It's great news to hear Asia's efforts to boost her financial markets as these would enhance her ability to intermediate savings into investments, which should improve on her capital accumulation process or prosperity.
This from the ADB, (bold highlights mine)
``The Asian Development Bank (ADB) and ASEAN nations, along with People’s Republic of China, Japan, and the Republic of Korea, are moving to establish a jointly owned credit guarantee facility, which is aimed at promoting financial stability and boosting long-term investment in the region.
``ADB's Board of Directors approved the establishment of the Credit Guarantee and Investment Facility (CGIF) as a trust fund with a capital contribution of $130 million. The ASEAN+3 governments will provide a combined $570 million to create the $700 million facility.
``The pilot CGIF, due to start operations in 2011, will provide guarantees on local currency denominated bonds issued by companies in the region. Such guarantees will make it easier for firms to issue local bonds with longer maturities. This will help reduce the currency and maturity mismatches which caused the 1997-1998 Asian financial crisis and make the regional financial system more resilient to volatile global capital flows and external shocks.
``Providing credit protection to investors should also help unlock the region’s vast savings for badly needed investment in infrastructure and other key areas.
"The Credit Guarantee and Investment Facility will make it possible for corporations to issue bonds in their domestic markets and in neighboring markets and across ASEAN+3," said Noy Siackhachanh, advisor with ADB's Office of Regional Economic Integration. "Channeling regional savings into regional investments will support economic growth, creating jobs and alleviating poverty."
However, the overeagerness of the region's policymakers to provide "guarantees" on issuing companies risks exacerbating the seeds of the next bubble.
How? Via the Moral Hazard.
A refresher quote from Hyman Minksy [see How Moralism Impacts The Markets]
``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”
So yes, markets will likely respond positively to such policy efforts but this will likely skew the market's incentives for risk taking.
In short, moral hazard leads to Ponzi dynamics.
This from the ADB, (bold highlights mine)
``The Asian Development Bank (ADB) and ASEAN nations, along with People’s Republic of China, Japan, and the Republic of Korea, are moving to establish a jointly owned credit guarantee facility, which is aimed at promoting financial stability and boosting long-term investment in the region.
``ADB's Board of Directors approved the establishment of the Credit Guarantee and Investment Facility (CGIF) as a trust fund with a capital contribution of $130 million. The ASEAN+3 governments will provide a combined $570 million to create the $700 million facility.
``The pilot CGIF, due to start operations in 2011, will provide guarantees on local currency denominated bonds issued by companies in the region. Such guarantees will make it easier for firms to issue local bonds with longer maturities. This will help reduce the currency and maturity mismatches which caused the 1997-1998 Asian financial crisis and make the regional financial system more resilient to volatile global capital flows and external shocks.
``Providing credit protection to investors should also help unlock the region’s vast savings for badly needed investment in infrastructure and other key areas.
"The Credit Guarantee and Investment Facility will make it possible for corporations to issue bonds in their domestic markets and in neighboring markets and across ASEAN+3," said Noy Siackhachanh, advisor with ADB's Office of Regional Economic Integration. "Channeling regional savings into regional investments will support economic growth, creating jobs and alleviating poverty."
However, the overeagerness of the region's policymakers to provide "guarantees" on issuing companies risks exacerbating the seeds of the next bubble.
How? Via the Moral Hazard.
A refresher quote from Hyman Minksy [see How Moralism Impacts The Markets]
``It should be noted that this stabilizing effect of big government has destabilizing implications in that once borrowers and lenders recognize that the downside instability of profits has decreased there will be an increase in the willingness and ability of business and bankers to debt-finance. If the cash flows to validate debt are virtually guaranteed by the profit implications of big government then debt-financing of positions in capital assets is encouraged. An inflationary consequence follows from the way the downside variability of aggregate profits is constrained by deficits.”
So yes, markets will likely respond positively to such policy efforts but this will likely skew the market's incentives for risk taking.
In short, moral hazard leads to Ponzi dynamics.
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