Why Asia Was Spared In This Credit Crisis

Source : The Business Times, August 24, 2007

WHILE it was the steep slide in global equities which hogged headlines over the past week, Asia appears to have been more insulated from something else afflicting Western money markets.

True, stocks in this region did suffer their share of the bleeding, with some key Asian indices sliding as much as 20 per cent from the year's July peaks. But in private, there must have been Asian central banks who were pleased that some of the unhealthy froth had at last been removed from their bourses and - with that - some of the persistent upside pressures on their currencies as well.

And it's worth pointing out that the ongoing credit crunch in international financial markets has had far more consequences for Western central banks than Asian ones. Compared to the massive liquidity injections we've witnessed from Europe to the United States and Canada over the past week, Asian central banks (except for Japan's) appear to have been relatively insulated.

In the West, injections of hundreds of billions proved less than effective in calming lending fears in their domestic money market systems - until those short-term infusions were augmented by the Fed's decision to reduce its discount rate for banks' borrowings by half a percentage point to 5.75 per cent last Friday.

Over and above that, the big discussion among Fed watchers these days is not if, but when, the US central bank will follow that move with reductions in its key Fed funds money market rate as well - which, so far at least, has been left unchanged at 5.25 per cent.

At one point earlier this week, we were told that the TED spread - or the difference between government Treasury bill yields and straight deposits for the three month tenor - in the domestic money markets of the eurozone, the UK and the US had widened more than it did during the US stock market crash of 1987 or the Long Term Capital Management debacle of 1998.

In the US, the paranoia over hedge fund losses, doubtful credits and the failure of one prominent money market fund caused the TED spread to widen at one point on Monday to more than 3 per cent - compared to a more 'normal' gap of something like 0.7 per cent.

Safe refuge appeal caused the one-month US T-bill rate to fall even more sharply, to a low of 1.34 per cent - almost four percentage points lower than the US central bank's Fed funds rate of 5.25 per cent.

In Asia, by contrast, strong growth and price pressures at home obliged the People's Bank of China to announce its fourth hike in benchmark one-year deposit and lending rates for the Chinese economy on Tuesday this week.

It's almost as if less developed Asian financial markets were spared this time around precisely because they had not yet developed the complicated financial structures, investment funds or derivative instruments which are causing so much stress in the more sophisticated financial centres of the West.