The global gusher / economist

really a home run and a must read! / pflichtlektüre!

Thailand's bungled attempt to stem capital inflows is just one symptom of the worldwide liquidity glut

WHEN Thailand's introduction of capital controls sent its stockmarket plunging a few days before Christmas, you could have been forgiven for thinking, “Here we go again”. It is almost ten years since the start of the Asian financial crisis, when capital flight on a huge scale caused financial markets and economies in the region to collapse. The problem that Thailand and other Asian countries face today, however, is the exact opposite:

how to stop capital flowing in.

Worldwide, an abundance of liquidity has lured investors into riskier assets (like this story about junk bonds) in search of higher returns. Though there is no agreement on how to measure liquidity, using the global supply of dollars as a proxy, The Economist estimates that in the past four years it has risen by an annual average of 18%, probably the fastest pace ever (see chart).( that is the answer! to almost all excess in almost all asset classes / die antwort auf alle excesse in den anlageklassen )

Last year it washed through emerging economies in record amounts, pushing up their currencies. Between the start of 2006 and mid-December the Thai baht rose by 16% against the dollar—more than most other currencies tracked by The Economist. When capital inflows accelerated in December, the Bank of Thailand panicked and slapped a tax on inward portfolio investment (similar to that used in Chile). After share prices fell by 15% in a day, the controls were hastily removed from equities. They remain on debt investments.

This clumsy flip-flop has severely undermined the credibility of Thailand's economic policymakers. Yet the drastic measures highlight the seriousness of a dilemma faced elsewhere in Asia: how to curb domestic liquidity when foreign capital is flooding in. Thailand could have allowed the baht to rise further, but it had already gained against all other Asian currencies last year, raising concerns about exporters' competitiveness.

Some economists ( i´m sure they were directly from wall street!..... / bin mir sicher das diese direkt von der wall street kamen...)argue that Thailand should simply have cut interest rates to stem capital inflows, making bonds less attractive to foreign investors. But this is to misunderstand the nature of the problem. David Carbon, an economist at DBS, a Singapore bank, argues that the baht's strength is not the real issue, because Thailand's exports have continued to grow strongly. Instead, the Bank of Thailand is more worried about excessive domestic liquidity. Lower interest rates would simply add to the problem, generating higher credit growth, inflation and asset prices. Similarly, central-bank intervention to hold the baht down by buying dollars would also boost the money supply.

Moreover, as Brad Setser of Roubini Global Economics points out, Asian central banks are having to buy dollars not just because of their current-account surpluses, but also because foreign investors are moving money into the region. If the dollar subsequently falls, the central bank may make a loss on its reserves (i´n not sure that this argument is the reason behind some interventions / bin mir nicht sicher ob dieses argument zugkräftig ist), but the country's exporters gain. However, though Asian countries may be happy to subsidise their exporters they are not so keen to offer the same subsidy to foreign banks, pension funds or hedge funds.

Capital controls are a way around what economists call the “impossible trinity”: an economy cannot simultaneously control domestic liquidity, manage its exchange rate and have an open capital account. Only two of the three are possible. .....

Other Asian countries are also looking for ways to discourage foreign capital inflows. In December South Korea raised reserve requirements on foreign-currency debt to make it harder for banks to borrow from abroad. China has kept its restrictions on portfolio capital inflows, helping it to hold down its exchange rate. This, however, is squeezing the competitiveness of other Asian economies. Many economists reckon that a rise in the yuan would do little to reduce America's trade deficit, but it would certainly help to take pressure off other Asian exporters—and assist in curbing the gush of global liquidity.

The deluge of spare cash has two main sources.

First, average real interest rates in the developed world are still below their long-term average. Second, America's huge current-account deficit and the consequent build-up of foreign-exchange reserves by countries with external surpluses has also pumped vast quantities of dollars into the financial system. A large chunk of Asia's reserves and oil exporters' petrodollars have been used to buy American Treasury securities, thereby reducing bond yields. In turn, low bond-market returns have encouraged bigger inflows into higher yielding emerging-market bonds, equities and property, especially in Asia. Liquidity has been further boosted by the use of derivatives, and by carry trades(borrowing in currencies with low interest rates, such as yen, to buy higher-yielding currencies).

The spread on emerging-market bond yields over American Treasury bonds fell to another record low last week. Share prices in emerging economies have risen by 243% on average from their trough in 2003. That still leaves the average price/earnings ratio below its historical average and less than that in developed countries, so for most markets it is premature to talk about bubbles. But if asset prices continue to climb at their recent pace, central bankers will become increasingly nervous.

"thai´s to control speculation, stocks down 16%!"

fortunately this time it is only o financial tsunami that hits mainly foreign investors/speculators. this is a very dramatic move from the central bank and has triggered great pain the last time it has been made. but it will remind lots of investors of the risks that almost everybody seem to ignore in almost all kinds of markets these days. the vola will for sure spike and i´m sure lots of hedge funds will suffer big time! ( no sympathy ...)

glücklicherweise diesesmal nur ein finanzieller tsunami der zudem überwiegend ausländische invetsoren/spekulanten trifft. in jedem fall ist das ein dramatischer zug der beim letzten mal große verwerfungen über das jeweilige land hinaus ausgelöst hat. immerhin werden jetzt evtl auch mal wieder risiken aufgezeigt die momentan bei fast jeder assetlkasse keine rolle zu spielen scheinen. die vola wird sicher steigen udn einige hedge fonds werden sicher massive probleme bekommen. ( kein mitleid...)


Dec. 19 (Bloomberg) -- Thai stocks plunged the most in at least 19 years, triggering declines across Asia, after the central bank said international investors must pay a 10 percent penalty unless they keep funds in the country for a year.

The capital controls, announced yesterday by central bank Governor Tarisa Watanagase, are aimed at stemming a 16 percent gain in the baht this year. The Thai currency had its biggest two-day decline since April 2005.

``It's not good news, it means we've got a real problem in terms of redemption of funds,'' said Mark Mobius, who oversees $30 billion in emerging market stocks at Templeton Asset Management Ltd. ``Some people might get a bit scared because if Thailand is doing this, then maybe Malaysia might do it, and maybe the Philippines.''

Thailand's SET Index fell as much as 134.16, or 18 percent, to 596.39, led by PTT Pcl and Bangkok Bank Pcl, as of 3:09 p.m. in the Thai capital. Government bonds slumped, pushing the yield on the 10-year note up 0.23 percentage point to 5.1 percent. The baht fell as much as 1.5 percent to 36.08 and recently traded at 35.94.

Stocks also fell in India, Malaysia, Indonesia and the Philippines as the currency controls heightened concern about investing in emerging markets. Thailand in 1997 triggered currency collapses in South Korea and Indonesia, leaving much of Asia in a financial crisis that required an international bailout.

Capital Controls
Malaysia's government in 1998 fixed its currency against the dollar and imposed capital controls that barred the repatriation of proceeds from the sale of stocks and bonds for one year.

``Global investors have to recognize risk again,'' said Soichiro Monji, who helps oversee about $47 billion as senior strategist at Daiwa SB Investments Ltd. in Tokyo. ``Investors might shift from developing markets to other safer markets.''

The new rules limit international investors to using 70 percent of their funds to buy Thai stocks, bonds and property The remaining 30 percent will be held by banks and subject to a 33 percent penalty in the event an investor wants to withdraw the full amount and convert the proceeds into a foreign currency.

The baht rose to a nine-year high before yesterday's announcement on speculation economic growth would accelerate after a Sept. 19 coup ended a political deadlock that had curbed spending and confidence.

Thai Union Frozen Products Pcl, the world's second-largest tuna canner, was among exporters that last month asked the central bank to stem baht gains from undermining their competitiveness. Ten industry groups were part of the protest, including exporters of chicken meat, soybean and shrimp.

Stock Slide
``It'll help exporters and the country's trade balance,'' said Visit Tantisunthorn, secretary-general of the Government Pension Fund, the nation's largest money manager, with more than $7.8 billion in assets.
Shares of Bangkok Bank, the nation's largest lender, sank 19 percent to 100 baht, the biggest loss since at least 1990. An index of bank stocks plunged 24 percent. The magnitude of the market slump triggered a 30-minute trading halt at the Thai stock exchange.

``It's basically as if they're putting a tax on any trades less than a year,'' said Magnus Prim, a senior foreign-exchange strategist at Skandinaviska Enskilda Banken in Singapore. ``It's going to stop any buying pressure and with the stock market likely to be hit, we could see the baht falling some more.''

India's Sensitive Index declined 2.6 percent, the Kuala Lumpur Composite Index fell 2.1 percent and Indonesia's Jakarta Composite Index lost 2.2 percent. Elsewhere in Southeast Asia, Singapore's Straits Times Index dropped 1.5 percent and the Philippine Stock Exchange Index slid 1 percent.

Slowing Exports
.....``Most exporters are very happy with the central bank's new measure,'' said Dusit Chongsutthamanee, corporate finance manager at Pranda Jewelry Pcl, Thailand's biggest publicly traded jewelry exporter. ``The baht has strengthened at a much faster pace than other currencies in the region. That affects most exporters because it has made their product prices less competitive with other producers.''

`May Adjust'
.......A rising baht hurts exporters by cutting the value of their local currency-denominated profits and making their products more expensive compared with those of Asian rivals. China's yuan has added 3.2 percent against the dollar this year, Malaysia's ringgit has gained 5.5 percent and Singapore's dollar has climbed 7.4 percent.

The central bank may adjust the curbs ``if the baht doesn't continue to be strong,'' ...........

looks like they are already backpaddling.....

"Thailand Abandons Lockup on Foreign Stock Investments "

Finance Minister Pridiyathorn Devakula said Tuesday the central bank would exclude inflows into the stock market from the Bank of Thailand\'s drastic measure of 30 per cent reserve withholding requirement.

After an urgent meeting in the evening among Finance Ministry, Stock Exchange of Thailand, the Securities and Exchange Commission, and Bank of Thailand, the Thai authorities agreed that the earlier measure is too harsh. Pridiyathorn said they agreed to exclude inflows for stock investment from the harsh measure.