Editorial

ASIA's main stock indices were still largely negative yesterday, but less frightful in their falls than on Monday. The Japanese central bank did not cut rates below its baseline 0.5 per cent yesterday, yet the omission did not see a worse slump in the Nikkei index. For what it was worth - quite a lot, actually - this had to be encouraging. Japan's focus has been on price stability. This differs from many middle-income Asian countries, which have turned their attention from managing inflation to stimulating growth in anticipation of exports to North America and Europe contracting and domestic consumption slowing.

What was notable through the week's gyrations is that the Asian market behaviour does not appear to have been influenced all that much by the passage of the US$700 billion (S$1 trillion) bank stabilisation package by the United States Congress. If it was, the main bourses would have taken off on the confidence arising. Asia has been less panicked chiefly because of its banks - especially those of Japan, China and South Korea - are not as exposed to the mortgage-backed derivatives mania. Reinforcements built in after the 1997-98 currency crisis, in the form of capital adequacy, de-leveraging and sounder corporate governance, have also helped. On top of these is the healthy exchange reserves position of most central banks.

The question Asians are asking themselves is how much longer will they be spared the worst of the capital-markets contagion that has spread to Europe from the United States at such dizzying speed. If it crosses the Pacific or via the Atlantic, will Asians emerge in reasonably good shape? There is more than passing interest in the unilateral action of European Union nations in indemnifying savers' bank deposits fully. Ireland started the trend with a guarantee for all deposits - retail, wholesale and commercial. A number of other EU nations which have followed, like Germany, possibly will restrict protections to individual savers. It should be noted Asians are no less prone to making panicked withdrawals in stressful circumstances.

Governments and central banks would be monitoring the EU process, which followed the US move of guaranteeing bank deposits to a raised ceiling of US$250,000, from US$100,000. In both the US and EU policy choices, the objective was to preserve confidence in banks. Despite Asian banks' more liquid position, the indemnity option is available to the authorities if unprovoked withdrawals begin to disrupt lending activities.

This article was first published in The Straits Times on October 8, 2008.

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