Asian Markets: Rates are Cut but Panic Ensues and Markets Crash

Singapore, 10 Oct. Ever since this massive financial crisis began, the Asian markets have been up and down. This volatility indicates a high degree of uncertainty –

Singapore, 10 Oct. Ever since this massive financial crisis began, the Asian markets have been up and down. This volatility indicates a high degree of uncertainty – investors still aren’t sure how the recent bailout plans are going to affect them in Asia.

Just this week, almost every market in Asia-Pacific has dropped anywhere from 5-10%, mimicking US sentiment. Many believed the US rescue plan would quell markets, but it has not had that effect yet, in spite of a more recent consideration of capital injections into the banks.

Spokesperson Dana Perino said, “These capital injections are something that Secretary (Henry) Paulson is actively considering.” She did not comment on the timing or amount of such investments. Iceland, the UK, and Italy have all used this approach to rescue ailing institutions.

In light of these catastrophic drops, most Asian governments have taken steps to counter the situation. The Bank of Korea set a federal funds rate target a quarter of a point lower, The People’s Bank of China slashed rates for the second time in three weeks and even cut reserve requirements, while Hong Kong slashed its target rate by 1.5%.

Palaniappan Chidambaram, India’s Finance Minister, commented on his plans to keep banks afloat, “If need be, we will take further measures to infuse liquidity in the market,” he said.

Japan did its part by infusing US $20 billion into money markets. The Japanese rate is so low (0.5%) that it cannot really afford to cut it anymore.

But this injection could not help Yamato Life Insurance Co. which filed for bankruptcy today, according to the president. He said, “In the critical situation of the global financial market, our equity asset value went down in a speed and depth that we never expected.”

Yamato, based in Tokyo, can blame its failure directly on the US crisis. It held around US $12 million in US subprime assets. For the period ending 30 September, 2007, the company reported a net loss of US $11.8 million, which was the first time in three years it logged a first fiscal half loss. The company is now seeking rehab sponsors.

Yamato joins the corporate casualties in Japan: Such bankruptcies increased a whopping 34% in September, the most in eight years, according to a report by Tokyo Shoko Research.

It seems that the US action setting the federal funds rate target another 50 basis points lower was just too little, too late. Even with the European Central Bank, the Bank of England, Swedish, Swiss, and Canadian banks doing the same, Asia still hit the bottom hard.

Until a comprehensive plan by Treasury Secretary Henry Paulson is revealed, market volatility should come as no surprise, as uncertainty will prevail. Hopefully the upcoming G7 meeting of finance ministers and central banks will draw out some plans and put markets at ease. Until then, try not to panic.

Hector Sim, EconomyWatch.com