Asia's sly aus­ter­ity makes debt chal­lenge worse

The Pak Banker - - OPINION - Andy Mukherjee

Asia's debt hang­over is about to turn into a split­ting mi­graine. Blame it on an aus­ter­ity pill turn­ing into poi­son. Com­pa­nies and house­holds in the 12 largest economies of Asia-Pa­cific roughly owe about 168 per­cent of their na­tions' GDP to cred­i­tors, up from 147 per­cent in 2007. Put another way, the pri­vate sec­tor's debt bur­den has risen by 2.5 months of an­nual out­put since the fi­nan­cial cri­sis.

This ra­tio is set to inch up fur­ther as GDP is in­creas­ing at a slower pace than debt. In turn, higher debt tends to weigh on GDP growth, be­cause lever­aged con­sumers hold back on spend­ing and lever­aged pro­duc­ers hold back on in­vest­ments. Re­straint makes sense for each com­pany and ev­ery house­hold, but is a dis­as­ter for the over­all econ­omy. The "para­dox of thrift" sim­ply re­duces in­comes for ev­ery­one, mak­ing loans even harder to ser­vice. China is strug­gling with just such a toxic in­ter­ac­tion.

Gov­ern­ments can help, typ­i­cally by run­ning bud­get deficits. The ex­tra funds pro­vided by fis­cal ag­gres­sion can slow or re­verse the painful cy­cle of ris­ing debts and slow­ing growth. But Asian author­i­ties have been loath to lift the fis­cal squeeze. The more they read about the trou­bles that deficit spend­ing brought to Greece, the queasier they got. Asia-Pa­cific's public debt-toGDP ra­tio has crashed from 90 per­cent in 2012 to 65 per­cent. In con­trast, there has been a 12 per­cent­age point in­crease in the ra­tio of Bri­tain's public li­a­bil­i­ties to GDP since March 2011. For all his aus­ter­ity talk, Prime Min­is­ter David Cameron piled up debt; his Asian friends delever­aged.

But fur­ther delever­ag­ing by gov­ern­ments might trap Asian economies in a debtors' prison by drag­ging down GDP growth and low­er­ing in­fla­tion. Sour­ing loans might force banks to ra­tion fresh credit. Growth could nose­dive. To break this vi­cious cy­cle, Mor­gan Stan­ley econ­o­mists are rec­om­mend­ing fis­cal stim­u­lus in the form of tax breaks and re­bates for con­sumers. It's un­likely that gov­ern­ments will heed the good ad­vice.

Fis­cal ex­pan­sion in China is be­ing held back by messy lo­cal gov­ern­ment fi­nances. In­done­sia and Thai­land are find­ing it hard to bump up public spend­ing. South Korea's age­ing so­ci­ety makes the author­i­ties fru­gal, even as Korean pri­vate con­sump­tion is be­ing dragged down by an over­hang of house­hold debt. In­dia's fis­cal am­mu­ni­tion is spent; it's hop­ing that a new goods and ser­vices tax will al­low it to reload. The Sin­ga­pore gov­ern­ment is an out­lier. As the In­ter­na­tional Mon­e­tary Fund en­thu­si­as­ti­cally notes, its bud­get sur­plus, as large as 8 per­cent of GDP in 2012, will shrink to less than 2 per­cent this year.

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