September 25, 2008

Asian Savers Get Case of the Jitters Worries of Fallout From Wall St. Crisis

By Keith Bradsher and Heather Timmons

Throngs of depositors lined up Wednesday outside the headquarters and branches of Bank of East Asia here to withdraw their money, underlining widespread public nervousness in Asia that Wall Street's recent difficulties might spread across the Pacific.

The Hong Kong Monetary Authority and the bank denied that there was any basis to rumors that the bank was in financial distress. Bank of East Asia, with $51 billion in assets, said "malicious rumors" began spreading through electronic messages late Tuesday. The police said they would investigate.

Depositors who lined up outside the company's headquarters in the city center said that after Lehman Brothers failed, they no longer fully trusted any financial institution.

"If a business as big as Lehman can go down, then we're scared," said Ann Chan, an off-duty nurse, whose husband had suddenly called her Wednesday afternoon and sent her to wait in line to close their account.

The bank run was the first in an Asian financial center since Wall Street's turmoil escalated this month. It followed a rush last week in Hong Kong and Singapore by some policyholders to withdraw money from American International Group, the insurance company.

Bank of East Asia remained open long after normal business hours on Wednesday to serve its customers into the evening, but it did not say how much money had been withdrawn.

The Asian financial crisis in 1997 and 1998 exacted a terrible price from the region by costing it years of growth and the savings of many families.

Yet most bankers and economists say that with a few exceptions - notably Russia and India and possibly the smaller banks in mainland China - the financial systems in most emerging markets are in fairly good shape to weather the global credit crunch. There has been little sign so far that Asia will be convulsed again by the capital flight, plunging currencies and widespread bank failures that characterized the Asian financial crisis, although the rate of corporate bankruptcies and bank failures could rise as the region's economies slow along with economies elsewhere.

As Ajay Kapur, the chief global strategist at Mirae Asset, a large South Korean investment bank, put it, "We've already had our crisis, so it's pretty difficult to blow up twice in a decade."

Standard & Poor's nonetheless reduced the credit outlook for six Asian banks and six Asian insurers from positive to stable late last week. S&P, the credit-rating agency, expressed concern not so much about the short-term prospects for Asian financial institutions - practically none had sizable exposures to U.S. mortgage-backed securities or Lehman Brothers - but rather about the longer-term consequences of a probable slowing in export-dependent Asian economies.

Asian exporters of mainly manufactured goods, like China and South Korea, face a serious challenge to their economic growth. Demand from the United States and Europe is likely to wither as their economies falter.

S&P and Moody's Investor Service both lowered their credit outlooks for Bank of East Asia late last week to negative, from stable, after the bank was required to restate its earnings for the first half of this year. The bank announced that it had discovered an unauthorized "manipulation" of how it valued equity derivatives and restated its first-half profit, reducing it by $16.8 million. The bank attributed the loss to a rogue trader, not to global credit problems.

Both credit-rating agencies expressed concern about what the incident suggested about the bank's risk controls. But Ryan Tsang, the China bank ratings analyst at S&P, said by telephone Wednesday evening, "We believe the Bank of East Asia's overall financial health is sound."

Bank of East Asia also announced Wednesday, after the bank run had started, that its exposure to the Lehman Brothers bankruptcy was $54 million and its exposure to American International Group, which was extended credit by the Federal Reserve last week, was $6.4 million.

The bank's stock closed on Wednesday at 25.15 Hong Kong dollars, or $3.24, down 1.85 dollars, or 6.9 percent.

Joseph Yam, the chief executive of the Hong Kong Monetary Authority, the central bank here, said it had offered assistance to Bank of East Asia but had been assured that the bank did not need it. The bank's capital adequacy ratio is 14.6 percent, well above the international requirement of 8 percent, and that the bank's liquidity stands at 40 percent, well above Hong Kong's requirement of 25 percent, Yam said.

Banks in Asia tend to follow the European model of combining commercial and investment banking, or relying just on commercial banking, instead of following the American model until recently of allowing highly leveraged investment banks.

The Lehman bankruptcy filing is an especially sensitive subject in Hong Kong. Mutual funds are not popular, partly because they charge very high management fees by international standards. Individual investors commonly buy small-denomination corporate bonds directly from banks or brokerage firms instead.

More than 10,000 residents have lost money on Lehman's so-called mini-bonds, of which $1.6 billion was sold to local consumer and institutional investors. The Hong Kong Securities and Futures Commission is now investigating whether buyers of the mini-bonds were warned of the risks or whether the mini-bonds were not covered by deposit insurance.

Hong Kong started offering depositor insurance only two years ago. A government-backed bank-deposit protection board is now financed with fees collected from banks and guarantees accounts up to 100,000 Hong Kong dollars per depositor.

Emerging markets are generally in a stronger position now than at the start of the Asian financial crisis. Their governments and companies have been fairly restrained about borrowing in foreign currencies in recent years, even in an age of easy credit that tripped up the U.S. financial system. Emerging-market borrowers have also tended to avoid the short-term borrowing that created problems in the 1990s, so they have less debt to refinance in the coming months.

A detailed analysis last Friday by the Dutch financial group ING found that $81 billion of the $631.5 billion in outstanding emerging- market corporate bonds would be maturing by the end of next year. The debt maturing by the end of next year is concentrated among financial companies, which accounted for 70 percent of the total.

But less than a third of the $81 billion had been issued by borrowers with a junk-bond rating or no rating and who could have severe difficulty finding lenders to buy more bonds to replace those that are maturing.

Even those who can borrow money are likely to pay much higher interest, as credit spreads between U.S. Treasury securities and emerging market bonds have widened. The ING report nonetheless said, "Details of the corporate profile are less worrisome than might have been feared," meaning the corporate bond situation was not as dire as some debt analysts had assumed.

Only $30 billion of the $525.3 billion in outstanding emerging- market government bonds will be maturing by the end of next year. Among governments, China has the largest payments coming due in the fourth quarter of this year, at just $1.6 billion, ING calculated.

By comparison, estimates of the interest that China earns on its $1.8 trillion in foreign exchange reserves range from $13 billion to $18 billion a quarter.

Even Thailand, which has been intervening in markets, still had $101 billion in foreign exchange reserves last month, India had $295 billion and Russia had $581 billion. The unknowable is how long those reserves would hold up under extremely adverse conditions.

While emerging markets as a whole appear to be in strong financial condition - at least until eroding exports begin to hurt their balance sheets - there are important exceptions. Russia, South Korea and India have all spurred concern, as has Eastern Europe.

Although Russia's enormous foreign exchange reserves would seem to give it the ability to finance any assistance that might be needed to banks there, the speed with which the conflict with Georgia broke out and an apparent shift in government attitudes toward business have unnerved many investors.

The presence of new uncertainties has eroded broader confidence in Russia and contributed to capital flight, said Dariusz Kowalczyk, the chief investment strategist at CFC Seymour, a Hong Kong securities firm.

Eastern Europe has drawn attention because of its heavy reliance on exports to the slowing economies of Western Europe. Countries in the region, particularly Baltic countries, have tended to run trade deficits that they finance through borrowing.

South Korea and India have caused concern because of their reliance on foreign borrowing. But neither has substantial sums of bonds maturing by the end of next year, and both have large reserves of foreign exchange.

Still, India is the more worrisome case. "A substantial part of the government funding is done in the international market," said Takahira Ogawa, director of Asian and Pacific sovereign debt ratings at the S&P office in Singapore. "That makes their position more vulnerable right now, particularly in an international financial situation like now with greater uncertainties."

A Goldman Sachs report released on Tuesday predicted that for Indian banks "earnings growth will still be robust" but that there might be "head winds" from rising inflation.

Growth in bank lending inside India has been substantial in recent years, and countries with rapid increases in bank lending have historically been the most vulnerable if it turns out that many of the new loans were unwise.

Even with slower worldwide growth, some analysts say the Indian banking system may be able to weather the storm. "A slowdown is possible, but there is no crisis," said Punit Srivastava, an analyst with Enam Securities in Mumbai.


Heather Timmons reported from New Delhi.

Originally published by The New York Times Media Group.

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