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Minor Differences Mean Major Finance Issues

mfmMARION Barry, the mayor of Washington, D.C., has put up $100,000 of his taxpayers’ money so the city can compete to host the next summer Olympics. Apparently he hopes to enter himself in the crack and field events.

This promises to be a most educational month or two in the international markets. What has gone on so far in Asia promises to be just a runup to the main events. Let’s take South Korea, whose economy is bigger than those of Indonesia, Thailand, and Malaysia put together.

The more conspiratorially minded followers of international finance tend to believe that there is some person or group with superhuman intelligence and power who will be able to orchestrate a bailout of the system — at the expense, of course, of the small producer, investor, voter, taxpayer, etc. My own experience is that the world is ruled more by collective incompetence than by conspiracy. I think we are about to see my hypothesis proved right.

South Korea has a minimum of $60 billion of foreign-currency debt due in less than one year. It may have foreign-exchange reserves of as much as $30 billion (the optimistic estimate) or less than $15 billion.

South Korea needs a minimum of around $20 billion just to have the working capital to conduct normal trade. Korean companies and banks — which have been run according to the sort of centrally planned capitalism that was so fashionable a few years ago — had been borrowing dollars and yen on the assumption that they would be able to pay back the loans by converting Korean won at relatively stable exchange rates.

Well, the won has been collapsing — it’s down by more than 16 per cent since the beginning of the year — and those debts cannot be rolled over on normal commercial terms. That means the Koreans have to get approximately $60 billion lined up over the next month or so. Where will the money come from?

The first reaction of semi-knowledgeable people is that the International Monetary Fund will come in and “bail them out.” But the IMF’s usable assets have been draining rather rapidly in the last few months. It has used over $40 billion in propping up the Southeast Asian countries’ central banks. That leaves at most a little over $60 billion left to take care of any other crises, including Korea’s. So as one monetary economist told us, “Yes, they could take care of Korea, but then there would be nothing left for a Russia or any other problem country.”

cmOf course, the IMF does have 103 million ounces of gold apart from those currency reserves, and the thought is that it could raise additional money by lending out the gold. But Jeff Christian of CPM Group, who are precious-metals market analysts, points out: “You would need a change in the IMF’s charter to lend gold. The Board of Governors could sell some, but it is very unlikely that they would sell more than 5 million to 10 million ounces. That’s only about $1.5 billion to $3 billion.” Not enough.

Now, of course, the Board of Governors and the Clinton Administration realized that the Fund would need more money, so they tried to get the authority from Congress to hand some over under what is called the NAB, or New Arrangement to Borrow. But all those appropriations got caught up in a pro-life (some congressmen) vs. pro-choice (the Administration) fight over whether foreign-aid funds could go to family-planning organizations that sponsored abortions. Neither side gave way before the congressional recess; so no money for the IMF.

So for want of a nail the battle might be lost. I can understand the point of principle on which Mr. Clinton stood with regard to choice. If feminists had the file on me that they have on Clinton, I might well make the same moral decision. Who knows? Congress will probably put up the money, but not until it comes back in late January, and probably not until mid February. In the meantime, the Korean crisis will have hit.

Then of course there is everybody’s favorite lender of last resort — the Japanese. A few months ago they were all fired up to start an Asian Monetary Fund under their control that would take power away from the resented gaijin. But remember that it’s the engineers who are smart in Japan — not the financiers. Once they figured out that they might need to use their foreign-exchange reserves as part of the bailout of their own system, and that an AMF could easily turn into yet another black hole, they sucked in their breath and backpedaled. And Robert Rubin, our own Secretary of the Treasury, has, up to now, taken the position that we’re not going to write a Mexico-sized check for the Koreans.

Maybe the Koreans can be saved by a surge in exports and a fall in imports caused by devaluation. But will that happen fast enough? Can private or semi-private institutions like the banks refinance in time?

In these circumstances, I think a little more caution is called for than seems to be discounted in the U.S. equities market. For that matter, T-bonds are what the Asians have a whole lot of if they need to raise some fast money. So I would not be sure the bond was a “safe haven.” I think it’s unlikely that gold will be sold aggressively to raise money, although we’ll probably have to wait a little longer for its hour to come. I would go to more cash and shorten up. Opportunity costs are a lot more acceptable than losses in this environment.

Grant Noble, out in Lake Forest, Ill., who does a lot of interesting technical analysis, tells me he likes both beans and corn, but thinks beans look better the further out you go. I’m going to look at the agricultural markets in my next column.

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