Reversal of fortune

While the threat of credit rating downgrades hangs over Europe, a few big emerging market economies are on the upswing, reports Reuters. Indonesia provides arguably the starkest contrast. Fitch's upgrade of Indonesia's sovereign rating on Dec. 15 restored it to investment grade status for the first time in 14 years. Back in 1997, when the Asian financial crisis exploded, the International Monetary Fund (IMF) had to step in with a three-year loan worth $10.1 billion at the time. Fast-forward to 2011, and it is European banks that are the focus of concern as the euro zone struggles to come up with a politically palatable way to solve its own debt crisis. All three of the world's major ratings agencies have warned that European countries face downgrades if they cannot stem the crisis. Fitch said Dec. 16 that a comprehensive solution was "technically and politically beyond reach." Why the role reversal? Indonesia's 2012 growth is expected to reach 6.4 per cent, according to a Reuters poll of economists, down only slightly from 2011's estimated 6.5 per cent. The euro zone is widely expected to be stuck in recession next year, while U.S. growth will probably trudge along at one-third of Indonesia's pace. Asia now holds most of the world's foreign exchange reserves, with about $4.5 trillion concentrated in China and Japan combined. But there are also large stockpiles in India, Indonesia and South Korea. That cushion can provide protection from financial market turbulence. Indonesia, South Korea, India and others have tapped reserves this year to defend their currencies from extreme volatility. "Schizophrenic" Investors: The IMF itself seems to have learned a few lessons from its experience in Asia, especially on how deep budget cuts can hurt a country's economic growth and its citizens. The IMF at the time expected Indonesia's growth, which had been around 8.0 per cent before the crisis, to slow to 5.0 per cent in the first year of the programme and 3.0 per cent in the second. In fact, Indonesia's economy contracted by 13.1 per cent in 1998 and grew by only 0.8 per cent in 1999. Many economists worry that Europe's austerity measures, much like those in Indonesia in the late 1990s, will end up doing even more damage to the economy, worsening the debt picture. Who is next? European countries are the obvious candidates for imminent downgrade. S&P's move could come any day. Moody's said on Dec. 12 it will revisit its European ratings in the first quarter of 2012. Since Aug. 5.0, when Standard & Poor's stripped the United States of its AAA-rating, countries including Indonesia, Brazil, Estonia, the Czech Republic, Paraguay, Peru, Kazakhstan and Israel have received upgrades from at least one of the world's big three ratings agencies. But it is the negative actions that pose the global economic threat. The advanced economies in the Organisation for Economic Co-operation and Development (OECD) have 2012 borrowing needs estimated at $10.5 trillion. A number this large means even a small increase in borrowing costs is meaningful.