German lawmakers are expected to vote for a bigger bail-out today. However, the vote by the biggest European nation to boost the firepower of the European Financial Stability Facility (EFSF) alone will not permanently end the euro-zone debt woes, especially if European Union leaders continue to avoid the painful but necessary process that Asian countries underwent following the 1997 currency crisis.
Kasikornbank's market and economic research chief Kobsidthi Silpachai said both currency crises showed the dark side of currency peg and currency pool, which - for stability of their currencies - demanded that the countries lose their autonomy in monetary and fiscal management to the currency host country's authorities.
"Thailand faced a daunting task to recover from the Tom Yam Kung crisis, which arose from the country's reluctance to give up monetary power. To ensure stability of the euro [used by 17 European nations], the members need to give up their fiscal autonomy. Under the Maastricht Treaty, they are required to maintain the ratio of annual government deficit to gross domestic product at below 3 per cent, but it turned out that several countries like Greece failed to honour the agreement," he said.
Though the baht was then pegged to the US dollar, the interest rate was allowed to move freely. With higher rates, the baht needed to be devalued to match the dollar value. As the peg continued, the Thai currency was under heavy attack and created the contagion crisis. Then, Thailand and other Asian countries were forced to devalue their currencies, at a huge cost to the government and business sectors. As the debt burden doubled, financial institutions faced deposit runs. Aside from the closure of 56 finance companies, several banks were nationalised, which required Bt1.4 trillion from the Financial Institutions Development Fund.
Kobsidthi said there are several indicators that the European Union is experiencing a similar crisis. Given that the EU economic outlook is bleak, with about 20 per cent of population aged over 65, as well as huge public debts, investors have lost confidence.
Among indicators of the confidence crisis, the London Interbank Offered Rate is now heading upward, indicating the banks' increasing reluctance to lend to their counterparties. The three-month rate at 0.36856 is the highest level since August 2010. Credit default swaps spreads (for European banks, a measure of how costly it is to buy insurance against their default) are at record highs, at 334 basis points yesterday. In 1998, when the baht devaluation was announced, Thai stocks were traded 0.5 times below book value, from 2.5 times in 1996. The European bank index is now traded below 0.5 times.
"The previous two stress tests are misleading as government bonds are not marked to market. Huge losses would show on their balance sheets, and European banks will need huge recapitalisation, possibly to the tune of US$400 billion (S$513 billion)," the economist said. "Investors have deserted them and the big question is if depositors would follow suit. A clean slate is a must." Thailand rose from the ashes due to the devaluation, which sparked demand for exports. Export income became the main staple in repaying loans from the International Monetary Fund.
German Chancellor Angela Merkel was right when she said last week that one solution to tackle this woe is to create a firewall around Greece. It's in keeping with the suggestion by many economists that Greece should be allowed to default, to pave the way for debt restructuring and bank recapitalisation. Last but not least, there are calls for issue of euro-bonds, which would be backed by all 17 euro-zone nations, to raise the needed funds.
As Kobsidthi said, the euro has been created without an opportunity for the nations to take a step back. A recent article in The Economist magazine warned that walking out of the euro would create huge losses for the continent. While funds would flow to strong economies like Germany, it would hit their exports while the business sector would remain affected by euro-induced damage. The publication also quoted analysts at UBS as saying the euro break-up could cost a peripheral country 40-50 per cent of GDP in the first year and a core country 20-25 per cent.
Warning that the debt crisis has reached a "serious" stage, European Commission President Jose Barroso yesterday called for the faster creation of a permanent rescue fund to show Europe's determination to stamp out the debt crisis. Due to be set up in mid-2013, the European Stability Mechanism will wield a ¤500 billion (Bt21 trillion) war chest that could be used more flexibly than the current guarantee-based temporary financial backstop.
Still, funds injection alone will not help. All countries should be aware that the current crisis stems from the huge government spendings after the 2008 crisis. The pain will continue to be felt, without restructuring.
Source: http://business.asiaone.com
Kasikornbank's market and economic research chief Kobsidthi Silpachai said both currency crises showed the dark side of currency peg and currency pool, which - for stability of their currencies - demanded that the countries lose their autonomy in monetary and fiscal management to the currency host country's authorities.
"Thailand faced a daunting task to recover from the Tom Yam Kung crisis, which arose from the country's reluctance to give up monetary power. To ensure stability of the euro [used by 17 European nations], the members need to give up their fiscal autonomy. Under the Maastricht Treaty, they are required to maintain the ratio of annual government deficit to gross domestic product at below 3 per cent, but it turned out that several countries like Greece failed to honour the agreement," he said.
Though the baht was then pegged to the US dollar, the interest rate was allowed to move freely. With higher rates, the baht needed to be devalued to match the dollar value. As the peg continued, the Thai currency was under heavy attack and created the contagion crisis. Then, Thailand and other Asian countries were forced to devalue their currencies, at a huge cost to the government and business sectors. As the debt burden doubled, financial institutions faced deposit runs. Aside from the closure of 56 finance companies, several banks were nationalised, which required Bt1.4 trillion from the Financial Institutions Development Fund.
Kobsidthi said there are several indicators that the European Union is experiencing a similar crisis. Given that the EU economic outlook is bleak, with about 20 per cent of population aged over 65, as well as huge public debts, investors have lost confidence.
Among indicators of the confidence crisis, the London Interbank Offered Rate is now heading upward, indicating the banks' increasing reluctance to lend to their counterparties. The three-month rate at 0.36856 is the highest level since August 2010. Credit default swaps spreads (for European banks, a measure of how costly it is to buy insurance against their default) are at record highs, at 334 basis points yesterday. In 1998, when the baht devaluation was announced, Thai stocks were traded 0.5 times below book value, from 2.5 times in 1996. The European bank index is now traded below 0.5 times.
"The previous two stress tests are misleading as government bonds are not marked to market. Huge losses would show on their balance sheets, and European banks will need huge recapitalisation, possibly to the tune of US$400 billion (S$513 billion)," the economist said. "Investors have deserted them and the big question is if depositors would follow suit. A clean slate is a must." Thailand rose from the ashes due to the devaluation, which sparked demand for exports. Export income became the main staple in repaying loans from the International Monetary Fund.
German Chancellor Angela Merkel was right when she said last week that one solution to tackle this woe is to create a firewall around Greece. It's in keeping with the suggestion by many economists that Greece should be allowed to default, to pave the way for debt restructuring and bank recapitalisation. Last but not least, there are calls for issue of euro-bonds, which would be backed by all 17 euro-zone nations, to raise the needed funds.
As Kobsidthi said, the euro has been created without an opportunity for the nations to take a step back. A recent article in The Economist magazine warned that walking out of the euro would create huge losses for the continent. While funds would flow to strong economies like Germany, it would hit their exports while the business sector would remain affected by euro-induced damage. The publication also quoted analysts at UBS as saying the euro break-up could cost a peripheral country 40-50 per cent of GDP in the first year and a core country 20-25 per cent.
Warning that the debt crisis has reached a "serious" stage, European Commission President Jose Barroso yesterday called for the faster creation of a permanent rescue fund to show Europe's determination to stamp out the debt crisis. Due to be set up in mid-2013, the European Stability Mechanism will wield a ¤500 billion (Bt21 trillion) war chest that could be used more flexibly than the current guarantee-based temporary financial backstop.
Still, funds injection alone will not help. All countries should be aware that the current crisis stems from the huge government spendings after the 2008 crisis. The pain will continue to be felt, without restructuring.
Source: http://business.asiaone.com
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