HONG KONG: A stampede for safety has sent many of Asia's currencies diving and the cost of insuring its debt soaring. The retreat says less about the region's financial health than Europe's. It's a reminder that hot money is most dangerous not when it pours in, but when it pulls out.
Take South Korea. For months, authorities in Seoul have been trying to cool a fad among investors to borrow dollars cheaply offshore and buy won-denominated assets. These speculators were betting that the dollar would fall and that rising inflation would force the central bank to raise rates.
South Korean banks took out $13.8 billion in short-term loans from abroad in the first quarter. This helped push the Korean won up as much as 9 per cent by August.
Indonesia has been another popular destination for hot money this year. By mid-August, foreign investors had bought $1.23 billion in Indonesian stocks and acquired 30 per cent of Indonesian government bonds. This helped push yields to their lowest in more than five years and Indonesia's currency to its strongest since 2004.
The trouble is that a lot of this hot money came from Europe, where Asia looks relatively less risky. As a result, European lending to Asia has soared above $900 billion, according to the Bank for International Settlements. That's well above its pre-crisis peak.
Now, nothing major in Asia has changed. But the ability of European investors to keep so much credit extended is shrinking fast. Whether or not they start reeling in money from Asia, other investors are doing so in anticipation. The results have been dramatic, with the Indonesian rupiah losing 2 per cent of its value in just four days.
The rush for the exits could create a temporary shortage of dollars in local markets. There were signs of that this week in Jakarta, where yields on 10-year Indonesian government bonds shot up to 7.2 per cent from 6.5 per cent.
Though dramatic, that only pushed the yield back up to its July level. And other Asian bond markets have so far remained oases of calm. But if the alarm in Europe grows shriller, Asia will have new reasons to curse the hot money.
