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East Asian Currency East Asian Currency Crisis, Crisis, 19971997
East Asian Currency East Asian Currency Crisis, Crisis, 19971997
Presented by Presented by
Irene SaldanhaIrene SaldanhaJosh BrubakerJosh BrubakerRaj DebnathRaj Debnath
Troy MontgomeryTroy Montgomery
Presented by Presented by
Irene SaldanhaIrene SaldanhaJosh BrubakerJosh BrubakerRaj DebnathRaj Debnath
Troy MontgomeryTroy Montgomery
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Why is this relevantWhy is this relevant
Why talk about a crisis that’s over now?Why talk about a crisis that’s over now?Anything we should learn from this?Anything we should learn from this?
Why talk about a crisis that’s over now?Why talk about a crisis that’s over now?Anything we should learn from this?Anything we should learn from this?
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Summer of 1997Summer of 1997Bangkok, Thailand, East AsiaBangkok, Thailand, East Asia
Summer of 1997Summer of 1997Bangkok, Thailand, East AsiaBangkok, Thailand, East Asia
Once upon a time….Once upon a time….
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From 1985 to 1996, growth rate averaging almost From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's 9% annually - increased pressure on Thailand's currency, the currency, the bahtbaht
From 1985 until July 1997, Baht was pegged at 25 US$
From 1985 to 1996, growth rate averaging almost From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's 9% annually - increased pressure on Thailand's currency, the currency, the bahtbaht
From 1985 until July 1997, Baht was pegged at 25 US$
Before it started…Before it started…
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Mid-May ‘97: Thai Baht was hit by massive Mid-May ‘97: Thai Baht was hit by massive speculative attackspeculative attack
Spark: End-June ‘97, Thai Prime Minister declared Spark: End-June ‘97, Thai Prime Minister declared that he would not devaluate the Bahtthat he would not devaluate the Baht
Thai Government failed to defend the Baht Thai Government failed to defend the Baht against International speculators against International speculators
Financial Crisis hits….Financial Crisis hits….
Mid-May ‘97: Thai Baht was hit by massive Mid-May ‘97: Thai Baht was hit by massive speculative attackspeculative attack
Spark: End-June ‘97, Thai Prime Minister declared Spark: End-June ‘97, Thai Prime Minister declared that he would not devaluate the Bahtthat he would not devaluate the Baht
Thai Government failed to defend the Baht Thai Government failed to defend the Baht against International speculators against International speculators
Financial Crisis hits….Financial Crisis hits….
What happened in Thailand…
What happened in Thailand…
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Booming Thai Economy ground to a halt, contracted Booming Thai Economy ground to a halt, contracted by 1.9% by 1.9%
Massive lay-offs in Finance, Real Estate & Massive lay-offs in Finance, Real Estate & Construction: unemployment rate all-time highConstruction: unemployment rate all-time high
Huge numbers of workers returning to their villages in Huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers sent the countryside and 600,000 foreign workers sent backback
Stock market dropped Stock market dropped 75%, 75%,
“ “Finance One” collapsedFinance One” collapsed
Baht reached 56 US$ in Baht reached 56 US$ in Jan ‘98 Jan ‘98
Booming Thai Economy ground to a halt, contracted Booming Thai Economy ground to a halt, contracted by 1.9% by 1.9%
Massive lay-offs in Finance, Real Estate & Massive lay-offs in Finance, Real Estate & Construction: unemployment rate all-time highConstruction: unemployment rate all-time high
Huge numbers of workers returning to their villages in Huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers sent the countryside and 600,000 foreign workers sent backback
Stock market dropped Stock market dropped 75%, 75%,
“ “Finance One” collapsedFinance One” collapsed
Baht reached 56 US$ in Baht reached 56 US$ in Jan ‘98 Jan ‘98
What happened in Thailand…
What happened in Thailand…
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Who were hit…Who were hit…Primary Casualty: Thailand, Indonesia, South Korea
Fairly hurt: Hong Kong, Malaysia, Laos and Philippines
Most Asian countries’ currencies fall significantly relative to the US$
Fear of Financial Contagion, Globally
Primary Casualty: Thailand, Indonesia, South Korea
Fairly hurt: Hong Kong, Malaysia, Laos and Philippines
Most Asian countries’ currencies fall significantly relative to the US$
Fear of Financial Contagion, Globally
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Drastic devaluation of the rupiah: from 2,000 Drastic devaluation of the rupiah: from 2,000 to 18,000 for 1 US$to 18,000 for 1 US$
Sharp price increaseSharp price increase
Wake of widespread rioting: Wake of widespread rioting: 500 deaths in Jakarta alone500 deaths in Jakarta alone
Governor, Bank Indonesia was sackedGovernor, Bank Indonesia was sacked
President Suharto was forced to step down in President Suharto was forced to step down in May 1998 after 30 years in powerMay 1998 after 30 years in power
Drastic devaluation of the rupiah: from 2,000 Drastic devaluation of the rupiah: from 2,000 to 18,000 for 1 US$to 18,000 for 1 US$
Sharp price increaseSharp price increase
Wake of widespread rioting: Wake of widespread rioting: 500 deaths in Jakarta alone500 deaths in Jakarta alone
Governor, Bank Indonesia was sackedGovernor, Bank Indonesia was sacked
President Suharto was forced to step down in President Suharto was forced to step down in May 1998 after 30 years in powerMay 1998 after 30 years in power
What happened in Indonesia…
What happened in Indonesia…
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Drastic devaluation of the Drastic devaluation of the wonwon: from 1,000 to : from 1,000 to 1,700 for 1 US$1,700 for 1 US$
Credit rating of the country (Moody’s): A1 to Credit rating of the country (Moody’s): A1 to B2B2
National Debt-to-GDP ratio more than doubledNational Debt-to-GDP ratio more than doubled
Major setback in Automobile industryMajor setback in Automobile industry
Drastic devaluation of the Drastic devaluation of the wonwon: from 1,000 to : from 1,000 to 1,700 for 1 US$1,700 for 1 US$
Credit rating of the country (Moody’s): A1 to Credit rating of the country (Moody’s): A1 to B2B2
National Debt-to-GDP ratio more than doubledNational Debt-to-GDP ratio more than doubled
Major setback in Automobile industryMajor setback in Automobile industry
What happened in S.Korea…What happened in S.Korea…
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Growth dropped to virtually zero in 1998Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ to Peso fell significantly, from 26/US$ to even 55/US$even 55/US$
President Joseph Estrada was forced to President Joseph Estrada was forced to resignresign
Growth dropped to virtually zero in 1998Growth dropped to virtually zero in 1998
Peso fell significantly, from 26/US$ to Peso fell significantly, from 26/US$ to even 55/US$even 55/US$
President Joseph Estrada was forced to President Joseph Estrada was forced to resignresign
What happened in Philippines..
What happened in Philippines..
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40% of Japan’s export go to Asia, so it was 40% of Japan’s export go to Asia, so it was affected even if the economy was strongaffected even if the economy was strong
Japanese Japanese YenYen fall to 147 as mass selling began fall to 147 as mass selling began
GDP real growth rate slowed from 5% to 1.6%GDP real growth rate slowed from 5% to 1.6%
Some companies went BankruptSome companies went Bankrupt
Being world’s largest currency holder, Japan Being world’s largest currency holder, Japan could bounce back quicklycould bounce back quickly
40% of Japan’s export go to Asia, so it was 40% of Japan’s export go to Asia, so it was affected even if the economy was strongaffected even if the economy was strong
Japanese Japanese YenYen fall to 147 as mass selling began fall to 147 as mass selling began
GDP real growth rate slowed from 5% to 1.6%GDP real growth rate slowed from 5% to 1.6%
Some companies went BankruptSome companies went Bankrupt
Being world’s largest currency holder, Japan Being world’s largest currency holder, Japan could bounce back quicklycould bounce back quickly
What happened in Japan…What happened in Japan…
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Markets did not collapse, but were severely hitMarkets did not collapse, but were severely hit
NYSE briefly suspended trading, for the first NYSE briefly suspended trading, for the first timetime
Dow Jones Industrial Average suffered as 3rd Dow Jones Industrial Average suffered as 3rd biggest point losses everbiggest point losses ever
Relationship with Relationship with JapanJapan changed forever: changed forever: US stopped supporting the highly artificial US stopped supporting the highly artificial Trade environment and Exchange Rate Trade environment and Exchange Rate
Markets did not collapse, but were severely hitMarkets did not collapse, but were severely hit
NYSE briefly suspended trading, for the first NYSE briefly suspended trading, for the first timetime
Dow Jones Industrial Average suffered as 3rd Dow Jones Industrial Average suffered as 3rd biggest point losses everbiggest point losses ever
Relationship with Relationship with JapanJapan changed forever: changed forever: US stopped supporting the highly artificial US stopped supporting the highly artificial Trade environment and Exchange Rate Trade environment and Exchange Rate
What happened in US...What happened in US...
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Let’s hear to what Let’s hear to what Paul KrugmanPaul Krugman was trying to say was trying to say since 1994…since 1994…
"Asian economic miracle”.. "Asian economic miracle”..
Result of capital investment Result of capital investment (high interest rate to attract (high interest rate to attract foreign investment) foreign investment)
Growth in productivity, without Growth in productivity, without much improvement in much improvement in Total Factor productivityTotal Factor productivity needed for long-term prosperityneeded for long-term prosperity
Let’s hear to what Let’s hear to what Paul KrugmanPaul Krugman was trying to say was trying to say since 1994…since 1994…
"Asian economic miracle”.. "Asian economic miracle”..
Result of capital investment Result of capital investment (high interest rate to attract (high interest rate to attract foreign investment) foreign investment)
Growth in productivity, without Growth in productivity, without much improvement in much improvement in Total Factor productivityTotal Factor productivity needed for long-term prosperityneeded for long-term prosperity
Why it happened… Part 1Why it happened… Part 1
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Bubble TheoryBubble Theory
bubble fueled by "hot money”bubble fueled by "hot money”
More and more was required as the size of the More and more was required as the size of the bubble grewbubble grew
short-term capital flow was expensive and often short-term capital flow was expensive and often highly conditioned for quick profithighly conditioned for quick profit
Development money went in a largely Development money went in a largely uncontrolled manner to people closest to the uncontrolled manner to people closest to the political powerpolitical power
Bubble TheoryBubble Theory
bubble fueled by "hot money”bubble fueled by "hot money”
More and more was required as the size of the More and more was required as the size of the bubble grewbubble grew
short-term capital flow was expensive and often short-term capital flow was expensive and often highly conditioned for quick profithighly conditioned for quick profit
Development money went in a largely Development money went in a largely uncontrolled manner to people closest to the uncontrolled manner to people closest to the political powerpolitical power
Why it happened… Part 2Why it happened… Part 2
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Real Estate Speculation
Excessive real estate speculationExcessive real estate speculation
Chinese effect
Competition from China due to its export-oriented Competition from China due to its export-oriented reforms in 90’sreforms in 90’s
Western importers found cheaper manufacturers Western importers found cheaper manufacturers in China whose currency was depreciated relative in China whose currency was depreciated relative to the US$to the US$
Real Estate Speculation
Excessive real estate speculationExcessive real estate speculation
Chinese effect
Competition from China due to its export-oriented Competition from China due to its export-oriented reforms in 90’sreforms in 90’s
Western importers found cheaper manufacturers Western importers found cheaper manufacturers in China whose currency was depreciated relative in China whose currency was depreciated relative to the US$to the US$
Why it happened… Part 3Why it happened… Part 3
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Policy that distorts the incentives within the lender-Policy that distorts the incentives within the lender-borrower relationshipborrower relationship
Artificially high Interest rate to attract investorsArtificially high Interest rate to attract investors
Large quantities of available creditLarge quantities of available credit
Highly-Leveraged economic climateHighly-Leveraged economic climate
Asset prices pushed up to unsustainable level, and eventually collapse Asset prices pushed up to unsustainable level, and eventually collapse
Default on Debt obligationDefault on Debt obligation
Panic among LendersPanic among Lenders
Large withdrawal of creditLarge withdrawal of credit
Credit crunch and further bankruptciesCredit crunch and further bankruptcies
Depreciative pressure on credit ratesDepreciative pressure on credit rates
Potential Collapse of the marketPotential Collapse of the market Government Government enters…..enters…..
Policy that distorts the incentives within the lender-Policy that distorts the incentives within the lender-borrower relationshipborrower relationship
Artificially high Interest rate to attract investorsArtificially high Interest rate to attract investors
Large quantities of available creditLarge quantities of available credit
Highly-Leveraged economic climateHighly-Leveraged economic climate
Asset prices pushed up to unsustainable level, and eventually collapse Asset prices pushed up to unsustainable level, and eventually collapse
Default on Debt obligationDefault on Debt obligation
Panic among LendersPanic among Lenders
Large withdrawal of creditLarge withdrawal of credit
Credit crunch and further bankruptciesCredit crunch and further bankruptcies
Depreciative pressure on credit ratesDepreciative pressure on credit rates
Potential Collapse of the marketPotential Collapse of the market Government Government enters…..enters…..
Why it happened… the Complete Story
Why it happened… the Complete Story
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Policy that distorts the incentives within the lender-Policy that distorts the incentives within the lender-borrower relationship borrower relationship (continued)(continued)
Government is forced to raise Domestic interest rate to exceedingly Government is forced to raise Domestic interest rate to exceedingly highhigh
Economy becomes more fragileEconomy becomes more fragile
Government buys excess domestic currency at fixed exchange rateGovernment buys excess domestic currency at fixed exchange rateHemorrhaging foreign reserves of central banksHemorrhaging foreign reserves of central banks
Tide of fleeing capital does not stopTide of fleeing capital does not stopAuthority ceases to defend fixed exchange rateAuthority ceases to defend fixed exchange rateCurrency floats and depreciatesCurrency floats and depreciatesForeign currency-denominated liabilities grew substantially Foreign currency-denominated liabilities grew substantially (in domestic currency terms)(in domestic currency terms)More bankruptcies More bankruptcies Further deepening of the crisisFurther deepening of the crisis
Policy that distorts the incentives within the lender-Policy that distorts the incentives within the lender-borrower relationship borrower relationship (continued)(continued)
Government is forced to raise Domestic interest rate to exceedingly Government is forced to raise Domestic interest rate to exceedingly highhigh
Economy becomes more fragileEconomy becomes more fragile
Government buys excess domestic currency at fixed exchange rateGovernment buys excess domestic currency at fixed exchange rateHemorrhaging foreign reserves of central banksHemorrhaging foreign reserves of central banks
Tide of fleeing capital does not stopTide of fleeing capital does not stopAuthority ceases to defend fixed exchange rateAuthority ceases to defend fixed exchange rateCurrency floats and depreciatesCurrency floats and depreciatesForeign currency-denominated liabilities grew substantially Foreign currency-denominated liabilities grew substantially (in domestic currency terms)(in domestic currency terms)More bankruptcies More bankruptcies Further deepening of the crisisFurther deepening of the crisis
Why it happened… the complete story
Why it happened… the complete story
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Let’s assume that foreign investors buy “Thai Bond” when they invest
Exceedingly high interest rate attracts more such investment
So Bond Demand > Bond Supply and Money demand < Money Supply
Equilibrium is disturbed when Interest rate is
pushed to artificially high, higher than the optimum rate r*
With higher rate r, M/p (Money/price) decreases
Asset price falls
Govt increases Interest rate
Let’s assume that foreign investors buy “Thai Bond” when they invest
Exceedingly high interest rate attracts more such investment
So Bond Demand > Bond Supply and Money demand < Money Supply
Equilibrium is disturbed when Interest rate is
pushed to artificially high, higher than the optimum rate r*
With higher rate r, M/p (Money/price) decreases
Asset price falls
Govt increases Interest rate
Can we explain this…Can we explain this…
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Mistakes:
Goals of raising interest rates, ideally: economic growthto combat unemployment and inflationto cool an otherwise overheated economy
Contractionary PolicyContractionary Policy
Incorrect Monetary Policy, artificially raising the Rate of Interest to exceedingly high
Fiscal Policy related problem: incorrect distribution of wealth
Mistakes:
Goals of raising interest rates, ideally: economic growthto combat unemployment and inflationto cool an otherwise overheated economy
Contractionary PolicyContractionary Policy
Incorrect Monetary Policy, artificially raising the Rate of Interest to exceedingly high
Fiscal Policy related problem: incorrect distribution of wealth
Why Relevant….Why Relevant….
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Let’s see what happened to our Thai friends…
IMF unveiled a $17 billion rescue package, and another bailout package of $3.9 billion
subject to conditionality for reorganizing and restructuring, establishing strong regulatory frameworks
Tax revenue balanced the budget in 2004, 4 years ahead of schedule
Baht reached 33/US$ by 2007
Let’s see what happened to our Thai friends…
IMF unveiled a $17 billion rescue package, and another bailout package of $3.9 billion
subject to conditionality for reorganizing and restructuring, establishing strong regulatory frameworks
Tax revenue balanced the budget in 2004, 4 years ahead of schedule
Baht reached 33/US$ by 2007
Before we close…Before we close…
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Questions?Questions?
References:References:
Miles, Scott, “Understanding the Wealth of Nations”Miles, Scott, “Understanding the Wealth of Nations”
Krugman, Paul: “The Myth of Asia's Miracle: A Cautionary Fable”Krugman, Paul: “The Myth of Asia's Miracle: A Cautionary Fable”
Palma, Gabriel: “The Three Routes to Financial Crises”Palma, Gabriel: “The Three Routes to Financial Crises”
Hughes , Helen: “Crony Capitalism & East Asian Currency Financial Crises”Hughes , Helen: “Crony Capitalism & East Asian Currency Financial Crises”
Bello, Walden: “IMF's Role in the Asian Financial Crisis”Bello, Walden: “IMF's Role in the Asian Financial Crisis”
Yellen, Janet: “The Asian Financial Crisis Ten Years Later”Yellen, Janet: “The Asian Financial Crisis Ten Years Later”
Wikipedia.comWikipedia.com
newschool.edunewschool.edu
References:References:
Miles, Scott, “Understanding the Wealth of Nations”Miles, Scott, “Understanding the Wealth of Nations”
Krugman, Paul: “The Myth of Asia's Miracle: A Cautionary Fable”Krugman, Paul: “The Myth of Asia's Miracle: A Cautionary Fable”
Palma, Gabriel: “The Three Routes to Financial Crises”Palma, Gabriel: “The Three Routes to Financial Crises”
Hughes , Helen: “Crony Capitalism & East Asian Currency Financial Crises”Hughes , Helen: “Crony Capitalism & East Asian Currency Financial Crises”
Bello, Walden: “IMF's Role in the Asian Financial Crisis”Bello, Walden: “IMF's Role in the Asian Financial Crisis”
Yellen, Janet: “The Asian Financial Crisis Ten Years Later”Yellen, Janet: “The Asian Financial Crisis Ten Years Later”
Wikipedia.comWikipedia.com
newschool.edunewschool.edu
