The Hindu Business Line : Time to promote intra-Asian capital flows

MR Alan Greenspan's "conundrum" — the phenomenon of falling long-term interest rates coexisting with rising short-term rates — continues. In fact, 10-year treasury yields broke 4.2 per cent on the downside last week.

About two months after the Federal Reserve Chairman's testimony to the Senate Banking Committee, there is little sign of the yield curve assuming a more `sensible' shape. The spread between 10 years and two years is down to just 60 bps.

The US transgresses all canons of economic and fiscal prudence — witness its huge and rising fiscal and trade deficits — which, in other cases, would force a country to knock at the doors of the IMF and into penance. But the market is in no mood to punish the world's largest economy. On the contrary, recklessness seems to have its rewards. The latest figures show that foreign purchases of US securities are well above the trade deficit.

The booming economies of Asia have hardly lost their appetite for treasuries. Their holdings keep growing and account for perhaps half of the ownership of US Government debt. In what could only be described as comical, portfolio flows to emerging markets for higher returns are received and reinvested in their home countries at lower yields — a case of the poor subsidising the investments of the rich.

Naturally, the suggestion of an "Asian Monetary Fund", made from time to time and especially in the 1997-98 crisis, evokes no enthusiasm in the US. The export surpluses of Asia are captive to American treasuries and keep their yields low.

But Asia is as much to blame for the state of affairs. It does not offer as much safety of capital and returns as do the rich countries of the Western world. Buy US treasuries and you are assured of these and also liquidity, any time you want to sell them. But they do not come cheap. Yields are meagre. But that is the price Asians are paying for the security of their investments.

We have a long way to go in these matters but it is high time a beginning is made. With all the financial brains around — after all Asians too have made it big on Wall Street — it should not be difficult to build adequate safety and liquidity nets to promote intra-Asian capital flows offering much better returns than US Government securities and cutting intermediation costs. Our investment needs in infrastructure, both of the physical and social kinds, are massive. There is no place like home but Asian Governments, savers and fund managers must be convinced of that. Also, among ourselves, we are bedevilled by suspicions and jealousies, leaving little scope for cooperation. All this has to change.

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