest economy after
the US--through a coordinated relationship between government and business
that left very little to chance or the free market.  Most aspects of the
economy were planned, the weak were protected by the strong and foreigners
were let onto the playing field grudgingly.  ***

[para]  The implications are enormous because there are trillions of
dollars of Japanese household savings that have been trapped in the system,
languishing in low-interest savings accounts because of a lack of
competition.  [para]  If that money is freed to find its best use, it could
mean a windfall for Japan-based institutions and a renaissance for the
Japanese economy, or it could mean a SLOW HOLLOWING OUT as investment
rushes out of the country into more lucrative markets (emphasis added).
[para]  The possibilities seem bright enough to have set off a stampede of
American and European investment houses into the market to get ready for
the changes.  In the last year, foreign financial companies have been
beefing up their investments and staring joint ventures and other deals
with Japanese firms to position themselves for the Big Bang era.  [para[
The dealmaking represents one of the fastest and most dramatic tends by
foreigners in Japan.  In one of the biggest steps, Merrill Lynch will
create a new retail stock borkerage comapny, and it plans to hire 2,000
people from Yamaichi Securities, which failed last year.

[para]  The first step of the Big Bang comes next month, when controls on
foreign exchange transactions will be relaxed.  Theoretically, it means
that individual investors and Japanese companies would be able to teir
money out of Japan and invest through a brokerage in New York or anywhere
in the world.  [para]  Over the next five years, the government plans to
remove barriers and restrictions throughout the financial system to permit
Japanese investors and companies the same freedom as Americans and
Europeans to search the world for the best uses of their money.  [para]
Banks, investment houses and insurance companies--Japanese and foreign
owned--also will be freed from government control to compete as they do
overseas.  For example, borkerage commissions will be deregulated, banks
will be allowed to sell mutual funds and innovative new investments like
derivatives will be permitted.  [para]  The thinking is that if Japan opens
the system to international competition, it will push the Japanese industry
to become as innovative and efficient as overseas markets, and that will
make Japan stronger.  ***

[para]  The Japanese government says it has pursued the Big Bang because it
desperately needs to get its economy going again, and to do so it needs to
make Tokyo a financial capital on par with New York and London.  ****"
Michael A. Lev, "Japan hoping 'Big Bang' will turn bust into boom:
Financial industry to be deregulated,"  Chicago Tribune, March 15, 1998:
Section 1: 4.


SOUTH KOREA

"Korean Airlines, South Korea's largest airline, said yesterday that losses
almost doubled last year as the currency turmoil slowed passenger traffic
and inflated its costs.  ***  [para]  The company lost money as operating
costs, including fuel prices, rose and foreign exchange losses swelled
because of the won's slide against the dollar.  The won weakened 44 percent
last year, driving up fuel costs and making it more expensive for the
airline to service its $4.7 billion of net foreign-currency debt."
Bloomberg News, "Korean Air Says Losses Nearly Doubled in 1997", NYT, March
11, 1998: C-4.

SOUTH KOREA

"South Korea and international banks have successfully converted enough of
the country's short-term foreign debt into long-term debt to ease the
liquidity crisis that has been threatening to topple the economy since late
last year.  [para]  While hardly the end of what still promises to be a
painful economic adjustment for South Korea, which has been shaken since a
major financial crisis began to lay siege to Southeast Asia last summer,
the debt exchange is a significant step toward restoring international
financial confidence in the country.

[para]  In a joint announcement last night, South Korea's Ministry of
Finance and Citcorp, the leading administrator for international banks,
said that $21.3 billion of approximately $22 billion in bank debt had been
exchanged for new one-, two-, and three-year loans guaranteed by South
Korea.  [para]  The South Korean Government and major banks began a global
campaign two weeks ago to persuade scores of international banks to sign on
to a plan aimed at repackaging what was then estimated to be $24 billion in
South Korean debt coming due by March 31.  Last night was the deadline for
subscribing to the plan and at least $17 billion had to be converted to
make the deal valid.  ****"  Timothy L. O'Brien, "Short-Term Korean Debt
Converted by Bank Plan", NYT, March 13, 1998: C-2.

SOUTH KOREA

"'Go naked ... don't eat ... don't drink ... don't breathe!' says a woman
in a Korean television commercial.  [para]  She pulls her belt tighter,
then gasps--the perfect illustration of what analysts fear is happening to
South Korea's economy.  [para]  The government-funded public service
announcement is designed to change Koreans' ideas about how to help revive
their ravaged economy.  [para]  Its message:  Your austerity has gone too
far--so get out there and spend some money.

[para]  The television spot made its debut a few weeks ago, just after the
statistics began to show the biggest slump in decades for January consumer
spending, industrial output, electricity use and other economic indicators.
[para]  The numbers showed what Koreans already knew:  Since the
International Monetary Fund was called in to save the collapsing economy in
November, huge numbers of people have stopped driving cars, eating out and
taking trips.  [para]  Now it appears their actions could eventually
strangle an economy already on the respirator. [para] 'Too much austerity
is killing Korean companies', said Chung Moon Kun, an economist with the
Samsung Economic Research Institute.  'It will lead to more unemployed,
which will lead to less consumption--and then a vicious circle'.

[para]  Of course, austerity is being forced on a certain percentage of
Koreans.  Unemployment hit 4.5 percent  in January and inflation is eating
up more of people's falling incomes.  [para]  But some analysts have been
warning for months that a big injection of frugality was not the right
medicine for Korea's ills.  ****"  Associated Press, "S. Koreans hear
different message:  'Too much austerity' hurts recovery", Chicago Tribune,
March 15, 1998: Section 1: 15.

SOUTH KOREA

"***.  Koreans shop at Samsung department stores, operate Samsung PCs,
stroll through Samsung art galleries, chat on Samsung mobile phones, have
operations at Samsung hospitals, and live in houses built by Samsung
construction equipment.  Many of the companies selling these products and
services barely break even, yet [Samsung Group Chairman Lee Kung] Lee has
added steadily to this sprawl, thanks to abundant loans from foreign and
local banks that have regarded Samsung as the bluest of Korean blue chips.
And inside the group, Samsung Electronics, THE WORLD'S DOMINANT MEMORY CHIP
MAKER, has bankrolled other Samsung businesses, even guaranteeing $4.5
billion of their debt (emphasis added).

[para[  Yet not even a dynamo like Lee can reverse the effects of the Asian
crisis and a slump in the global chip business.  Both events have conspired
to deprive Samsung of what it needs most--ready cash to prop up profitless
companies, service billions in debt, and embark on imperial adventures like
the new auto business.  As a result, Lee faces a choice--change Samsung
radically, or risk fatally weakening his group, especially the core
chipmaking business.  How he and his lieutenants tackle this task could
well set the tone for all of Korea, Inc.'s restructuring.

[para]  Lee would not speak with Business Week, but five of his senior
executives did.  What emerges from these interviews is a willingness to
change that no one thought possible just a year ago.  Still, no bold plan
has emerged to reinvent Samsung.  That, say analysts, would involve laying
off 20% of the workforce of 230,000, and selling off autos, petrochemicals,
aerospace, and other laggards to focus on memory chips, liquid-crystal
displays (LCDs), telecom equipment, and financial services.

[para]  ***.  Group earnings, which plummeted 80%, to $67 million on sales
of $93 billion in 1996, may even fall into a loss when Samsung releases its
1997 results in late March.  [para]  The major problem is debt--oceans and
oceans of it, $23.4 billion owed to domestic and overseas banks.  That's
267% of equity, nd it's getting hugely expensive to service now that local
interest rates have skyrocked and banks are balking at making more loans.
Executives are not obsessing about ways to shrink debt to about 150% of
equity.  ***  Samsung is cutting global investments by 30%, selling some
$300 million in real estate and other assets, and shelving projects such as
a planned 102-story skyscraper in Seoul.  Petrochemicals may go.  ***

[para]  The big problem is that the keystone of Lee's empire--Samsung
Electronics--is now in a dangerously exposed postion.    When the price of
16-megabit chips collapsed in 1996, it dragged down the unit's profits 93%
to $194 million, vs. $2.8 billion in 1995.  Last year probably wasn't much
better.  Lee wants to diversify into higher-margin microprocessors,
application-specific chips, and other logic chips used in everything from
dishwashers to car-navigation systems.  [para]  Such a move up the food
chain requires scads of cash.  But Samsung Electronics is already laboring
under $6 billion in dollar-denominated debt, which is much harder to pay
off with depreciated won.  *** Samsung Electronics probably would not be in
such a fix if it had not served as the in-house cash machine.  When chips
reaped windfall profits back in 1994 and 1995, insiders say, profits flowed
into questionable projects.  ****  "South Korea--The Crisis at Samsung:
Will the giant make needed changes?", Business Week, March 23, 1998: 46-47.


THAILAND

"The United States has agreed to allow Thailand to cancel its purchase of
eight F/A-18 fighter jets because of Thailand's economic crisis,
Administration officials said today.  ***  Thailand, which has already paid
$72 million, faces another $100 million payment by the end of the month to
the planes' manufacturer, the Boeing Company.  It is not clear what effect
cancellation of the sale will have on Boeing, but one offical said the
Administration hoped thailand would resume purchases once its economy
recovers its footing.

[para]  Thailand's inability to pay for the planes underscored the extent
to which the economic crises that have swept Southeast Asia have curbed a
budding regional arms buildup, which has pitted American arms makers
against European and Russian companies.  Malaysia, Indonesia and South
Korea have all announced cuts in military spending, including purchases
from the United States.  ****"  Steven Lee Myers, "Thais Expected to End
$392 Million Boeing Deal", NYT, March 13, 1998: A-6.

THAILAND

"Offering Thailand as an example of proper economic management, President
Clinton warned today that investors could throw Southeast Asia 'into a
long-term recession' if they fail to reward the countries that are
effectively grappling with the financial crisis there.  [para]  Asked if
the worst of the Asian crisis was ast, Mr. Clinton said he was not sure.
But he said:  'I think what we're beginning to see is a differentiation on
the part of the markets in dealing with these different countries.  And
that's what, first and foremost, I would like to see'.

[para] ***  As expected, the President agreed to release the Thai
Government from a contract to buy American-made jet fighters that it can no
longer afford.

[para]  [Thai prime Minister, Chuan] Leekpai is visiting Washington and New
York seeking investment and improved credit ratings for his country in
exchange for the stiff measures he has taken, ranging from closing dozens
of finance companies to slashing spending and raising taxes.  Thailand
turned last year to the International Monetary Fund for a bailout after its
currency collapsed.  [para]  In total, the Administration said it had
assembled a package of aid worht about $1.7 billion for Thailand this year,
including trade assistance and investment in power projects.  ****"  James
Bennet, "Clinton Urges Asia Investors To Aid Lands Like Thailand," NYT,
March 14, 1998: A-5.