William Pesek: Europe's woes ring alarm bells in Asia

Jean-Claude Trichet. Photo / AP

Opinion

If anyone could use a few days in the Sydney summer sun, it's Jean-Claude Trichet.

It was not to be. Pressing business last week yanked the European Central Bank governor back to the Brussels winter. Few in Sydney begrudge Trichet for bolting from a Reserve Bank of Australia symposium. Not with Greece on the brink and the creditworthiness of Portugal and Spain in question.

Trichet's early departure highlighted the contrast between the plight of Western economies and the enviable state of Asian ones. It's also a reminder that Asia can't be complacent as a new phase of the global financial crisis looms.

Remember how a tiny economy like Iceland's sent shockwaves through the region in 2008. Greece is, well, a real economy that is part of one of the world's three main currencies. Turmoil there won't be a non-issue for Asia. Consider, too, that Greece is merely the most fragile of the "Pigs" economies: Portugal, Ireland, Greece and Spain. And that Europe's problems may deepen as the year unfolds, regardless of how policymakers act today.

Trichet's return to Europe eased nerves. It suggested the region's leaders understand the magnitude of its debt crisis and will act accordingly. It doesn't change one thing: The post- Lehman Brothers Holdings world remains a dangerous one and Asia's economies are largely in the developing-nation camp. So, when analysts such as Thomas Stolper of Goldman Sachs Group in London warn about "risks of contagion through the financial sector and broader risk premia," Asia must brace for the fallout. Asia's process of exiting from the fiscal and monetary largesse of the last year may be delayed. What's more, Asia will be on its own longer than thought, lacking the traditional growth engines of the US and Europe.

Say what you want about Asia decoupling from the West, but this region is in a rough place when US$27.8 trillion ($39.9 trillion) worth of world gross domestic product is underperforming. While Asia performed impressively in 2009, this year will be more difficult if at least modest world growth doesn't return soon. That may explain why central banks have been timid. With the exception of Vietnam and China, Asia's central banks have been slower to pull liquidity out of economies than analysts expected at the start of the year. RBA Governor Glenn Stevens surprised markets this month by not raising interest rates. The RBA, the world's first major central bank to tighten last year, is likely to resume its rate-increase campaign following the latest jobs data. In January, Australian employers added the most workers - 52,700 - in more than three years. US President Barack Obama can only dream of such gains.

The Pigs crisis complicates things for Asia-Pacific policymakers. In China, for example, the central bank must drain yuan from the financial system to contain asset bubbles. While doing that, it also must consider how such steps will affect growth and how Europe's debt troubles could worsen.

If sovereign debt is the new sub-prime, the next 12 months will be rocky. Credit risks abound. Earlier this month, Moody's Investors Service said America's AAA debt rating will come under pressure unless something is done about expanding deficits. The US won't be downgraded anytime soon, of course. Not because it shouldn't be, but because the financial Armageddon it would unleash in markets could mean Moody's no longer has many paying customers on which to bestow ratings.

The fiscal squishiness pervading the globe is a clear and present danger to developing nations. Say Greece went the way of Iceland. Who would rush into the euro for safety? Or into the yen? Most likely, the dollar would be the haven of choice, strange given the US's fiscal trajectory.

In such an environment, Indonesia, Thailand and Malaysia can't expect much capital to come their way. Good chunks of the money sitting in their markets today might leave and go into US Treasuries.

Sadly, policy-makers are still talking more about reining in risks than acting. That was painfully apparent in Sydney last week. You would think that with the Pigs crisis casting a stink around the globe, policymakers would emerge with more than same-old-same-old. In leaving early, Trichet may have been on to something.

- BLOOMBERG