Asian bond markets as a shock absorber from the world economy
By Jon Fernquest[Introduction|Article]
[Reading Questions|Answers]
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Robert Zoellick the new head of the World Bank, is moving cautiously in his new job.
He prefers to consult with his people in the field first and only then decide on a course of action.
He's pushing for more well-developed Asian bond markets as a shock absorber from the world economy.
Bonds provide a lower risk asset than equities that foreign investors can shift funds into during a sudden financial panic and crisis:
"...when asset prices plunged, investors who wanted to stay in Indonesia, Thailand or the Philippines didn't have the choice of moving their money from stocks to bonds. So, they fled the region."Work on developing bond markets in Asia began after the 1997 crisis but didn't progress very far.
The development of local bond markets resembles other post-1997 initiatives such as the Chiang Mai Initiative by seeking financial autonomy for Asia and the ability to weather sudden financial crises without bringing in the IMF with its painful medicine.
The World Bank - a bank founded with the IMF after World War II in order to lend money and provide technical assistance to poorer countries for the economic developmentToday's article was written by William Pesek, a Bloomsburg Bloomberg News columnist. For biographical information see a previous Readbangkokpost article.
Robert Zoellick - new head of the World Bank
consult with - talk and discuss ideas about an issue before making a decision
people in the field - bank employees working in the countries that the bank lends money to (since they are close to the action, they will know more about the problems that need to be solved)
course of action - a plan
a shock absorber - the part of a car that cushions bumps when wheels go over bumps in the road
Reading Questions
Here are some questions to guide your reading (See answers at end):1. What is the new head of the World Bank going to do before he sets priorities for the bank? Why? (Use inference)
2. How long has Mr. Zoellick been on the job?
3. What does the World Bank do?
4. What was Mr. Zoellick's background before entering government service?
What kind of knowledge would this give him?
5. Have the plans after the 1997 crisis to develop Asia's debt and bond markets progressed very far?
6. How can the economies of whole countries, not just investors, benefit from more well-developed bond and financial markets?
7. How can bond markets act as a shock absorber protecting Asian economies from turmoil in the greater world economy producing sudden inflows and outflows of capital?
8. What international economic events create potential for another financial crisis?
9. What benefits would more well-developed bond markets have for Thai businesses and the Thai economy?
10. Through what three channels might the US subprime mortgage crisis affect Asian economies?
11. How can bond markets help with bad loans in an economy?
Bangkok Post Article September 4, 2007
Zoellick sees Asia's clear and present danger
By WILLIAM PESEKWhen I asked what the World Bank's priorities will be in Asia under his leadership, Robert Zoellick's response was: "I plan to listen to our people in the field and then we'll talk."
That was on Aug 2 in Coolum, Australia. From there, Mr Zoellick headed to Cambodia, Vietnam and Japan. On Aug 8, I caught up with Mr Zoellick again in Tokyo to pick his brain on what Asia needs to do to avoid a repeat of the 1997 crisis. The short answer: Asia has come a long way, but has lots to do.
While Mr Zoellick has been in the job just two months now, it's hard not to be impressed by the poverty-fighting agency's new leader. Granted, after the debacle that was Paul Wolfowitz's two years in the job, Mr Zoellick hardly has big shoes to fill. Yet his take on Asia thus far seems refreshing.
pick his brain - ask an expert questions to learn about a topic
debacle - a complete failure
Paul Wolfowitz - former head of the World Bank who left after a scandal
big shoes to fill - the person before achieved a lot (so it is difficult to do as well as they did)
a take on - opinion about
Mr Zoellick's focus on debt is a case in point. The former Goldman Sachs Group Inc vice chairman understands two things about Asia's markets that are often overlooked. One, they are far less developed than the ones Asia's leaders pledged to create 10 years ago. Two, liquid bond markets aren't just about investors, but also reducing poverty.
"My experience, and this is as much from my prior job as this one, is that the securities markets still have a lot of work to do," Mr Zoellick said. "If you look at the depth and liquidity of bond markets here, it's pretty weak compared to what you have elsewhere in the world. That leads to a natural agenda, there needs to be things to do to get better information: that's corporate governance, accounting information."
Mr Zoellick continued that "there are things you could do to reduce the transaction costs and some of this is including having a greater variety of financial instruments that in more developed markets you can use to manage risk and diversify your position."
a case in point - an example of
Goldman Sachs - a major world investment bank and financial specialist
liquid bond markets - when markets have a lot of buyers and sellers so that assets can be quickly converted into cash (greater liquidity makes the an asset market more attractive for investors)
an agenda - list of important things to do
corporate governance - the high level running of a business ()setting high level policy by the board of directors)
transaction costs - the costs of buying and selling in a market (the higher these costs are the less transactions there will be and the less liquid the market will be)
financial instruments - a security such as a bond, stock, check, etc., Treasury Bills, U.S. government bonds, commercial paper, mortgages, certificates of deposit, or long-term bonds
diversify - hold different kinds of assets to reduce risk (because prices tend to move in offsetting directions)
Herein lies one of Asia's biggest vulnerabilities as a global surge in borrowing costs shakes up markets. The region's high growth rates are marred by the lack of the shock-absorbing mechanism provided by bond markets.
It's among the lessons from 1997 that Asia hasn't learned very well. Back then, when asset prices plunged, investors who wanted to stay in Indonesia, Thailand or the Philippines didn't have the choice of moving their money from stocks to bonds. So, they fled the region.
A decade after the crisis, Asia is experiencing a new financial contagion - from the US. It started with a crisis in the sub-prime mortgage market and has since morphed into broader problems in credit markets. Mr Zoellick sees increasing capital flows as a "clear and present danger" if Asia doesn't raise its game in bond markets.
Risks to Asia's outlook abound. They include a surge in oil prices, a collapse in the dollar and a reversal of trades involving investors borrowing cheaply in yen and moving the funds into higher-yielding assets overseas, even a terrorist attack.
An overheating China is another. China's Finance Minister Jin Renqing has resigned for "personal reasons". That didn't stop markets from buzzing about whether he was forced out for failing to keep inflation from accelerating in Asia's No.2 economy.
vulnerabilities - ways that it can be harmed and damaged
marred by - spoiled or damaged by
shock-absorbing mechanism - lessen the impact of shocks to the economy from outside the country
contagion - spreading of something bad (disease, financial or economic problem) from one person to another until everyone is affected
sub-prime mortgage - a mortgage given to a riskier borrower
morphed into - changed into
abound - there are lot's of
overheating - growth and economic activity greater than the capacity of the economy to grow (not enough factories, skilled workers) which results in inflation
buzzing about - gossiping and speculating about
Given all the liquidity flowing to Asia these last few years, it's time governments got more serious about developing deeper debt markets.
Along with offering investors more places to put their money, well-functioning bond markets would help Asia keep more of its vast household savings at home, as opposed to watching it flow to the West.
Such a dynamic would lower borrowing costs and offer more financing opportunities. Small- and medium-sized enterprises would be among the biggest beneficiaries.
They often go hungry for investment capital because banks are too preoccupied with larger businesses to lend to less established upstarts. More financing options would mean more entrepreneurship and job creation.
That's desperately needed in Asia. Amid the region's economic boom, it's easy to forget Asia is home to two-thirds of the world's poor. Better capital markets might help change things.
liquidity - availability of money (buyers in a market, loans in an economy)
preoccupied with - too involved with
upstarts - recent and sudden challengers
There's also the US' sub-prime troubles, which could increasingly affect emerging markets through three different channels, says Nouriel Roubini, chairman of Roubini Global Economics [Blog] LLC in New York.
They include increased risk aversion, the growing odds emerging-market investors have direct exposure to the US housing market and financial turmoil deepening a slump in the US.
There are plenty of other reasons why Asia needs a bonding experience. China, for example, lacks a liquid secondary debt market. It needs one to help clear bad loans from banks and corporate balance sheets -- especially given all the debt being amassed to prepare for the 2008 Olympics in Beijing. China also needs to breathe life into the private sector. It's all about economic maturity.
The relative immaturity of Asian debt markets will be a bigger problem if today's market turmoil worsens. It's great that the World Bank's new president is focused on the issue. It's even more important for Asian leaders to do the same.
risk aversion - not wanting to take risks
direct exposure to - affected directly by
turmoil - disorder, lack of order
slump - economic downturn (decreased economic activity and prosperity)
liquid secondary debt market -
clear loans from balance sheet - get rid of, eliminate from balance sheet
maturity - being fully developed
immaturity - not being fully developed
William Pesek is a Bloomberg News columnist. The opinions expressed are his own.
Answer Key:
1. What is the new head of the World Bank going to do before he sets priorities for the bank? Why? (Use inference)
Listen to his "people in the field."
His "people in the field" are going to be closer to the action and more familiar with the problems the bank faces.
2. How long has Mr. Zoellick been on the job?
Only two months.
3. What does the World Bank do?
Poverty fighting.
4. What was Mr. Zoellick's background before entering government service?
What kind of knowledge would this give him?
He worked in investment banking for Goldman Sachs.
This would mean that he has very practical knowledge of how financial markets operate.
5. Have the plans after the 1997 crisis to develop Asia's debt and bond markets progressed very far?
No, they are far less developed than what Asia's leaders pledged to create 10 years ago after the 1997 crisis.
6. How can the economies of whole countries, not just investors, benefit from more well-developed bond and financial markets?
More well-developed bond markets can aid in poverty reduction. They can lead to better corporate governance and better accounting information becoming publicly available. They can also help manage risk in business.
7. How can bond markets act as a shock absorber protecting Asian economies from turmoil in the greater world economy producing sudden inflows and outflows of capital?
When asset prices collapsed in the 1997 crisis investors didn't have the option of moving funds from high risk equity into lower risk bonds, so they moved their money out of the country instead causing massive devaluation of the exchange rate.
("Back then, when asset prices plunged, investors who wanted to stay in Indonesia, Thailand or the Philippines didn't have the choice of moving their money from stocks to bonds. So, they fled the region.")
8. What international economic events create potential for another financial crisis?
a. A "global surge in borrowing costs is shaking up markets."
b. Financial contagion from the US subprime mortgage crisis.
c. A surge in oil prices.
d. A collapse in the dollar.
e. The Japanese Carry Trade ("a reversal of trades involving investors borrowing cheaply in yen and moving the funds into higher-yielding assets overseas")
f. Possible terrorist attack.
g. An overheating Chinese economy.
9. What benefits would more well-developed bond markets have for Thai businesses and the Thai economy?
a. Allow Asian countries to keep more of their high levels of saving at home, investing in their own economies rather than investing it in other economies.
b. Lower borrowing costs.
c. More financing opportunities.
d. New opportunities for financing SMEs.
10. Through what three channels might the US subprime mortgage crisis affect Asian economies?
a. Increased risk aversion among investors.
b. Exposure of Asian financial to the subprime crisis through subprime mortgage assets that they hold.
c. Reduced demand for Asian exports due to the economic downturn in the United States.
11. How can bond markets help with bad loans in an economy?
A liquid secondary debt market allows bad loans to be cleared from the balance sheets of banks and companies.
