Commentary by William Pesek
Feb. 16 (Bloomberg) -- Henry Paulson’s “bazooka” is looking more like an intercontinental ballistic missile.
That’s the word the former Treasury secretary used in August to explain the firepower of hundreds of billions of dollars of U.S. stimulus. In November, China rolled out its own $586 billion bazooka. India, Indonesia, Japan, Malaysia and Singapore intend to raise spending to boost growth.
Two things are worth noting about this unprecedented deluge. One, it marks the end of the corporate-bond market as we know it. It’s not going too far to declare corporate bonds dead for the foreseeable future. Two, Asia’s efforts to develop deeper debt markets are now on the backburner.
Government debt is already the U.S.’s most precious export. Paulson’s successor, Timothy Geithner, will oversee an even bigger expansion of debt issuance.
Asia, too, will see an unprecedented bond boom. Why? Today’s growth forecasts are just way too optimistic. The International Monetary Fund expects Asia’s developing economies will expand 5.5 percent this year, the slowest pace since 1998. That’s highly optimistic considering the U.S., Japan and Europe are in recession, and China may be heading that way.
How can companies hope to compete? The corporate market already has been hurt in secondary trading and primary-market issuance. Asia is about to see the next wave.
Governments have few options here and stimulus is badly needed. With so many bazookas being deployed, private companies risk being crowded out of debt markets, according to the Manila- based Asian Development Bank. Companies face multiple financing risks as they navigate global turmoil and increased competition.
Crowded Out
“Companies today face higher borrowing costs, and risks of any abrupt withdrawal of funds from emerging markets may prove to be an additional complicating factor for new local-currency denominated corporate bond issuance in emerging East Asia,” says Jong Wha Lee, head of the ADB’s office of regional economic integration. Lee’s concern is that governments will “crowd out new corporate funding or refinancing.”
All these bazookas may morph into something more lethal -- like a financial version of an ICBM.
The U.S. is banking on Asia’s savings to finance its current and future stimulus efforts. There’s virtually zero chance the money approved thus far by Congress is sufficient to revitalize U.S. banks. More than 15 years after Japan’s asset bubble burst, that nation’s banks still aren’t lending money as hoped.
Japan’s Example
The U.S. Treasury’s future borrowing efforts will bump up against those of Japan, China and Europe. This crisis has a drip-drip-drip dynamic that tends to make what seems implausible one day real the next. Expect today’s debt-issuance estimates to appear quaint by comparison a year from now.
Japan is a case in point. Asia’s biggest economy is sure to announce ambitious new issuance plans. Japanese were shocked enough in December when Prime Minister Taro Aso scrapped plans to balance the budget. Just wait until he -- or, given his 14 percent voter support rate, his successor -- unveils plans to open the borrowing floodgates.
China, too. Never mind the spin in Beijing. Its $3.3 trillion economy is slowing fast and needs far more support than the government’s plans to date. European governments also are sure to increase borrowing programs to stabilize growth.
Increasing Debt
“I’m concerned about the fiscal policy in some countries” of the euro region, European Central Bank Executive Board member Juergen Stark said in Baden Baden, Germany, on Feb. 12. “The fiscal situation in some countries is alarming. Governments urgently have to address the problems. The markets react to increasing debt levels.”
Stark noted that he’s already concerned about a crowding- out phenomenon in Europe. Imagine how he will feel if deepening recessions necessitate even greater government borrowing. This won’t be a good year for fiscal conservatives.
The non-partisan Congressional Budget Office says U.S. stimulus efforts might provide a short-term boost to growth, but the added debt burden and crowding out of private investment will be a net drag on the economy and wages by 2014. A similar experience may befall Asia, too.
“Governments will absolutely overwhelm the market in ways we have not seen before,” says Jeff Brunton, head of credit markets at AMP Capital Investors in Sydney.
Deluge in 2009
The deluge adds another element to Asia’s 2009. The region’s efforts to create deeper debt markets will be undermined. Asia still needs international markets for corporate and asset-backed debt. You can forget that for a while.
The good news is that Asian-currency bonds will dominate this wave as governments turn to local capital markets for funding and as overseas investors favor sovereign issuers or state-owned companies. It was borrowing in foreign currencies that got Asia into trouble a decade ago.
To help alleviate pressure on corporate borrowers, the ADB is in talks with the countries of the Association of South East Asian Nations, plus Japan, China, and South Korea, to set up a fund providing credit guarantees for local-currency debt.
That’s all well and good. With so many government bazookas being aimed at markets, though, private bond issuers are in for a trying few years.
(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)
To contact the writer of this column: William Pesek in Tokyo at wpesek@bloomberg.net
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