Leaders Say Bailout Could Kill Healthy Firms : Is IMF Overmedicating Asian Patients? 
International Herald Tribune
December 12, 1997
Thomas Crampton

As Asia's markets spiral downward, Asian business and political leaders are warning that the IMF bailout programs have prescribed the wrong kind of medicine and risk hurting the economies they are intended to save.

These officials and executives criticized the International Monetary Fund for force-fitting the measures — which they said were tailored to stop a government spending spree in Latin America a decade ago — onto Asia's financial crisis, which has at its root the overspending by corporations, not its governments.

Relentless application of the agency's orthodox bailout, which includes increased taxes, high interest rates and budget cuts, will smother the already fragile companies and economies of South Korea, Thailand, Indonesia and Malaysia, they warned.

"You smack a child for misbehaving so he learns a lesson, you don't beat him to death," said Chumpol Na Lamlieng, president of Siam Cement PLC, a Thai industrial company. "While it is good to restrict unnecessary lending with high interest rates, the current tight liquidity is killing formerly viable companies."

In recent interviews, leading officials, such as the new Thai prime minister and new South Korean finance minister, suggested that IMF belt-tightening was cutting into their countries' real economies, rather than reining in spending.

A top IMF official in Washington disputed this point of view, and said that the agency's Asian prescription was a necessary and urgent medicine needed to stabilize Asia's financial markets so that recovery could take place.

"In these financial panics — and every time we go in, it is a financial panic — we see a need for tight monetary policy until confidence is restored," the official said, speaking on the condition he not be identified.

High interest rates, this official said, were necessary to slow the rapid depreciation of Asia's currencies.

"There has been a pervasive loss of confidence in the currency, and we have to attract domestic residents and foreigners to hold the domestic currency," he said. "We ask interest rates to be raised to a level that will stop hemorrhaging of reserves."

Jeffrey Garten, a former American trade diplomat, said that the IMF might be using the wrong medicine in Asia.

"It is a legitimate question as to whether the IMF is moving in with prescriptions that are more relevant to Latin American-style crises than to Asian crises," said Mr. Garten, former U.S. undersecretary of commerce, who is now the dean of the Yale School of Management.

"There's another difference between Mexico and the Asian crisis: Mexico is one country, and the countries around it were not all succumbing to the same problem," he said.

A key question, Mr. Garten said, was whether there was enough flexibility among all parties for programs to be altered.

Finance Minister Lim Chang Yuel of South Korea said this week that IMF-ordained slow growth is not what his country needs, and two of the top three presidential candidates insist they want to renegotiate bailout conditions.

Prime Minister Mahathir bin Mohamad of Malaysia, a long-time critic of the IMF, has said his country would resist the agency's aid because its formula helps guarantee loan payments, rather than rescue distraught economies.

Mr. Mahathir takes issue with three conditions he fears would be placed on IMF aid: an opening of financial markets that allowed foreigners to buy out local banks, increased interest rates that would stifle business activity and increased taxes, which would cut consumption.

"Now your currency has gone down and people are poorer," Mr. Mahathir said in a recent speech. "If you have to pay more taxes, then the burden on the people will be even greater."

In Thailand and Indonesia, the first to sign on for IMF programs during the current crisis, companies are being crushed by high interest rates that have arrived as part of the package.

Mr. Chumpol of Siam Cement said that if interest rates did not ease by the end of the year from the current 20 percent level, one-third of Thailand's companies would be too short of cash to pay interest on their debts.

While it may be tough for companies to find money in the short term, the IMF official said the crisis had already created a completely untenable situation. "It has to be stabilized. The effects of continued depreciation are also devastating to all those companies that have large debts," the official said.

The only reasonable way to confront these problems is to sharply raise interest rates and undertake a fiscal correction, the official said. "Our view is, undertake these actions firmly, with conviction, and leave the markets in no doubt you are doing them, and you will stabilize the situation." The official said that some Asian currencies had fallen between 30 percent and 60 percent in value.

"The way to stop it in the short term is to show that you are determined to defend the exchange rate, not at a particular level, but to defend it against continued depreciation," the official said. "Once that period is over, interest rates can go down reasonably fast."

While emphasizing that the government would strictly adhere to all agreements with the IMF, Prime Minister Chuan Leekpai of Thailand and Deputy Prime Minister Supachai Panitchpakdi said separately that the program was harshly cutting into the country's real economy.

"The deflationary effect was stronger than the IMF predicted, and I have to caution them," said Mr. Supachai, who is in charge of the government's economic team. "We have to accept that some assets are overpriced, but the current slowdown is strong, severe and exaggerated beyond what is necessary." Mr. Supachai said the program was essential to Thailand, but should be scrutinized for future adjustment.

"We should do everything we can to make sure it does not rob the fundamentals of the Thai economy. You can just say you take the bitter medicine and accept the consequences, but no, we need to discuss about these matters." The IMF's standard treatment was originally drawn up to address a situation in which a government with a weakening currency and draining foreign reserves prints money to finance a budget deficit, said Masatsugu Nagato, general manager of the Industrial Bank of Japan Ltd. in Thailand.

But Indonesia, Malaysia, Thailand and the Philippines, until the start of the current crisis, all ran budget surpluses, kept inflation low and had stable or even increasing foreign reserves, he said.

"With Thailand, this could be the first time in its history that the IMF has had to face such a serious private-sector bad debt problem," Mr. Nagato said.

Bad debt in the finance sector, which some estimate may reach 25 percent of outstanding loans, will eventually require the sort of government financed bailout the IMF dislikes, Mr. Nagato said.

Copyright © 2006 the International Herald Tribune