Asia most at risk since Lehman collapse, says ex-trader

Trader-turned-author fingers region as most susceptible to crisis amid surge in interbank lending rates, jump in default protection costs

PUBLISHED : Saturday, 14 September, 2013, 12:00am
UPDATED : Saturday, 14 September, 2013, 7:27am

Asia will be where the next international financial crisis explodes and stress levels in the region's banking system are already at their highest since the collapse of Lehman Brothers triggered a global market meltdown five years ago.

A measure of 21 key risk indicators covering everything from investor complacency to bank-to-bank trust shows systemic risk is on the rise, says Lawrence McDonald, a former Lehman trader turned independent risk consultant whose 2008 book about his experiences and the bank's final days turned him into a best-selling author.

Crises metamorphosise and the next one for sure is going to be in Asia. My big worry is that something happens and it affects Japan, because Japan has zero room for error
Former Lehman trader Lawrence McDonald

"All of these indicators in Asia are extremely elevated," McDonald told the South China Morning Post in a telephone interview from his base in New York, to which he had just returned after a 16-nation speaking tour on the risks that still stalk the global financial system.

Lehman's collapse, five years ago today, and its subsequent filing for bankruptcy protection, triggered the worst maelstrom in markets since 1929's Wall Street Crash and set off a chain reaction debt crisis in Europe that is still rippling across the continent.

McDonald's unique "Bear Traps" risk index captures a range of warning signs that he says were ignored at the time of Lehman, but which correlate with the financial stress that can set off crises.

A spike in interbank borrowing costs and rising costs of protecting against default at some of the region's biggest banks are the ones that speak loudest to him.

"Put simply, banks are pulling back on trust," McDonald said. "Capitalism doesn't work without it."

Interbank borrowing costs have jumped higher around Asia in recent months.

Global investors have been spooked by a lock-up in bank liquidity in the mainland induced in June by the People's Bank of China, the central bank.

And they have intensified scrutiny of Asian economies where budget balances and current accounts are most stretched, sending currencies like the Indian rupee and Indonesian rupiah tumbling.

They are classic signs of a contagion effect that, if it takes hold, could set off a crisis that drags in economies one by one, as it did in Asia's 1997-1998 crisis.

While the broad economic fundamentals of the region are much different now with fewer currencies pegged directly to the US dollar, far greater foreign exchange reserve buffers and less investment funded by overseas borrowings, a problem in one country could spill over into another if investors get spooked.

"Crises metamorphosise and the next one for sure is going to be in Asia," said McDonald, who is working on another book.

"My big worry is that something happens and it affects Japan, because Japan has zero room for error," he added.

The Japanese prime minister, Shinzo Abe, has launched a controversial programme of monetary and fiscal stimulus and structural reform to lift the world's third-biggest economy out of two decades of decline, leaving analysts nervous about the risk of an inflationary spike and surging borrowing costs if it fails.