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US finance system meltdown

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US finance system meltdown:
•    Thailand: Central bank sees little impact on AIG unit
•    Singapore: MAS reassures worried AIG policyholders
•    Philippine banks raise provisions to reduce exposure
•    Indonesia cuts loan rates as US credit woes spread
•    US crisis biggest risk to Asia growth - ADB

Commercial banks and monetary authorities in Bangkok, Singapore, Manila and Jakarta found themselves bracing for the impact and aftershocks from the worsening financial turmoil in the United States Wednesday as US Federal Reserve planned $85-billion rescue loan to save insurance giant American International Group (AIG) following the Lehman Brothers' bankruptcy Monday.

AIG in a statement said its businesses "including its extensive Asian operations, continue to operate normally and remain adequately capitalised and fully capable of meeting their obligations to policyholders."

Thailand: Central bank sees little impact on AIG unit
In Thailand, Bank of Thailand (BoT) assistant governor Sorasith Sunthorngas on Tuesday said the financial trouble the US-based AIG Group was facing from severe liquidity crunch had no impact on the performance of its subsidiary AIG Retail Bank (Thailand), state news agency TNA reported.

The AIG Retail Bank has a separate capital fund from that of its parent and its business transactions are not related to those of the parent group, according to Sorasith.

He said AIG Retail Bank's position is strong with its capital-to-risk asset ratio under the BIS rule being as high as 24 percent compared with an average 15 percent of commercial banks as a whole. Non-performing loans held by the bank stood at only 6 per cent and a full loan-loss provisioning was set.

Acknowledging that some AIG Retail Bank depositors had withdrawn funds from the bank, Sorasith said the bank still had sufficient cash to accommodate (future) deposit withdrawals, adding that Thailand's Deposit Insurance Institute could guarantee the full amount of deposits should the bank’s troubles worsen.

Meanwhile, Thailand’s commercial banks are expected to suffer an estimated loss of 3 billion baht from total exposures of 4.3 billion baht in their investments with leading US investment bank Lehman Brothers which declared bankruptcy Monday, TNA quoted Nattapol Chavalitcheevin, president of Thai Bond Market Association, as saying Tuesday.

Investment by foreign investors in the Thai bond market is not much, said Mr. Nattapol, adding that foreign investment in the market declined about Bt7 billion since the beginning of 2008.

The US finance system meltdown is likely to force the Federal Reserve to lower its rate by at least 25 basis points which will pressure the Bank of Thailand's Monetary Policy Committee (MPC) to follow suit and reduce its rate to the same level from the current 3.75 percent, Nattapol said.

According to Thawatchai Yongkittikul, secretary-general of Thai Bankers Association, financial problems in the US were more serious than he had thought and might result in tight liquidity in Thailand because parent firms in the US may transfer money from Thailand to help rescue their financial ailing situation.

Direct impact on Thai financial institutions following the Lehman Brothers-initiated trouble is expected to be minimal because their combined investment of Bt4.3 billion represented less than two per cent of their investment overseas, he said.

Among the worst-hit in Thailand by the Lehman Brothers bankruptcy is Bangkok Bank, Thailand's top lender, which holds 3.5 billion baht ($101 million) in senior, unsecured bonds issued by the US firm, reported Reuters.

Other leading Thai banks, including second-ranked Krung Thai Bank and number five Bank of Ayudhya, reportedly said they had limited, indirect investments in Lehman Brothers through collateralised debt obligations (CDOs).

Singapore: MAS reassures worried AIG policyholders
In Singapore on Tuesday, hundreds of worried customers rushed to a local American International Assurance office to redeem policies amid fears the US insurance giant could be the next big financial firm to tumble, reported Reuters.

In a related report, Singapore’s state news agency Channle News Asia said the central bank, known officially as the Monetary Authority of Singapore (MAS) has urged AIA policyholders not to act hastily to terminate their insurance policies, as queues formed outside AIA's offices on Tuesday, with some clients seeking to end their policies.

"The value of these assets is not linked to AIA's or AIG's financial condition, but like all investments, their value may be affected by general market conditions," said the MAS assuring the public that "AIA currently has sufficient assets in its insurance funds to meet its liabilities to policyholders".

Philippine banks raise provisions to reduce exposure

In the Philippines, lenders Banco de Oro and Metrobank said Tuesday they were setting aside provisions totalling $94.7 million to cover their exposure to the Lehman Brothers' collapse, reported AFP.

The central bank meanwhile offered emergency lending but its governor Amando Tetangco said the local banking system did not need it since it had enough liquidity and improved capital bases.

"Due to the uncertainty relating to the financial condition of Lehman Brothers, Banco de Oro Unibank Inc. is setting aside provisions totalling 3.8 billion pesos ($80.7 million) to cover its exposure to said entity," the number-two lender said in a disclosure to the Philippine Stock Exchange.

Metropolitan Bank and Trust Co. (Metrobank), the country's number-one lender in terms of assets, said it has "made provisions equivalent to 14 million dollars" for its direct bonds exposure of 20.4 million dollars.

It told the exchange Metrobank had separately lent a Lehman subsidiary in the Philippines 2.4 billion pesos. "The loan status is current and the company is in normal operations," it said.

Banco de Oro did not disclose the extent of its exposure to Lehman paper, saying only that its balance sheet should be "adequately covered from potential losses arising from its Lehman exposure."

"The provisions will come from reallocation of excess reserves and from additional provisions in the current period," it said.

Central Bank of the Philippines governor Tetangco said earlier Tuesday that a number of Filipino banks have a limited exposure to Lehman Brothers.

Meanwhile, the Philippine American Life and General Insurance Co, or Philamlife, said Tuesday it is insulated from the financial difficulties of its major shareholder, American International Group Inc (AIG).

"While AIG is our parent company, we are separately capitalised ... the largest and strongest capital base of any insurance company in the Philippines," Philamlife president and chief executive Jose Cuisia said in a television interview.

"There is no impact of what's going on in the US on the Philippine operations. Most of our investments are in government securities and prime equity blue-chip stocks, local stocks not US stocks," said former central bank governor Cuisia.

Indonesia cuts loan rates as US credit woes spread
Indonesia's central bank cut one of its rates at which it lends to commercial banks as upheaval on Wall Street threatened to dry up the flow of funds through the global financial system. Bank Indonesia also offered to pay more on deposits that banks place with it, offering local lenders extra help at a time when market were gyrating after the collapse of Lehman Brothers, the takeover of crisis-hit Merril Lynch and funding troubles at insurer American International Group, Reuters reported.

The bank left its benchmark rate at 9.25 percent. It cut overnight repo rate by 200 basis point to 10.25 percent and raised the rate it pays on overnight deposits -- also known as the Fasbi rate -- by 100 basis points to 8.25 percent.

"The double measure announced by BI suggests that the central bank want to ensure the easing of emergency lending, in a move that we see as a safeguard against a possible distress in the domestic financial market," said Singapore-based analyst Gundy Cahyadi of IDEAglobal.

Central banks from Sydney to Frankfurt pumped billions of dollars of emergency funds to prevent money markets from seizing up and those which held back offered assurances they stood ready to act.

Even before the latest wave of credit turmoil struck markets worldwide, Indonesian money market got squeezed by foreign investors' sales of local bonds and a gradual policy tightening by the central bank in its battle with double-digit inflation.

The rapid loan growth in step with the still fast expanding Indonesian economy, which by far outstripped growth in bank deposits also contributed to the tight liquidity.

The squeeze has pushed money market overnight rates to as much as 13 percent, compared with the central bank's target of between 8.25 percent and 10.25 percent. The cut in the repo rate should effectively cap overnight financing cost at 10.25 percent.

Bank Indonesia's overall monetary tightening policy aimed at reducing double digit inflation was likely to remain in place, analysts said.

"I am still of the opinion that the benchmark BI rate is based on inflation expectation" rather than short-term fluctuations," said Helmi Arman economist at Bank Danamon.

He expects the policy rate to rise to 9.5 percent by the year's end. The central bank normally reviews its policy rate at monthly meetings. The bank raised the policy rate by 25 basis points to 9.25 percent in September, the fifth hike this year, in a campaign to control inflation which hit 11.85 percent in August.

US crisis biggest risk to Asia growth - ADB
Asia's developing economies, the fastest growing in the world, should expand by 7.5 percent this year but financial convulsions in the West could hurt growth, Reuters quoted the Asian Development Bank as saying Tuesday.

"The risks to Asia today are much, much higher than what we had projected in April," ADB Chief Economist Ifzal Ali told journalists in Hong Kong.

The biggest risk was that the US financial crisis would affect G3 economies indefinitely, hurting Asian exports and financial markets. "If the impact goes beyond 2009 that will be very, very negative for Asia."

For now though, Asia still needed to tackle inflation rather than focus on growth, Ali said.

The Manila-based bank's latest 2008 growth forecast, worked out before Lehman Brothers collapsed and Merrill Lynch was sold in the worst financial crisis in the United States in decades, was only slightly lower than an 7.6 percent estimate in April.

But it is the slowest growth in the region since 2003.

"The silver lining so far has been that US growth though slower has held up. The turmoil of the last eight days points to clear and present danger that growth in the United States could slip very, very sharply," Ali said.

The ADB also slashed the 2009 growth forecast to 7.2 percent from 7.8 percent as it said the global slowdown, high inflation and tight monetary policy would cut back on expansion.

The ADB's Asian Development Outlook Update said Asia's financial systems were healthy and had so far been relatively inured to the U.S. credit crunch.

"If the sub-prime crisis worsens significantly, Asia is bound to suffer much more serious financial effects, including an abrupt reversal of the capital inflows that have held up well so far," the bank said in the report.

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