Shock waves hit world financial system
Ten years after the stock market crash, five years since the last recession, two years after the Mexican bail-out, new shocks have jolted the international financial system, threatening every corner of the capitalist world with economic ruin. Capitalism’s miracle economies are bankrupt. Stock markets are lurching downwards. Banks and financial institutions are collapsing all over southeast Asia. David Yaffe explains the latest gyrations of capitalism’s long-term structural crisis.
However drastic the crisis facing world capitalism, its economic experts will never admit that capitalism suffers from structural contradictions which threaten its destruction. Crises, they say, are always due to wrong, misguided policies, usually in other countries. The latest debacle is no exception.
Triumphant capitalism in chaos [1]
The miracle of the Asian ‘Tigers’ turns out to be no miracle at all but the result of a ‘crony capitalism and unbridled lending’ that is now jeopardising the whole region. It was not, we are now told, the Tiger economies’ exporting prowess, that shining light to all aspirant capitalist powers, that drove economic growth but ‘often debt-fuelled speculation in golf resorts, high-rise office towers, and luxury condos…Money that did flow to manufacturing often just built auto or chip plants that simply added to the global glut in those products.’ (Business Week 17 November 1997). At the root of the trouble is ‘loose regulation, corruption, and over-reliance on lending to collapsing property and stock markets.’ (Financial Times 31 October 1997). ‘The confidence trick has been unmasked’. The lending that banks have made all over the continent has been exposed as unsound. ‘Thai banks lent to property developers to support vastly over-priced office blocks; Korean banks have supported state industries losing billions…’ (The Observer 23 November 1997). How fickle are the friends of capitalism!
In similar vein, the deep crisis facing the Japanese financial system is put down to its ‘unique institutional arrangement, which allows holders of equities to use them as collateral for bank lending’ (Financial Times 17 November 1997). A rising stock market leads to rising credit, which forces the stock market up further. It led to the creation of the so-called ‘bubble economy’. On the other hand, when the ‘bubble burst’ with the stock market crash of 1990-92, the banks withdrew lending as equity and property prices crashed, so accelerating business
failures. This in turn further depressed the stock market – a cumulative process. The Japanese economy has stagnated since that time. Japanese banks have been left holding a large portfolio of bad loans. Many face bankruptcy. The crisis in southeast Asia, where Japanese banks are the largest lenders, has only intensified this crisis. And for Yamaichi Securities, Japan’s biggest bankruptcy so far with debts of Y3,200bn (£15.3bn), ‘there was unhappy involvement in organised crime’ (The Observer). ‘Unsound lending’, ‘misguided policies’ and ‘corrupt capitalists’, everything but capitalism itself, is used to explain away the latest crisis of the international financial system.
The crisis is real enough. 20% of all bank loans in Thailand no longer receive interest, neither do more than 15% in Malaysia and South Korea. Non-performing loans held by banks in Indonesia, Malaysia, the Philippines, Singapore and Thailand are expected to reach $73bn, about 14% of their total loans outstanding
and equivalent to 13.3% of south-east Asia’s gross domestic product. In South Korea, where seven of Korea’s conglomerates, the chaebol, have collapsed or gone bankrupt, at least 17% of bank loans, some $52bn, are seen as bad debts. Add to this the crisis hitting Japanese financial institutions, the main lender to south-east Asia, with an estimated $250bn in bad loans – two banks and two security houses went bust in November – you have a serious threat to the international financial system.
East Asian companies have built up debts to the rest of the world of over $700bn since 1992. Japanese banks alone have lent $263bn with European countries throwing in $155bn and the US $55bn. With their currencies fixed in relation to the dollar, and world trade, economic growth and stock markets booming, these ever-increasing loans were not called into question. But as growth and trade slowed, and rising inflation made exports less competitive, their currencies came under attack. Since June, the Thai baht has fallen by 36% against the US dollar, the Indonesian rupiah by 32%, the Malaysian ringgit by 27% and the South Korean won by 20%. Interest rates were forced up and stock and property markets began to crash. In Malaysia the stock market has fallen nearly 60% from its peak early this year. The South Korean market has hit a 10-year low, over 40% below its 1997 peak. ‘Risk-free’ loans have now become unpayable.
The immediate concern of the dominant imperialist powers is to prevent south-east Asia reneging on its massive short-term foreign debts as they become due over the next months. That debt was built up to finance a rapidly deteriorating balance of payments position. Importing more than they were exporting, they have been increasingly reliant on short-term capital inflows to finance the deficit. Of Thailand’s nearly $90bn foreign debt, an estimated $40-66bn, $20bn of it short-term, is due over the next 13 months. That is greater than its reserves. Of South Korea’s $110bn foreign debt, around $60-70bn is short-term and due to be paid back within a year. Its central bank has foreign exchange reserves of around $30bn. Similar problems face the other countries. With the Japanese banking system itself in deep trouble and in the process of cutting credit lines to these countries, an international rescue operation became necessary. Imperialism’s trouble-shooter, the International Monetary Fund (IMF) was called in. So far loans to bail out Thailand of around $20bn, Indonesia of $40bn and South Korea, an initial $20bn, have been raised. They will almost certainly not be enough. And they come at a price.
Recolonising Asia
Many Asian countries were opposed to IMF intervention and so, initially, was Japan. These countries were involved in talks led by Japan to set up a new financial regime for the area which would be independent of the neo-liberal/free trade ‘Washington consensus’, and would begin to represent the economic interests of an Asian imperialist bloc headed by Japan. The aim was to set up a $100bn Asian Monetary Fund which would back a new regime of capital controls against foreign currency speculation and support countries refusing to comply with IMF/WTO demands to open their economies fully to US and European penetration. In response, the US launched a massive diplomatic effort in November to persuade Japan that all external rescue efforts were to be conducted through the IMF and that the principles of free trade should be adhered to by the Pacific Rim countries. The pressure continued, with the personal intervention of US President Clinton during the Asia Pacific Economic Co-operation forum in Vancouver in the last week of November. For the moment the US has had its way but real tensions remain and can be expected to intensify as the full implications of IMF intervention become clear.
In Indonesia the IMF has forced the government to liquidate insolvent banks, to drop restrictions on wheat and flour imports, lessen the power of the National Logistics Boards, which governs trade and distribution of commodities, and scrap regulations governing use of local products in car assembly. Already two million jobs have been lost due to the economic downturn. The IMF austerity programme will cause further devastation. In South Korea the IMF is demanding full financial liberalisation, the shutting down of insolvent banks, and industrial restructuring, which will lead to the closing of debt-ridden chaebol, throwing tens of thousands of Korean workers out of their jobs. Already South Korea’s fourth largest shipbuilder has said that it will sack half its 6,000 workers by next month. The workers, among the most militant in South Korea, have made it clear that they intend to resist.
The IMF intervention is an attempt by the US and European imperialist powers to take advantage of the economic crisis in Asia to prise open further the Asian economies, including Japan, to increased trade and investment by US and European multinationals and banks. South Korea, the world’s 11th largest industrial power, is being forced to open up its debt-ridden chaebols and banks to buy-outs and mergers with western multinationals as part of the restructuring process. In November, Doosan, a beverage company, announced that it is selling its bottling operation to Coca-Cola for $432m. Ssangyong has sold its paper-making business
to Proctor and Gamble and is looking to sell its carplant to Daimler Benz. Japan has already been forced to bring in foreign banks to help package and market its banks’ bad debts, including real estate, in marketable securities, and distribute them globally. Bankers Trust New York Corp, Barclays Bank and Swiss Bank are involved and teaming up with other Japanese Banks. So far some $50bn of such securities have been sold.[2] It is only the beginning. The process of opening up the Japanese financial sector to other imperialist financial institutions will intensify. It is part of the growing rivalry between the three competing imperialist power blocs, the ‘Triad’, as the international crisis of capitalism rapidly deteriorates.[3] They are manoeuvring in the contest to redivide and recolonise Asia.
A crisis of the international capitalist system
This crisis cannot simply be put down to the ‘crony capitalism and unbridled lending’ of the Tiger economies. After all, it was the rising capital flows from the imperialist nations, as they sought to find profitable outlets for their surplus capital, that was the basis for that lending and expansion. Private capital flows to developing countries in 1996 reached $244bn, six times that of official development assistance. More than 80% of it went to just 12 countries, the majority in Asia.
On 27 October the New York stock market came close to crashing with the biggest points fall in its history forcing it to suspend trading. This was precipitated by events in southeast Asia, but they were not its cause. ‘What Wall Street calls a bull market is an asset-price bubble created by …very easy monetary policy at the Fed through most of the 1990s.’ Since 1992, US debt has increased by $1,200bn, an amount which is greater than the increase in income in that period. ‘The US has been on a credit binge’ to fuel a stagnating economy (The Wall Street Journal Europe 15 April 1997). The stock market is at present close to 130% of corporate net worth, higher than any time since 1920 and double the long-run average. It does not take much of a setback to cause that ‘asset-price bubble’ to burst.
That is why, as part of the US diplomatic offensive during November, pressure was put on the Japanese not to resort to huge sales of its US Treasury bonds to shore up the balance sheets of its failing banks. If Japan liquidates a sizeable amount of its $250bn holdings of US Treasury bonds – one quarter of the foreign holdings of US debt [4] – then global interest rates will rise, precipitating an almost certain crash on the world’s overvalued stock markets with devastating consequences for the world’s population. The 1929 stock market crash was a prelude to massive unemployment and hunger around the world and the march through fascism to the second imperialist world war.
The massive capital flows to southeast Asia, the easy credit that has financed the global stock market boom, the growing monopolisation of capital through mergers, acquisitions and privatisations, the unprecedented autonomy of the financial system from real production, and the growing rivalry between the major imperialist powers, have the same cause – an overaccumulation of capital in the heartlands of capitalism. The frenetic international expansion of capitalism – globalisation – has now spread that crisis to every part of the world. The latest shocks to the world’s financial system are just another stage in the countdown to capitalism’s collapse.
Footnotes
1. A description used in Trevor Rayne’s article ‘Meltdown’ in Fight Racism! Fight Imperialism! (FRFI) 127 October/November 1995. A good background to present developments is contained in that article.
2. Business Week 17 November 1997
3. See my articles, ‘The gloved fist of imperialism’ in FRFI 111 February/March 1993 and ‘Globalisation; a redivision of the world by imperialism’ in FRFI 131 June/July 1996.
4. As a result of devalued currencies in southeast Asia, the US trade deficit is almost certain to mushroom, with ever cheaper goods crowding the US market while US exports become increasingly uncompetitive. This will fuel the drive towards protectionism in the US where Congress has already refused President Clinton ‘fast track’ authority in trade relations with other countries.
FRFI 140 December 1997 / January 1998
