Asian markets withstand crisis

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: The recent turmoil in the financial market continues to surface new risk, further tightening the liquidity in the market and exposing the dark side of modern finance where every form of asset can be purchased, packaged and sold again. In the past few years, money was available cheap and easy and a lot of it was chasing comparatively limited quality assets.

As a result, a lot of bad quality asset were purchased without adequate risk assessment or at their correct valuation. Credit rating agencies played along this boom turning a blind eye to the rising risk in sub-prime mortgage market. Banks were all too happy to lend debt to private equity firms and underwrite deals. Before the risk showed on the balance sheet of the lender, it was securitised and sold, thereby dispersing risk to the next player in the market. Since the risk of default was passed on, lending became ruthless and volumes ruled the day. When the lid was open and the underlying crisis exposed, it was a little too late to prevent the boom-bust cycle of US housing market but it comes at the right time to play party pooper for the debt driven take-over boom instilled by private equity and hedge firms.

The big question is how bad the situation is likely to be and what will be its impact on global economy. The debt market will witness difficult times ahead. Reckless lending will be abandoned and every deal will be highly scrutinised. By the very nature of the risks involved in such opaque and unregulated hedge funds investment, it could take weeks or even months before the exact volume of losses and the real victims of this fallout emerge in the open.

Until then, markets are bound to be volatile and central banks on their toes. The borrowing power for the weak will go down while borrowing for the strong will become more expensive. However, the corporate earnings have been very robust which will help withstand the current liquidity crunch without sacrificing the corporate investments. Banks that have ended up with unsold high-risk debt, will be hit the hardest. They are stuck with massive debt to the tune of $300 billion for which there are no willing investors. This will bring their lending business to a crippling halt and the tremors will be felt far and wide.