20 years after the East Asia crash: is history repeating itself?

5_asian_contagion_gi.jpg

20 years ago this month, a run on the Thai currency triggered a financial crisis that quickly devastated the economy of the entire region, sinking the currencies of Thailand, Indonesia and South Korea and ultimately spreading as far as Russia and Brazil. Far from ‘lessons being learned’, however, history looks worryingly set to repeat itself.

On 2nd July 1997, Thailand’s Prime Minister Chavalit Yongchaiyudh announced that the baht, would be freely floated. The Thai government lacked the foreign exchange reserves necessary to continue pegging the currency to the US dollar – and the result was a collapse of the baht to less than half its former value.

The contagion quickly spread to Thailand’s neighbours as panicked investors began selling off their stocks in other East Asian currencies. Within months, noted the Financial Times on the 2nd January 1998, the crisis had “laid waste to what was once the most dynamic part of the world economy”, leading to a collapse of the currencies of Indonesia, Malaysia, the Philippines, and South Korea. Later that year, the economies of Russia and Brazil were seriously hit by the impact of the crisis on commodity prices, triggering crises of their own.

Across the region, economic devastation reigned. Unable to refinance their debts, companies of all sizes had their loans called in. But the collapse of their currencies meant that the value of these debts – denominated in dollars – had increased exponentially. A wave of bankruptcies drove unemployment through the roof, whilst governments hit by declining tax revenues – and IMF-imposed austerity – were forced to cut back on social safety nets. At the same time, the collapse of currency values led to rapid inflation, forcing up prices of basic essentials such as food and fuel. Poverty rates ramped up – and in Indonesia, the resulting social unrest even led to the overthrow of the government.

What had caused this devastation? In the years preceding the crash, the economies of East Asia had, under IMF tutelage, removed capital controls. This, in turn, had led to an influx of ‘hot money’ into those economies, as low returns in the developed world prompted investors to seek capital outlets elsewhere. As the Financial Times noted in January 1998, “between 1992 and 1996 net private capital flows to Asian developing countries jumped from $21bn to $101bn. …What caused the inflow was largely the search for better returns by investors made insensitive to risk and hungry for profit by the western bull market.” Those investors had been especially encouraged by the 1993 World Bank report “The East Asian miracle” praising the growth those countries had achieved. To keep their exports competitive, they had pegged their currencies to – then undervalued – dollar. But things turned sour when the so-called ‘reverse Plaza accord’ of 1995 brought about a major appreciation of the dollar, decimating the exports of the East Asian economies. It took a while for this to ‘filter through’ to investors, but once it became clear that East Asian currencies and stocks were overvalued, the herd mentality took over. “As usual,” wrote the FT, “mania ended in panic”.

Thailand, Indonesia and South Korea were all forced to take billions of dollars in emergency loans from the IMF – coming, of course, with strict conditions, which exacerbated the crisis. As is standard with the IMF, recipient governments were forced to adopt strict austerity measures, which preventing them from doing anything to stimulate demand. But they were also forced to abolish all barriers on foreigners purchasing assets such as banks and property. As a result, Western capital was able to swoop in and buy up Asian infrastructure – some of the most modern plant and machinery in the world – for pennies on the dollar, as companies unable to meet their dollar debts were forced to sell their assets at rock-bottom prices. As Wade and Veneroso wrote, “the combination of massive devaluations, IMF-pushed financial liberalisation, and IMF-facilitated recovery may have precipitated the biggest peacetime transfer of assets from domestic to foreign owners in the past fifty years anywhere in the world”. For Professor Radhika Desai, this was “the most impressive exercise of US power the world had seen in some time”, providing, in the words of Peter Gowan, “a welcome boost for the US financial markets and through them for the US domestic economy” as “capital flows bypassed emerging-economy financial markets and went directly into the upward-moving US bond and stock markets” (Desai). Western policy had facilitated the crisis, exacerbated it, and profited immensely from it: for, as Peter Gowan has noted, “the US economy depends…upon constantly reproduced international monetary and financial turbulence” – whilst Wall St in particular “depends upon chaotic instabilities in ‘emerging market’ financial systems”.

With the western world poised to ramp up interest rates, could it be that we are again on the verge of just such an episode? The parallels are worrying.

First of all, just as during the years prior to 1997, the past decade has seen a massive influx of capital into the developing world, exacerbated by the British-US-German-Japanese ‘quantitative easing’ (QE) programmes. According to the world bank, “Over the four-year period between mid-2009 and the first quarter of 2013 [ie the first four years of the QE experiment], cumulative gross financial inflows into the developing world rose from $192 billion to $598 billion”, which, it noted, was “more than twice the pace compared to the far more modest increase of $185 billion between mid-2002 and the first quarter of 2006”.  Former foreign secretary of India, Shyam Saran, warned of the potentially destabilising effects of this influx back in 2013: “According to one estimate, about 40 percent of the increase in the U.S. monetary base in the QE-1 phase leaked out in the form of increased gross capital outflows, while in the QE-2 phase, it may have been about one-third. This massive and continuing surge of capital outflows to emerging and other developing economies is having a major impact. Corporations, which have a sound credit rating, are taking on more debt, and increasing their foreign exchange exposure, attracted by low borrowing costs. Their vulnerability to future interest rate changes in the developed world and exchange rate volatility will increase.” The Daily Telegraph has also picked up on this vulnerability, noting that “Nobody knows what will happen when the spigot of cheap dollar liquidity is actually turned off. Dollar debts outside US jurisdiction have ballooned from $2 trillion to $9 trillion in fifteen years, leaving the world more dollarised and more vulnerable to Fed action than at any time since the fixed exchange system of the Gold Standard.” Even the World Bank have admitted that the reversal of QE “is a central concern for developing economies, which have struggled to cope with the surge in financial inflows that they have experienced over the past several years, and are fearful that the renormalization of high income monetary policies will be accompanied by a disorderly sudden stop in capital inflows.” Later in their study, they conclude that “These fears were not unfounded”. Just as during the pre-1997 period, emerging markets are dangerously leveraged, with the influx of ‘hot money’ into the developing world leaving it exceptionally vulnerable to any action that might reverse this flow. And such action is almost certainly on the cards.

On July 18th, the Times’ economics editor Philip Aldrick wrote that “In two months’ time, the US Federal Reserve is expected to begin the next phase in the greatest economic experiment of modern times. America’s central bank has signalled that it may start unwinding quantitative easing in September with the piecemeal sale of the $3.5trn of bonds bought since QE’s 2008 launch. No one quite knows what happens next, but the gloomiest predict another financial maelstrom. One thing is certain. Borrowing costs will rise”. Indeed, he writes, “it’s already happening. Government bond yields, used to price everything from fixed rate mortgages to corporate loans to pension schemes, have jumped. Since June, the yield on ten-year UK gilts has risen from below 1% to 1.275%. The same is happening in US and German bonds.

Against the backdrop of automatic global monetary tightening, a Fed decision to flood the market with more bonds would lift borrowing costs even higher.” In other words, we are entering an era of rising effective interest rates exactly like that which prefigured the 1997 crisis.

A second parallel is that the debts being accumulated in the global South are, again, largely denominated in dollars. In 1997, this was devastating as it meant that, as local currencies dropped in value, their dollar debts effectively escalated by the same amount; had the debts been denominated in local currency, the number of bankruptcies would not have been nearly so large. To guard against a repeat scenario, therefore, the countries hit in 1997 began to issue debt only in their own currency: those wishing to invest would have to first convert their money into the local currency, and only then could they do so. As the years passed, however, complacency seems to have set in: to such an extent that, today, according to the Bank of International Settlements, non-bank borrowers in emerging markets have now accumulated more than $3 trillion in dollar-denominated debt. According to a report published by the Bank last year, “The accumulation of debt since the global financial crisis has left EMEs [emerging market economies] particularly vulnerable to capital outflows. As private sector borrowing has led to overheating in several large EMEs, the unwinding of imbalances may generate destabilizing dynamics.” The report goes on to note that around $340 billion of developing country debt will be maturing this year, “creating a potential default risk if investors start pulling money out of emerging markets”.

All the warning signs are there. Writing for Bloomberg, Lisa Abramowicz wrote in November 2016 that “the debt of developing economies is positioned uniquely for pain.” Noting Adair Turner’s warning that “the large increase of emerging-market debt, much of it denominated in dollars,” is one of the biggest risks in the financial system right now, she added, “All that money is owed to somebody, and a failure to pay it back will cause big ripple effects. So as emerging markets come under stress, bond investors around the world should take note. As the dollar continues to strengthen, it’s not a stretch to see how this developing-market debt selloff can worsen, having far-reaching consequences on markets around the world.”

Others have specifically drawn attention to the parallels with 1997. Reporting on a speech by Bill Dudley, head of the New York Fed, the Telegraph noted that he had “hinted that the Fed may opt for the fast tightening cycle of the mid-1990s, an episode that caught markets badly off guard and led to the East Asia crisis and Russia’s default.” And the above quoted former foreign secretary of India, Shyam Saran, warned that The Asian financial crisis of 1997/98 was, in part, triggered by an earlier version of QE pursued by Japan in the aftermath of the bursting of its property and asset bubble in the early 1990s. Then, too, the large inflow of low-cost yen loans led to the asset price bubbles, inflationary pressures and currency instability in the Asian economies.”

Of course, triggering a new crisis by ramping up interest rates and selling off bonds – precisely at a time when a large portion of developing world debts are maturing – would hurt the West as well. Yet this seems to be precisely what is being planned. Because if a new crisis is inevitable – and I believe the inherent capitalist tendency towards overproduction means it is – it makes perfect sense to time it at a moment when the global South will be forced to bear the brunt. And, even if the US it hit, so long as everyone else is hit harder, that is a net gain for US power. As the Telegraph noted, “The US is perhaps strong enough to withstand the rigours of monetary tightening. It is less clear whether others are so resilient.” And, says Abramowicz, “While bonds globally are posting some of the biggest losses on record, debt of U.S., Germany, Japan and other large economies will eventually have natural buyers that can swoop in and support values.”

Fans of Breaking Bad will remember the memorable scene in which drug lord Gus Fring arrives at the mansion of his arch rival Don Eladio with a bottle of poisoned tequila disguised as a peace offering. Eladio is suspicious, so to prove its purity, Gus drinks the first shot. Whilst the rest of the cartel are poisoning themselves, he heads to the bathroom to make himself sick. After nearly dying, he eventually recovers – whilst his rivals’ corpses  lay strewn around the swimming pool. Is the US hoping to pull the same stunt – choking themselves, but fatally throttling everyone else in the process, so they can swoop in and pick up the pieces? It wouldn’t be the first time.

This article originally appeared on RT.com

Advertisements

The new era of famine: made in the West

The Wider Image: Risk of famine looms in Yemen
Salem Abdullah Musabih, 6, lies on a bed at a malnutrition intensive care unit at a hospital in the Red Sea port city of Hodaida, Yemen September 11, 2016. 

The famines threatening four countries today have one thing in common: Western aggression and destabilisation.

In February of this year, the world’s first famine in six years was officially declared in South Sudan. A month later, the UN’s humanitarian chief Stephen O’Brien warned the Security Council that three other countries – Yemen, Somalia, and Nigeria – also stood on the brink of famine, with 20 million at risk of starving to death within months. The world, he said, was now “facing the largest humanitarian crisis since the creation of the United Nations”. Unless $4.4billion in emergency funds was raised by the end of March, warned UN Secretary General Antionio Guterres, 20 million would likely starve to death. When the deadline was reached, he had received less than a tenth of that, a paltry $423million.

The amount raised has increased then, but still stands at little above one third of the target. It is almost certain not to met, with donations dropping sharply since mid-May.

For context, the New York Times helpfully pointed out, that $4.4billion is almost exactly the same amount as Britain has made selling weapons to Saudi Arabia in the past two years – most of which have been used against the famine-stricken Yemenis – and less than 10% of the $54billion in additional spending Donald Trump just pledged for the US military.

Yemen was in the news again this week, twice. First was the announcement by the Red Cross that cholera cases in Yemen have now reached 300,000. Then came the ruling by Britain’s High Court – choosing to believe private government assurances over volumes of first-hand eyewitness accounts – that the UK government’s arming of the vicious Saudi war against the Yemeni people is perfectly above board. These two declarations are not unrelated. For it is precisely Britain’s proxy war against Yemen that has led to the medieval levels of famine and disease now sweeping the country.

Back in October 2015 the head of the International Red Cross wrote that “Yemen after five months looks Syria after five years”. Today, according to Save the Children, one Yemeni child is infected with cholera every 35 seconds. This epidemic comes hot on the heels of last year’s dengue fever outbreak, which the World Health Organisation said they struggled to control due to the “near collapse of the health system” and “disruption of water supplies” resulting from the Western-supplied bombing campaign.  Hospitals have been bombed regularly. Following Philip Hammond’s justification of bombing raids on three Yemeni hospitals in as many months, the MSF warned that targeting hospitals was now becoming the “new normal”.

Bombing of hospitals and grain distribution centres, however, is just part of the story of the West’s genocide against the Yemeni people. Yemen is dependent on imports for more than 80% of its fuel, food and medicine, and 70% of these imports come through the Huydadeh port. This port was bombed in August 2015 by the Saudi-led coalition, and has been blockaded ever since, directly creating the current situation in which 21 million suffer food shortages, including 7 million facing famine. As the UN Special Rapporteur on human rights and international sanctions has noted, this blockade is “one of the main causes of the humanitarian catastrophe”, helping to lead to what he called  “this man-made famine”. Needless to say, this blockade – along with every aspect of the Saudi genocide in the Yemen – is fully supported by the US and Britain.

Yet Yemen is not the only place where Western policy is leading to famine.

This week marks the sixth anniversary of the independence of South Sudan. Yet, for the second year in a row, the planned celebrations have been cancelled because, in the midst of starvation and civil war, there is nothing to celebrate.

The country’s descent into famine was officially announced on 20th February this year, with 100,000 starving and a further 1 million on the brink of famine. The official criteria for a famine are that 20% of a population must be suffering “extreme food shortages”, 30% suffering acute malnutrition, and at least 1 per 5000 dying each day. Whilst those criteria are no longer being met, acute hunger has now reached 6 million, up from 5 million in February – over half the population. As in Yemen, this is a crisis of biblical proportions. As in Yemen, it is man-made. And, as in Yemen, it is the thoroughly predictable outcome of Western militarism.

The US and Britain were instrumental to the partition of Sudan in 2011, and it is precisely this partition which has bequeathed the country’s current tragedy. Just as in Libya, in the same year, a loose coalition of rebels with no unified programme were effectively placed in power by Western largesse. And just as in Libya, the inevitable collapse of this coalition has brought total devastation to the country.

The Southern People’s Liberation Movement (SPLM) was formed by rebel army colonel John Garang in 1983, and in the 1990s, under Clinton, the US began pouring millions of dollars into the insurgent movement. Although formally an uprising against the government in Khartoum, it has often relied on an appeal to ethnic chauvanism to galvanise support. According to former national committee memberDr. Peter Nyaba, for example, the movement’s very first mobilisation “that took more than ten thousand Bor youth to SPLA training camps in 1983 was not for the national agenda of liberation but to settle local scores with their neighbours, the Murles or the Nuers.” Similarly, Riek Machar’s faction of the SPLM, based mainly within the Nuer community, conducted a massacre of thousands of Dinka civilians in 1991. Dr Nyaba argues that political training was neglected in favour of, often very brutal, military training, leading to often horrific excesses against the populations under their control. After liberating an area, said Nyaba, the Movement should have

instituted “democratic reforms: a popular justice system, a new system of

education, health and veterinary services.” Such a move, he says, “would have given the SPLM the opportunity to prove itself to the people and to the world and, therefore,

to build a solid popular power base making the SPLM/A the authentic

representative of the people….the ‘New Sudan’ would have been born in the

physical and objective reality of the people, allowing the SPLM/A to acquire

political sovereignty and diplomatic recognition”. These, indeed, are the normal steps taken by genuinely successful revolutionary movements the world over. But this is not what happened. Rather, says Nyaba, the SPLM “denigrated into an agent of plunder, pillage and destructive conquest”. It was at precisely this point that the US began funding the movement, with the initial $20 million provided by Clinton soon expanding to $100 million per year under Bush’s satirically-named “Sudan Peace Act” of 2002.

Just as in Libya, the impact of such US largesse has been to enable insurgent groups to achieve their aims without providing the visionary leadership or mass organisational skills necessary to galvanise genuine mass support. Put simply, US support has rendered mass support unnecessary. Genuine revolutions – that is, revolutions attained primarily through the efforts of the masses themselves, rather than through pressure applied by external patrons – can only succeed with a visionary programme capable of winning the total commitment of the masses. Yet in South Sudan, the SPLM, thanks to US support, were able to come to power without this. The long term impact of this lack of popular, inspirational leadership has been an ideological vacuum into which have poured power struggles over patronage and resource networks.

Confident of external support, the SPLM – and its leader since Garang’s death in 2005, Salva Kiir – had no pressing need to win the support of all the tribes of the South. Without Western funding, Kiir would had to have reached out to the Nuer and the Murle and the other non-Dinka groups in order to secure enough support to force concessions from Sudan’s government. Had he done so, on the basis of a genuine mass programme capable of galvanising all the peoples of southern Sudan on a non-ethnic basis, this very programme would have formed the basis of a viable unity government following independence. However, confident of US backing, Kiir had no need to develop any of this. Instead, his clear patronage from the US enabled him to impose a false unity on his Nuer and Shilik rivals, in which his proximity to the US alone was enough to force them to fall in line if they did not want to be completely excluded from the power and the money coming his way. Political struggles for mass support were to be eclipsed by factional rivalries over who would control the flow of resources.

The same pattern has continued after independence. Assuming, correctly, that US support would continue to flow, President Kiir has had no particular need to endear himself to those outside his primary Dinka constituency, even going so far as to sack his Nuer deputy Riek Machar in 2013, triggering the latest round of civil war. This latest round of war has taken on particularly nasty ethnic dimensions, as the the SPLM’s rival factions, for years bound together by US dollars rather than by a genuine programme of unity, unravels.

Whilst Yemen’s near-famine was caused by the Western-directed bombing and blockade of that country, then, South Sudan’s actual famine is the result of years of proxy war funded by the West and the disastrous partition it produced. The situation in Nigeria is also a result of war, in this case the Boko Haram insurgency – an insurgency which owes its massive spread in recent years directly to the NATO destruction of Libya, which opened up the country’s weapons dumps to Boko Haram and its partners. Have no doubt, the latest wave of famine is a direct by-product of Western aggression – creating another 20 million victims for whom US and British governments must be brought to justice.

 

The country’s descent into famine was officially announced on 20th February this year, with 100,000 starving and a further 1 million on the brink of famine. The official criteria for a famine are that 20% of a population must be suffering “extreme food shortages”, 30% suffering acute malnutrition, and at least 1 per 5000 dying each day. Whilst those criteria are no longer being met, acute hunger has now reached 6 million, up from 5 million in February – over half the population. As in Yemen, this is a crisis of biblical proportions. As in Yemen, it is man-made. And, as in Yemen, it is the thoroughly predictable outcome of Western militarism.

 

The US and Britain were instrumental to the partition of Sudan in 2011, and it is precisely this partition which has bequeathed the country’s current tragedy. Just as in Libya, in the same year, a loose coalition of rebels with no unified programme were effectively placed in power by Western largesse. And just as in Libya, the inevitable collapse of this coalition has brought total devastation to the country.

 

The Southern People’s Liberation Movement (SPLM) was formed by rebel army colonel John Garang in 1983, and in the 1990s, under Clinton, the US began pouring millions of dollars into the insurgent movement. Although formally an uprising against the government in Khartoum, it has often relied on an appeal to ethnic chauvanism to galvanise support. According to former national committee memberDr. Peter Nyaba, for example, the movement’s very first mobilisation “that took more than ten thousand Bor youth to SPLA training camps in 1983 was not for the national agenda of liberation but to settle local scores with their neighbours, the Murles or the Nuers.” Similarly, Riek Machar’s faction of the SPLM, based mainly within the Nuer community, conducted a massacre of thousands of Dinka civilians in 1991. Dr Nyaba argues that political training was neglected in favour of, often very brutal, military training, leading to often horrific excesses against the populations under their control. After liberating an area, said Nyaba, the Movement should have

instituted “democratic reforms: a popular justice system, a new system of

education, health and veterinary services.” Such a move, he says, “would have given the SPLM the opportunity to prove itself to the people and to the world and, therefore,

to build a solid popular power base making the SPLM/A the authentic

representative of the people….the ‘New Sudan’ would have been born in the

physical and objective reality of the people, allowing the SPLM/A to acquire

political sovereignty and diplomatic recognition”. These, indeed, are the normal steps taken by genuinely successful revolutionary movements the world over. But this is not what happened. Rather, says Nyaba, the SPLM “denigrated into an agent of plunder, pillage and destructive conquest”. It was at precisely this point that the US began funding the movement, with the initial $20 million provided by Clinton soon expanding to $100 million per year under Bush’s satirically-named “Sudan Peace Act” of 2002.

 

Just as in Libya, the impact of such US largesse has been to enable insurgent groups to achieve their aims without providing the visionary leadership or mass organisational skills necessary to galvanise genuine mass support. Put simply, US support has rendered mass support unnecessary. Genuine revolutions – that is, revolutions attained primarily through the efforts of the masses themselves, rather than through pressure applied by external patrons – can only succeed with a visionary programme capable of winning the total commitment of the masses. Yet in South Sudan, the SPLM, thanks to US support, were able to come to power without this. The long term impact of this lack of popular, inspirational leadership has been an ideological vacuum into which have poured power struggles over patronage and resource networks.

 

Confident of external support, the SPLM – and its leader since Garang’s death in 2005, Salva Kiir – had no pressing need to win the support of all the tribes of the South. Without Western funding, Kiir would had to have reached out to the Nuer and the Murle and the other non-Dinka groups in order to secure enough support to force concessions from Sudan’s government. Had he done so, on the basis of a genuine mass programme capable of galvanising all the peoples of southern Sudan on a non-ethnic basis, this very programme would have formed the basis of a viable unity government following independence. However, confident of US backing, Kiir had no need to develop any of this. Instead, his clear patronage from the US enabled him to impose a false unity on his Nuer and Shilik rivals, in which his proximity to the US alone was enough to force them to fall in line if they did not want to be completely excluded from the power and the money coming his way. Political struggles for mass support were to be eclipsed by factional rivalries over who would control the flow of resources.

 

The same pattern has continued after independence. Assuming, correctly, that US support would continue to flow, President Kiir has had no particular need to endear himself to those outside his primary Dinka constituency, even going so far as to sack his Nuer deputy Riek Machar in 2013, triggering the latest round of civil war. This latest round of war has taken on particularly nasty ethnic dimensions, as the the SPLM’s rival factions, for years bound together by US dollars rather than by a genuine programme of unity, unravels.

 

Whilst Yemen’s near-famine was caused by the Western-directed bombing and blockade of that country, then, South Sudan’s actual famine is the result of years of proxy war funded by the West and the disastrous partition it produced. The situation in Nigeria is also a result of war, in this case the Boko Haram insurgency – an insurgency which owes its massive spread in recent years directly to the NATO destruction of Libya, which opened up the country’s weapons dumps to Boko Haram and its partners. Have no doubt, the latest wave of famine is a direct by-product of Western aggression – creating another 20 million victims for whom US and British governments must be brought to justice.