With global Central Banks printing money, can Developing Countries fight the lure of short-term loan?

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Short-term debt is a dirty word in Asia.

Fortunately, the World Bank just gave a statistic that short-term debt from private lenders to the developing countries have fallen by 27% in 2011, as medium to long-term debt, increased by 300%. The year 2011, is off course, when globally, central banks were printing a great deal money, and pumping it into their economy in the hope of reviving growth. And much of that liquidity from central banks printing money, found its way, to Asia and ASEAN.

In fact, now and then, global banks, such as the Asian Development Bank, have come out to warn, of a “Bubble” in Asian economies, perhaps fearing, the impact of rapid movement of liquidity, in and out of Asia.

Asia’s Financial Crisis, some 10 to 15 years ago, off course, started in Thailand, with an explosion of Thailand’s short-term debt. And that Thai crisis, known as the “Tom Yum Koong Decease” spread globally.

  • The following is from Finance One:

The Balance Sheet and Short-Term Liabilities

The assets and liabilities of a firm can be segregated into their short-term and long-term components. Shortterm assets include cash, cash equivalents, marketable securities, and marketable inventories—i.e., any asset that can be converted in a short period of time to cash. Long-term assets include assets that cannot easily be converted to cash, such as plant and equipment, reputation, good will, and the present value of future growth opportunities. Short-term liabilities include short-term debt and liabilities which can be converted to debt, such as lender margin calls and trading counterparty collateral calls. Long-term liabilities include long-term debt and equity, or other long-term funding mechanisms.

As long as short-term assets exceed short-term liabilities, companies will not have many liquidity problems, finding resources or engaging in short-term borrowing to offset liabilities as they become due. A serious problem arises, however, when short-term assets or short-term liabilities are stochastic, or unpredictably variable. In these situations, its short-term liabilities can suddenly exceed short-term assets, forcing the company to liquidate long-term assets, increase long-term liabilities, or face bankruptcy. When these events Contributors to Liquidity Risk.

The term liquidity risk is meant to capture the risks to a corporation of having its short-term liability funding requirements unmet by its short-term assets. In essence, this is the risk that the company will not have sufficient cash to meet its liabilities as they fall due. Liquidity risk is also used to describe the risk of an increase in a security’s bid–offer spread or a reduction in market depth for a traded security. The two types of liquidity risk are related yet distinct. In this article, we focus on the first definition.

Liquidity risk arises from the variable components of short-term assets and liabilities. On the asset side, security values may fall. On the liability side, lenders may make margin calls on security loans, trading counterparties may make collateral calls on repurchase agreements and over-the-counter (OTC) derivative trades, and futures exchanges may make mark-to-market cash demands. In the case of a commercial bank, when depositors demand their funds, they are converting longer-term bank liabilities into shorter-term liabilities. In a classical “bank run,” the short-term liabilities exceed the available liquid assets of the bank, and the bank is forced into liquidating assets, restructuring, or going bankrupt.

  • And the root of that Asian Financial crisis?

There was a race with ASEAN countries, to position themselves as a “Financial Hub.” In Malaysia, there was the setting up of off shore banking on an island, and in Thailand, there was the Bangkok International Banking Facility (BIBF).

So in Thailand, lending to Thai firms, under BIBF exploded during the Democrat Party’s Chuan, administration of Thailand, and most of the lending were short-term fund, meaning, ready to pull out at the sign of trouble in the economy. Apart from BIBF, Thai firms were also tapping global source of funds directly, and again, the borrowing were mostly short-term borrowings, for projects, with payback duration, beyond the lending.

As these short-term borrowing piled up, there was a crisis of confidence in the Thai currency, baht, being over valued. And instead of floating the Thai currency, the Thai central bank, went off defending the baht. That defense, ate up all of Thailand foreign reserves. A new government, under Chaovalit, devalued the baht and seek Japan’s aid, to head off falling under IMF intervention.

That attempt failed as IMF scuttled the Japan plan and Thailand fell under the IMF’s package of austerity measures, coupled with privatization of Thai public enterprises, in exchange for the IMF financial support.

But the austerity measures and the privatization, coupled with a devalued Thai currency, did not produce an economic recovery. In fact, Thailand stubbornly, remained in a recession.

Thaksin was elected in 2002, and went about with a two policy drive, first, attracting investments into Thailand and secondly, injecting funds to the grassroots. What Thaksin did, was to increased both supply and demand into the Thai economy. In 2003, one year after Thaksin came to govern Thailand, the Thai economy began recovering. Within years, before the IMF and Thai government agreed payback of the IMF loan date, Thaksin paid back all the IMF loans.

Dip in capital inflows to developing countries: report

OneWorld South Asia

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Dec 21, 2012

In South Asia the trend was in the opposite direction, with the net inflow in 2011 double that of 2010 on account of the rapid rise in net inflow to India to $22 billion.

Net external debt inflows and aggregate net capital inflows to developing countries fell in 2011, driven by a sharp contraction in net inflows from official creditors and a collapse of portfolio equity flows, the World Bank reported yesterday.

Net external debt inflows to developing countries fell 9 percent in 2011 to 465 billion dollars due to the sharp contraction in inflows from official creditors, which fell to 30 billion dollars from 73 billion dollars in 2010.

According to the report at $434 billion, net inflows from private creditors were almost identical to their 2010 level, but with an important shift in composition: net short-term debt inflows contracted by 27 percent, while medium- and long–term financing from commercial banks tripled to $110 billion.

“These international debt statistics are a vital input for experts working to improve the management of capital flows around the world and having the data open to all is a welcome development,” says Ibrahim Levent, Senior Information Officer in the Bank’s Data Group and part of the team that produced the report.

Aggregate net capital inflows, which tally both debt and equity, also fell 9 percent in 2011 to 1,107 billion dollars, compared with 1,211 billion dollars in 2010. The downturn was due to the collapse in portfolio equity flows, which fell to 2 billion dollars, in contrast to an inflow of 120 billion dollars in 2010.

The decreases were partially offset by inflows from commercial banks, sustained access to international bond markets and a rise in foreign direct investment, the Washington-based global lender said.

The report also highlights a wide disparity in trend among the top 10 borrowers in 2011 ranging from a 29 percent increase in net inflows to India as compared to a 67 percent decline in those to Turkey.

According to the report, in South Asia the trend was in the opposite direction, with the net inflow in 2011 double that of 2010 on account of the rapid rise in net inflow to India to $22 billion ($10 billion in 2010).

It also reported that China received 27 percent of net debt and 35 percent of net equity flows to all developing countries in 2011.

When China is excluded, net external debt inflows and aggregate net capital inflows to developing countries fall 13 percent and 3 percent respectively in 2011, compared with 2010, according to the report.

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