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From: kojakbt22 Nov-10 9:23 pm
To: ALL (1 of 18)
2375.1
High growth brings high risks, for nations too
Iceland's fall to brink of bankruptcy a sobering example for Singapore
By Chua Lee Hoong, Political Editor
FIVE years is all it will take to ruin Singapore, Minister Mentor Lee Kuan Yew said recently.
Watching the financial crisis claim one victim after another in quick succession in recent weeks, I have been wondering if Mr Lee wasn't being too optimistic. Perhaps it won't take five years; perhaps a couple of years might be enough!
If we were North Korea or Myanmar, we wouldn't be vulnerable, we would be quite insulated from the global turmoil. But we wouldn't be very wealthy either.
Lest you think I have taken leave of my senses, let me hasten to add that I make that remark in light of the cataclysmic collapse of Lehman Brothers and the bizarre bankruptcy of Iceland.
Take Lehman Brothers first.
If a 158-year-old investment bank everybody thought was solid as a rock can collapse, can something similar happen to a Singapore institution? And if such a collapse happened, would the Republic be able to survive as a financial centre?
What Lehman Brothers held in liabilities was three times the total deposits in all banks in Singapore combined, say some analysts. So the answer to the question - Can the Republic survive? - is 'No'. Singapore will go belly-up, like Iceland did last month.
Just a year ago, Iceland was ranked by the United Nations Human Development Index as the most developed nation in the world. Its per capita gross domestic product was twice that of Singapore's. It had enjoyed a decade of high growth, fuelled by financial deregulation in the 1990s.
And then it went bankrupt for the oldest reason in the world: It borrowed too much.
Swashbuckling entrepreneurs borrowed to buy up assets in Europe; Iceland's banks financed their expansion not with deposits but with reckless borrowing from overseas. The central bank allowed it all to happen by keeping interest rates high at 12 to 15 per cent, inducing the inflow of deposits from overseas.
Result: Its banks collapsed under the weight of external debt estimated at ¥50 billion (S$95 billion), compared to a GDP of ¥8.5 billion. Iceland now has to borrow from the International Monetary Fund and Russia to keep its economy going.
If bankruptcy can happen to Iceland, what is there to prevent Singapore, another small nation, from following a similar path?
Nothing very much, really. Except the wits of its political leaders and monetary regulators, and the financial buffer provided by the reserves accumulated over many years.
Singapore's leaders have reminded the country time and again how important it is to have prudent ministers who will make decisions for the long-term good, and to save for a rainy day.
Let's fess up, most of us had become tired of hearing those reminders. But the rainy day is upon us, and it would be thoroughly churlish not to say now that those injunctions were right.
All we need is an incompetent leadership with no experience in steering the economy or setting monetary policies, and we won't need five years before we start seeing the negative effects.
I was particularly chilled by a question posed by a visiting American academic the other day: Why has no one attacked the Singdollar?
Why chilled? Because 10 years ago, speculative attacks on the Thai baht led to the collapse of the Thai economy and the Asian financial crisis.
That someone can ask the question about the Singdollar means that no one should rule out the possibility of it being attacked by speculators intent on profiting from doing so.
I have no knowledge of whether there have been such attacks, but my guess is that they have been few. Speculators know that Singapore can defend its dollar, thanks to its accumulated reserves.
Still, reserves are not infinite. A sum of $150 billion has already been pledged to guarantee bank deposits in Singapore up to 2010. A hundred billion or two here, a hundred billion or two there, and surely there must come a point when our reserves are significantly less - and we are consequently more vulnerable. It would be foolish to think that the reserves are a bottomless pit.
As the current turmoil has highlighted, being wealthy is no guarantee that you will not be vulnerable.
And Singapore is particularly vulnerable, thanks to its policy of going for high growth and high inter-connectedness with the world economy.
That policy has brought growth of 7 to 8 per cent a year when times were good.
Singaporeans have been told this repeatedly and have come to accept it as an article of faith - no connection with the globalised world means no rapid growth.
But what they might not have quite grasped - until now - is that high returns also means high risk, even for a country.
If Singapore were North Korea or Myanmar, insulated from the global turmoil, it wouldn't be so vulnerable. But it wouldn't be very wealthy either.
Once you've cast your lot with the global economy, there can be no decoupling.
But would Singaporeans have it any other way?
Probably not, which is why it is so critical how you choose your financial planner - or your political leaders.
[email protected]
From: kojakbt22 Nov-10 9:23 pm
To: ALL (1 of 18)
2375.1
High growth brings high risks, for nations too
Iceland's fall to brink of bankruptcy a sobering example for Singapore
By Chua Lee Hoong, Political Editor
FIVE years is all it will take to ruin Singapore, Minister Mentor Lee Kuan Yew said recently.
Watching the financial crisis claim one victim after another in quick succession in recent weeks, I have been wondering if Mr Lee wasn't being too optimistic. Perhaps it won't take five years; perhaps a couple of years might be enough!
If we were North Korea or Myanmar, we wouldn't be vulnerable, we would be quite insulated from the global turmoil. But we wouldn't be very wealthy either.
Lest you think I have taken leave of my senses, let me hasten to add that I make that remark in light of the cataclysmic collapse of Lehman Brothers and the bizarre bankruptcy of Iceland.
Take Lehman Brothers first.
If a 158-year-old investment bank everybody thought was solid as a rock can collapse, can something similar happen to a Singapore institution? And if such a collapse happened, would the Republic be able to survive as a financial centre?
What Lehman Brothers held in liabilities was three times the total deposits in all banks in Singapore combined, say some analysts. So the answer to the question - Can the Republic survive? - is 'No'. Singapore will go belly-up, like Iceland did last month.
Just a year ago, Iceland was ranked by the United Nations Human Development Index as the most developed nation in the world. Its per capita gross domestic product was twice that of Singapore's. It had enjoyed a decade of high growth, fuelled by financial deregulation in the 1990s.
And then it went bankrupt for the oldest reason in the world: It borrowed too much.
Swashbuckling entrepreneurs borrowed to buy up assets in Europe; Iceland's banks financed their expansion not with deposits but with reckless borrowing from overseas. The central bank allowed it all to happen by keeping interest rates high at 12 to 15 per cent, inducing the inflow of deposits from overseas.
Result: Its banks collapsed under the weight of external debt estimated at ¥50 billion (S$95 billion), compared to a GDP of ¥8.5 billion. Iceland now has to borrow from the International Monetary Fund and Russia to keep its economy going.
If bankruptcy can happen to Iceland, what is there to prevent Singapore, another small nation, from following a similar path?
Nothing very much, really. Except the wits of its political leaders and monetary regulators, and the financial buffer provided by the reserves accumulated over many years.
Singapore's leaders have reminded the country time and again how important it is to have prudent ministers who will make decisions for the long-term good, and to save for a rainy day.
Let's fess up, most of us had become tired of hearing those reminders. But the rainy day is upon us, and it would be thoroughly churlish not to say now that those injunctions were right.
All we need is an incompetent leadership with no experience in steering the economy or setting monetary policies, and we won't need five years before we start seeing the negative effects.
I was particularly chilled by a question posed by a visiting American academic the other day: Why has no one attacked the Singdollar?
Why chilled? Because 10 years ago, speculative attacks on the Thai baht led to the collapse of the Thai economy and the Asian financial crisis.
That someone can ask the question about the Singdollar means that no one should rule out the possibility of it being attacked by speculators intent on profiting from doing so.
I have no knowledge of whether there have been such attacks, but my guess is that they have been few. Speculators know that Singapore can defend its dollar, thanks to its accumulated reserves.
Still, reserves are not infinite. A sum of $150 billion has already been pledged to guarantee bank deposits in Singapore up to 2010. A hundred billion or two here, a hundred billion or two there, and surely there must come a point when our reserves are significantly less - and we are consequently more vulnerable. It would be foolish to think that the reserves are a bottomless pit.
As the current turmoil has highlighted, being wealthy is no guarantee that you will not be vulnerable.
And Singapore is particularly vulnerable, thanks to its policy of going for high growth and high inter-connectedness with the world economy.
That policy has brought growth of 7 to 8 per cent a year when times were good.
Singaporeans have been told this repeatedly and have come to accept it as an article of faith - no connection with the globalised world means no rapid growth.
But what they might not have quite grasped - until now - is that high returns also means high risk, even for a country.
If Singapore were North Korea or Myanmar, insulated from the global turmoil, it wouldn't be so vulnerable. But it wouldn't be very wealthy either.
Once you've cast your lot with the global economy, there can be no decoupling.
But would Singaporeans have it any other way?
Probably not, which is why it is so critical how you choose your financial planner - or your political leaders.
[email protected]
