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The new Asia crisis

September 25, 2008 13:48 IST

From where I sit in Hong Kong, you can't help but compare the Wall Street wipeout with the Asia Crisis of a decade ago.

Remember the Asia Crisis? It started back in 1997 when Thailand's currency collapsed, partly because of a real estate bubble. Soon, stock markets were swooning across Asia. Once-proud traders in Bangkok found themselves driving taxicabs, Indonesians rioted and Koreans lined up to donate gold rings to help the country recover its financial footing.

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Fast forward. Back where the crisis started, the stand of half-built skyscrapers, an eyesore along Bangkok's skyline for years, has given way to a modest number of construction cranes and new, completed expressways. Malaysia, a basket case a decade ago, exported more than it imported last year. Stock markets across Asia have caught Wall Street's flu and taken a pounding, but this time, currencies remain strong, and Asian banks are even lending money to the West.

China's Communist Party, with its huge reserves, has rescued the capitalists in America. As of July, the Chinese government held nearly $520 billion of US Treasuries, plus additional debt--mostly of Fannie Mae and Freddie Mac--of $440 billion. China's sovereign wealth fund owns 9.9 per cent of both the Blackstone Group and Morgan Stanley (nyse: MS - news - people ). The big Chinese banks have additional exposure of at least $280 billion to Lehman Brothers. Thus, China has well over $1 trillion stake in the US financial crisis. As Wall Street implodes, Asians are accidentally helping bail out troubled Western banks.

"Asia over the course of the last 10 years has not re-leveraged," says Jim Walker, managing director of Asianomics, a Hong Kong-based independent economic research firm. "It is completely the reverse of the US."

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So as Wall Street wavers, at least we don't have to worry about Asia. Right?

Not quite. The financial system may be strong, but politically, there are tremors across the entire region. There's no common theme to the political turbulence, but all at once, even in the midst of economic strength, governments are in turmoil in many Asian countries.

Political uncertainty stretches across the region. By far, the most farcical dramas are being played out in Malaysia and Thailand.

In Malaysia, opposition leader Anwar Ibrahim says he has enough votes to overthrow the government, led by the same party since 1957. Ibrahim has yet again been accused of sodomy--the charge Mahatir tried to embarrass him with years ago, and one which a court cleared him of then. Malaysians don't believe it this time around. The threatened ruling party is cracking down on its critics--and free speech--by throwing other government opponents, an anti-government blogger and a journalist in jail. Power may not be handed over easily, and Malaysia could wind up in civil war.

In Thailand, unpopular Thaksin Shinawatra left office in 2006 and, in August, was run out of town and into exile on corruption charges. After weeks of anti-government demonstrations, his successor and crony Samak Sundaravej was forced out for illegally accepting small payments for hosting a televised cooking show. Next up? The governing party nominated Thaksin's brother-in-law to replace Thaksin's replacement. More protests are ahead.

Southeast Asia is a political circus, but the political crises with the most far-reaching implications are happening in North Asia and in South Asia.

We literally don't know whether the dictator who led nuclear-armed North Korea is dead or alive (nor do we know what formaldehyde would do to Kim Jong Il's bouffant.)

And to the south, America's ally Pakistan continues to totter at the line of failed-statehood. It is clearly unable to control terrorists within its borders--as the weekend's deadly bombing of the Marriott Hotel in Islamabad showed. The US, frustrated by Pakistan's inability or unwillingness to go after terrorists on its soil, is adding to tensions there by stepping up military attacks within Pakistan's borders.

There is more. Japan is likely to name a new prime minister on Wednesday--Taro Aso, the former foreign minister with a knack for provoking China's ire. Meanwhile the government of Myanmar (formerly Burma), which stubbornly stood by while nature wiped out parts of its population, keeps its democratically elected leader under house arrest. Even the tiny Northern Mariana Islands, between the Philippines and Hawaii, are reeling amid a local corruption scandal. The islands are a commonwealth in political union with the U.S., so much of the Northern Mariana budget, however mismanaged, comes from the US Department of the Interior.

For years, in the canyons of Wall Street, financial types knew about the massive counterparty risks created by the proliferation of ever-more-complex derivatives, but those risks were ignored until they took down all of Wall Street. A decade after the worst of the Asia Crisis fanned out across the region, Asian economics are strong. But political risk across the region is at red-alert levels.

Robyn Meredith, Forbes
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