The Greek tragedy

Foreign borrowing is rather dangerous. Ask the Greeks and they will tell you why

THE problem with big finance is that it forgets - it forgets history.

There was a time when bankers pushed the line that the best risk was a sovereign one. Find a country to lend to and you will be sure of getting your money back.

But in the eighties, South America proved all that wrong when Argentina and many other countries from the continent defaulted on their scheduled repayment of debts to international banks.

Their currencies headed south, their economies collapsed, prices soared and there was tremendous hardship all round for their citizens. In that instance, even the banks were not completely spared because they had to take a haircut - their loans were not always repaid in full.

Then came the roaring nineties when Asia, and especially the Tiger economies - which referred primarily to the South East and East Asian economies of Indonesia, Singapore, Malaysia, Thailand and South Korea - grew by leaps and bounds.

That was until the 1997/98 Asian financial crisis. Mired in external debt, and with currencies battered by wilting confidence and speculative attacks, Thailand, Indonesia and South Korea were brought down to their knees and sought help from the International Monetary Fund or IMF.

The contagion spread to Malaysia whose finances were relatively strong but which had significant foreign borrowings. South East Asian growth was crimped for years afterwards and even financial rock Singapore was shaken.

The pain was bad in the three worst affected countries as jobs were lost, industries and companies were restructured, assets divvied up and sold, in some cases to foreigners. Yes, there was pain - the proverbial blood in the streets.

As is well known by now, the IMF extracts its pound of flesh for the help it gives. It ensures that it is repaid by imposing extreme - and I mean extreme - austerity on affected countries. Indonesia faced interest rates of 30% - 30%! - a year in 1997. How could anyone survive that?

And it ensures that other creditors - the large international banks - are paid. The standard one-size-fits-all solution is the drastic depreciation of the currency to improve export competitiveness and bring in money from overseas, high interest rates to cut spending, and severe budget cuts.

And now we have Greece, Spain and Portugal. It's a bit of a conundrum here because in this case they did not quite borrow in foreign currencies but in euros, their and the European Community's currency. When the IMF is involved, the solution is the same - austerity. But the banks which lent the money go scot free.

How come, you ask, that the US spent its way out of a bad deal? Well the rest of the world lent money to the US but in US dollars, not some other currency.

That meant that the US could use its own currency and reserves to reflate the economy and save its banks and financial institutions.

That may not be quite magic. At some of point of time, there could be reverberations from that move.

All those dollars floating around the place could cause some future problems such as inflation and a weakened dollar. And if there is loss of confidence in the US, money could flow out. But that's another story.

One lesson is that sovereign risk is not, well, risk-free. But if each time the IMF acts as if it is punishing the borrower but not the reckless lenders, it just encourages the same to be done again, and again. Really, should not the lenders to Greece take a haircut?

The other lesson is that countries, especially smaller countries, should think twice - no thrice - before loading on foreign debt. If your economy spirals and spins down, so does your currency. Your debt and repayments balloon.

Not only that, you may even be subject to penalty payments. You can't pay on schedule but the banks hit you with a penalty because you can't. Where's the logic in that?

There's plenty of liquidity in Asia (and Malaysia). Let's not make ourselves too dependent on foreign liquidity either through debt or equity.

A QUESTION OF BUSINESS
By P. GUNASEGARAM
■ Managing editor P. Gunasegaram does not quite believe Shakespeare's old adage “Neither a borrower nor a lender be”. But if you have to be either, know full well what you are in for.