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SCMP Reporter

The chances of an Asian sovereign loan default are intensifying as the financial downturn worsens, according to economists.

 Indonesia was the most obvious candidate for defaulting on loans, an economist at a European bank said.

 The country's new government had given little indication that it intended to honour debts or that it had the financial capacity to do so, he pointed out.

 'I think it's extremely likely it will,' he said. 'Indonesia is more or less in a state of debt moratorium now. It just hasn't been declared publicly.'  Economists said other countries were also in grave danger of failing to meet their repayments because of rising interest rates and inflation.

 Moreover, they said financiers stood to get little return, if any, from their investments.

 Hong Kong fund-manager Marc Faber said defaults were inevitable and desirable. He said the best remedy for financially stricken emerging markets was to walk away from their debts.

 Speaking yesterday at a Foreign Correspondents' Club luncheon, Mr Faber said there were precedents for such moves. The most recent came in the 1980s, he said, when several Latin American economies suffered huge debt blowouts.

 'At this level of real interest rates, there is no chance they can pay the interest in the long run and have economic growth,' he said. 'In a capitalist economy, it's very essential that you reward success and you accept failure.'  But sovereign bankruptcy had severe, long-term consequences, warned Mark McFarland, Santander Investment's chief economist.

 'The issue is that if countries in Asia are saddled with large liabilities and declaring debt moratoriums, will they be able to tap the credit market again, and if not, what are their options?' he asked.

 Economists said the only alternative to default for some countries was to restructure debt. And this action depended heavily on the goodwill of creditors.



Sovereign debt defaults threaten across region