Investors worried about the growing sovereign debt crisis in Europe and the painful road to recovery that lies ahead should look to Indonesia for solace. Thanks to heroic restructuring efforts over the past decade, one of the hardest-hit countries during the Asian financial crisis of the late 1990s is now one of the hottest economies on the planet. Jakarta's composite index is up 160% since the low of the Great Recession.

While similar reforms proposed in Europe may not lead to the same result, it is clear from Indonesia's success, and that of other high-flying Asian economies, that a period of harsh austerity will be central to getting the continent back on its feet.

"The restructuring was a necessary step in Asia and the same will need to take place in Europe," said Pierre Lapointe, a macro global strategist at Brockhouse Cooper. "This [crisis] is a wake-up call for Europe."

The Asian crisis of the late 1990s was triggered when Thailand's currency, the bhat, went into free-fall in the summer of 1997. Like wildfire, the mass exodus of foreign capital from Thailand's markets spread to other parts of the region, most notably Indonesia and South Korea, but also Hong Kong, Malaysia, Laos, Vietnam and the Philippines.

Even Japan, Asia Pacific's economic powerhouse at the time, saw its currency slump and its stock markets and other asset prices tumble.

With several Asian currencies reeling, the crisis exacerbated the region's growing debt burden. Foreign debt-to-GDP ratios in many countries shot up beyond 180% during the crisis and swooning local currencies were making it increasingly difficult for corporations to service the debt.

Ultimately, the International Monetary Fund stepped in. The economic upheaval inflicted massive damage to these countries and also sent shock waves through global capital markets. In Indonesia, output fell 10%, the country's stock market dropped in half and the rupiah, the country's currency, collapsed. Meanwhile, the S&P 500 in New York fell as much as 10% in October that year and the TSX was down 12%, hefty retreats for the time.

It was a rough few years for investors, but the severity of the crisis in East Asia was relatively brief and by 2000, markets in many countries were on the ­rebound.

Yung Chul Park and Jong-Wha Lee, economists with the U.S. National Bureau of Economic Research, said at the time the East Asian financial crisis was characterized not only by its severity, but also by how quickly these countries bounced back.

Mr. Park and Mr. Lee argued that the crisis was caused by too much short-term capital flowing into weak and under-supervised financial systems. Once liquidity returned to the market, crisis countries recovered quickly. aided by "large real [currency] depreciation, expansionary monetary and fiscal policy, and an improvement in the global economic environment," they argued.

More than that, they said, these countries still possessed the same strong fundamentals that had fuelled double-digit growth pre-crisis, namely "high rates of saving, good human resources, trade openness and maintenance of good institutions."

Just as Thailand was the canary in the coal mine 12 years ago, investors are predicting the sovereign debt problems that have left Greece on the brink of default are not isolated. Fears that neighbouring countries such as Spain, Portugal and Italy may also collapse in a mountain of debt led to global equity markets correcting 10% this month, and the euro is trading at US$1.22, its lowest level in four years.

This week's turmoil in markets occurred despite the European Union and the IMF stepping up earlier this month with a US$1-trillion bailout package.

While the package has bought time by covering debt service of the so-called PIIGS countries until 2012, investors remain deeply skeptical about the ability of these nations to fulfill harsh austerity measures that are conditions of the bailout.

"In Greece, there is resistance to restructuring with violent riots in the street. If this is the example, there is much more resistance to change than was the case in Asia," said David Rosenberg, chief economist and strategist at Gluskin Sheff & Associates Inc.

While protests also marked the IMF's intervention in the Asian crisis, Mr. Rosenberg said governments and citizens were relatively quick to adapt to measures prescribed to them.

"They went through the proverbial wringer and lived through a depression that Americans will only end up reading about," he said. "It's a different culture. It's all about thrift and not entitlement."

Mr. Rosenberg questions the resolve of some European countries to cut back on public-sector spending, including heavy reductions in wages and retirement benefits. As a result, he sees a much slower recovery from the Greece crisis, one that could mimic Japan's stagnant economic performance over the past 20 years.

"In the aftermath of a credit collapse, what you don't get in a peak-to-trough decline you pay for in duration. Japan is the extreme case in point."

George Hoguet, a global investment strategist at State Street Global Advisors, said there was a strong view during the late 1990s that Asia would do what it needed in order never to deal with the IMF again. Even then it took some time for a credible adjustment plan to resonate with markets.

"The program has to have all the elements in place, the government has to agree to it and the market also has to believe it can happen," he said.

Ultimately, South Korea and other countries successfully undertook major restructuring efforts in order to deleverage their private debt loads. At the same time, governments in the region built up their foreign-exchange reserves.

The goal, Mr. Hoguet said, was to promote greater reliance on domestic capital markets. In the end, the restructuring helped fuel an export-led recovery.

"When exchange rates fell sharply, it made the cost of labour cheaper, making those economies more competitive," he said.

In addition to restructuring their debts, Mr. Hoguet said it is essential that Greece and other southern European countries render their economies more flexible and more competitive against Germany and France.

In the case of Greece, that would require a 25% reduction in real wages, but as part of the European monetary union, Greece cannot do that simply by devaluing their own local currency.

"That's part of the conundrum," he said. "To stabilize expectations, you have to convince people things are going to get better," Mr. Hoguet said.

Until that happens, it seems investors have a right to be nervous for some time to come.

Although we have entered ­official correction territory, it is reasonable to assume ­further downside is in store given the 80% rally in global stock ­markets that preceded it. Eventually, however, the crisis should give way to some solid investing ­opportunities.

The key, Mr. Rosenberg said, is to have cash on hand to take advantage of those opportunities. Investors can no longer rely on the strategies that worked so well during the rally of the past year, he said.

"And what didn't work last year is going to work. So not junk, but high-quality names that provide dividend income and dividend growth. Boring will be sexy again," he said.

Financial Post

dpett@nationalpost