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Russian Collapse May Prolong the Asian Economic Turmoil

By Evelyn Iritani
Los Angeles Times
SEOUL, South Korea

Like a vortex, the global market collapse driven by Moscow's political and economic tumult last week promises to prolong and deepen the Asian crisis that helped trigger Russia's woes in the first place.

On the heels of fresh reports showing that Asia's economic travails have already proved more painful than predicted, analysts warn that the plunge in world markets has unleashed dynamics that will further undermine Japan's teetering banks and make it even harder for the region's debt-ravaged countries to raise money.

Events have dampened any remaining hopes of a swift recovery in Asia and raised the prospect of more crises to come.

"I don't think you can realistically exclude the possibility of a depression (in Asia), although it may be a bit premature to talk about that," said Richard Samuelson, chief analyst at SBC Warburg Dillon Read Securities in Seoul.

Asia's misery was on full display last week when somber-faced officials from some of the strongest of the weak - South Korea, Malaysia and Hong Kong - reported sharp second-quarter economic reversals, adding to the Russia-fed panic.

In country after country, the economic scorecard was bleak. For South Korea, it showed a 6.6 percent quarterly plunge in gross domestic product; in Malaysia, a 6.8 percent fall; and in Hong Kong, a 5 percent drop. Even the Philippines, which had insisted it could escape the negative growth that also has claimed Japan, Singapore and Indonesia, saw its second-quarter GDP growth shrink by 1.2 percent.

Japan fell even deeper into an economic black hole when the Nikkei stock index crashed below 14,000, an event that left many of Japan's largest banks unable to meet their international bank capitalization requirements.

That increased the danger that Japan's banks - which in recent years have accounted for one-third of the lending in the region - will be forced to call in loans from their Asian clients after already shutting off the spigot of new lending.

Indeed, Japan's once-powerful banks have suffered a dizzying fall from grace.

Kenneth Courtis, chief economist for Deutsche Bank, calculates that by the end of Friday's blood bath in Tokyo, the combined market value of the country's top 98 banks was less than two-thirds that of Microsoft Corp.

Unless Japan gets its financial house in order - a process that remained bogged down in political wrangling last week - the rest of Asia will stay frozen in place.

With Japan's all-important banks forced to the sidelines, last week's events assumed extra import for the rest of Asia - especially the "IMF economies," as they are known for having been bailed out by the International Monetary Fund over the past year.