Death of corporate bonds worth investigating

Henry Paulson's "bazooka" is looking more like an intercontinental ballistic missile.

That's the word the former Treasury secretary used in August to explain the firepower of hundreds of billions of dollars of US stimulus. In November, China rolled out its own $586 billion (Dh2.15 trillion) bazooka. India, Indonesia, Japan, Malaysia and Singapore intend to raise spending to boost growth.

Two things are worth noting about this unprecedented deluge. One, it marks the end of the corporate-bond market as we know it. Two, Asia's efforts to develop deeper debt markets are now on the backburner.

Government debt is already the US's most precious export. Paulson's successor, Timothy Geithner, will oversee an even bigger expansion of debt issuance.

Asia, too, will see an unprecedented bond boom. Why? Today's growth forecasts are just way too optimistic. How can companies hope to compete? The corporate market already has been hurt in secondary trading and primary-market issuance. Asia is about to see the next wave. Governments have few options here and stimulus is badly needed. With so many bazookas being deployed, private companies risk being crowded out of debt markets, according to the Asian Development Bank. Firms face multiple financing risks as they navigate global turmoil and increased competition.

"Companies today face higher borrowing costs, and risks of any abrupt withdrawal of funds from emerging markets may prove to be an additional complicating factor for new local-currency denominated corporate bond issuance in emerging East Asia," says Jong Wha Lee, head of the ADB's office of regional economic integration. Lee's concern is that governments will "crowd out new corporate funding or refinancing."

All these bazookas may morph into something more lethal - like a financial version of an ICBM.

The US is banking on Asia's savings to finance its current and future stimulus efforts. There's virtually zero chance the money approved thus far by Congress is sufficient to revitalise US banks. More than 15 years after Japan's asset bubble burst, that nation's banks still aren't lending money as hoped.

The US Treasury's future borrowing efforts will bump up against those of Japan, China and Europe. This crisis has a drip-drip-drip dynamic that tends to make what seems implausible one day real the next. Japan is a case in point. Asia's biggest economy is sure to announce ambitious new issuance plans.

China, too. Never mind the spin in Beijing. Its $3.3 trillion economy is slowing fast and needs far more support than the government's plans to date. European governments also are sure to increase borrowing programmes to stabilise growth.

"I'm concerned about the fiscal policy in some countries of the euro region," European Central Bank Executive Board member Juergen Stark said in Baden Baden on February 12.

The non-partisan Congressional Budget Office says US stimulus efforts might provide a short-term boost to growth, but the added debt burden and crowding out of private investment will be a net drag on the economy and wages by 2014. A similar experience may befall Asia, too.

The deluge adds another element to Asia's 2009. The region's efforts to create deeper debt markets will be undermined. Asia still needs international markets for corporate and asset-backed debt. You can forget that for a while.

The good news is that Asian-currency bonds will dominate this wave as governments turn to local capital markets for funding and as overseas investors favour sovereign issuers or state-owned companies. It was borrowing in foreign currencies that got Asia into trouble a decade ago.

To help alleviate pressure on corporate borrowers, the ADB is in talks with the countries of the Association of South East Asian Nations, plus Japan, China, and South Korea, to set up a fund providing credit guarantees for local-currency debt.

That's all well and good. With so many government bazookas being aimed at markets, though, private bond issuers are in for a trying few years.