The politics of a meltdown
The global market looks different in Washington, writes Steven Solomon
Sunday 02 November 1997
Washington insiders accept that Hong Kong's crash spooked Wall Street, but they trace the fall, in part, to Taiwan's surprise 17 October devaluation of its currency to offset the devaluations of other Asian countries. Taiwan has the world's largest currency reserves and had been under no speculative pressure.
"The market view was that if even Taiwan can't hold its exchange rate, then no one can," said William Cline, deputy managing director and chief economist at the Institute of Interna- t ional Finance.
A still longer fuse to the region's cycle of devaluations was China's devaluation in January 1994. China's export competitiveness put pressure on neighbouring countries to regain lost sales through devaluation. Speculative froth and economic mismanagement in Asian countries did the rest.
The prevailing view inside the Clinton Administration is that the overheated US market was due for a fall. If the correction in overpriced Asian emerging markets had not lit the fuse, something else would have done. Alan Greenspan, chairman of the Federal Reserve, said as much on Wednesday.
Many US officials dismiss the economic threat of the "Asian contagion" to the US economy.Others are worried about the collateral damage the uncontrolled contagion may cause. Spillover from Asia tripped Thursday's market plunges in Latin America, whose exports are competitive with Asian goods. Prolonged economic and political instability in Asia and Latin America is worrisome.
Such worry motivated the US to put up $3bn in financing to support Friday's $18bn (pounds 12bn) IMF-led emergency aid package for Indonesia. US leaders are examining ways to influence the IMF's $17.2bn stabilisation programme in Thailand. Right now, says a high US official, the IMF "has no clue as to the size of the hole there. These are dicey issues because there is a weak political establishment."
Some insiders feel the US has been too passive in deferring to Japan's insistence that Asia is its sphere of influence and that the US should follow its lead: Japan put up $4bn in the Thai programme, the US nothing.
The controversy over the US-led $37.5bn bail-out of Mexico from its 1994- 95 peso crisis has kept officials from putting up funds. After Mexico, US Congress imposed limits on the Administration's legal lending flexibility. In advancing $3bn to Indonesia, the Administration has decided the Asian contagion is so serious that these political risks must be faced.
Meanwhile, Treasury Secretary Robert Rubin has been consulting on mechanisms to strengthen Asia's economic and financial architecture. This is expected to produce results. Resolution of the tumult will be conditioned by the Chinese theatre. "If the Hong Kong dollar holds [its US dollar peg], it'll be okay," said Mr Cline at the IIF.
Yet the cloud looming over Hong Kong is China's exchange rate policy. "A lot of the Asian turmoil is due to the pricing in of uncertainty over what China will do," says a US official. "Will they feel they have to devalue to establish their competitive position? That is driving Hong Kong to some extent."
This is why US officials will be watching China closely as Jiang Zemin returns home.
- 1 Alan Rickman admits editing 'terrible' script with friends in Pizza Hut behind backs of writers on Robin Hood: Prince of Thieves
- 2 Rarest Beanie Baby of them all could be sold for £62,500 on eBay
- 3 Professional big game hunter Ian Gibson crushed to death by elephant during hunt
- 4 Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
- 5 Rebecca Francis accuses Ricky Gervais of using 'influence' to target female hunters after receiving barrage of death threats
Yemen crisis: Meet the child soldiers who have forsaken books for Kalashnikovs
Alan Rickman admits editing 'terrible' script with friends in Pizza Hut behind backs of writers on Robin Hood: Prince of Thieves
Rarest Beanie Baby of them all could be sold for £62,500 on eBay
Professional big game hunter Ian Gibson crushed to death by elephant during hunt
Farmer told to tear down mock-Tudor castle after hiding construction behind hay bales
If I’m being racially abused I don’t need a stranger with a saviour complex to rescue me
The only black face in the Ukip manifesto is on the page about overseas aid
Ukip is the only main political party to not address LGBT rights in its manifesto
Food banks: One million Britons will soon be using them, according to Trussell Trust
Religion isn't growing, it is becoming vigorous in its demise, says philosopher AC Grayling
BBC election debate: The one photo that summed up the whole 90-minute leaders debate
iJobs Money & Business
£20000 - £25000 per annum + OTE £45,000: SThree: SThree Group have been well e...
£50000 - £667000 per annum + excellent benefits : Ashdown Group: IT Manager / ...
£13000 - £20000 per annum: Recruitment Genius: Scotland's leading life insuran...
£40000 - £45000 per annum + benefits : Ashdown Group: Training Programme Manag...