Tales of the tigers
In the wake of the Asian markets crash of the late 1990s, it became no longer fashionable to talk about the Asian Tigers and their wondrous performance. But memories are short and it didn't take long for this kind of talk to be replaced by admiring references to the Celtic Tiger in Ireland and the remarkable resurgence of the previously sleepy Greek economy - not forgetting the miracle in the Iberian Peninsula, where Spain and, to a lesser extent Portugal, were showing the rest of Europe how economic growth really worked.
Until, as in Asia, the party came to an abrupt halt.
As Lorenzo Bini Smaghi, an executive board member of the European Central Bank, told an audience in Hong Kong in February, what followed 'might give those of you living in emerging economies a sense of deja vu'.
He noted how the so-called Asian Tigers were lauded for their impressive economic growth rates, how their governments were complimented for relaxing controls so that financial markets could flourish, and how, as money poured into these economies, real borrowing rates fell and some sectors registered truly impressive gains, especially the property market.
That was all to the good. But as Smaghi also reminded his audience, what followed also had a familiar ring. No one liked to question whether these massive capital inflows were necessarily beneficial, especially when it became apparent that the money that flowed in so easily could, just as abruptly, flow out.
Moreover, these inflows carried inflationary risks. As the economies flourished, it became easier for governments to turn a blind eye to the weak state of public finances and to shuffle many government liabilities off the balance sheet.
More than a decade has passed since the worst ravages of the Asian crisis, but let's remember that it was an assault on the currency of the relatively small Thai economy that triggered this debacle in 1997.
Thailand had been something of a poster boy for those who spoke about Asian miracles, even though it was not one of the so-called Tigers - Hong Kong, South Korea, Singapore and Taiwan - but in the next wave, including Indonesia, Malaysia and, somewhat improbably, the Philippines.
Thailand's economy had grown by an average of 9 per cent a year since 1986 and it looked set for never-ending expansion. However, much of this economic expansion was financed by loans denominated in yen and US dollars, carrying lower interest rates than loans in the domestic currency. There was no reason for these loans to be called in, but out in the badlands of financial speculation, savvy traders noted that if they put pressure on the Thai baht, the government would scramble to keep the currency strong and would be forced to do so with only modest reserves at its disposal. Thus, speculating against the baht became something of a no-brainer.
What happened next was the spurring of a domino effect, which laid low all the tigers and the tiger cubs.
'Experience has shown that contagion can spread through financial markets, especially when there is uncertainty about the precise location of exposures,' said Mervyn King, governor of the Bank of England, recently.
Asian nations, with the significant exception of Japan, which was well into its own crisis before 1997, never suffered European-style debt levels. But the continents are grimly united by what in essence is a crisis revolving around a lack of confidence.
There are, however, some significant differences between what happened in Asia more than a decade ago and in Europe recently.
It can be argued that Ireland's experience mirrors that of Thailand, another nation that had seemingly glowing growth prospects obscuring enormous public and private debt. However, Ireland's fiscal crisis is very much of its own making; its total debt is equivalent to almost 72 per cent of its gross domestic product and is equal to over US$35,000 per person. This compares with US$28,000 in the United States, the world's most indebted nation.
Moreover, European financial markets are more developed and linked by a single currency. This has forced the European Union member states into a level of co-operation that they don't exactly like, but leaves them no choice. In Asia there was heavy reliance on support from the International Monetary Fund. Pan-Asian organisations, notably the Association of Southeast Asian Nations, showed themselves to be impotent when faced with a collapse of this kind.
And in Asia two of the governments hit by the crisis departed from orthodox means of tackling the problem, turning to extreme measures that took the markets by surprise.
In Hong Kong (see below) the government embarked on a raid designed to bolster the stock market by buying some 10 per cent of the blue chips and curbing futures trading in shares. In Malaysia, the outflow of foreign funds was abruptly halted by the imposition of draconian capital controls and the introduction of a fixed exchange rate for the local currency.
Both Hong Kong and Malaysia emerged from the crisis with relative speed and claimed that their unorthodox response was responsible for this success.
'We have frustrated the speculators' plan,' crowed Donald Tsang Yam-kuen, then financial secretary.
However, all the other nations affected by the crisis - even Indonesia, which experienced a popular uprising in its wake - managed to emerge from this debacle, arguably with more vigour than those that had pursued unorthodox policies.
In Europe, nations such as Greece are swallowing a very bitter pill imposed by their neighbours in return for cash to keep them going. The treatment is only partially less severe in Ireland, Spain and Portugal.
As matters stand, it looks as if the pain will only deepen. But Europe should take comfort from Asia's example, which showed that the pain passes and that there is more than one route to recovery.
Stephen Vines is author of The Years of Living Dangerously -Asia: From Financial Crisis to the New Millennium
The probability of a Greek default indicated by credit default swaps
- The yield on Greek bonds fell to 26.03 per cent yesterday