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Asian crisis

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rosa dorn

on 23 May 2013

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Transcript of Asian crisis

The Asian Crisis two views on the crisis [16] huge capital inflows
- financial panic
- self-fulfilling run on liquitdity

(Radelet and Sachs) weaknesses in the Asian financial system
- moral hazard
- "crony capitalism"

(Krugmann; Corsetti et al....) Signs of Growing Risk slowing export growth [15]
high current account deficits [13]
Current account = National Savings - Domestic Investment Weaknesses in the economic structure productivity - little increase of output per unit of input
poor state of banking regulations
but governments guaranteed for the banks
lack of legal frameworks [11] Moral Hazard close ties between business interests and government officials [11]

- Moral hazard led to excessive, risky lending Agenda Huge Capital Inflows... according to Radelet and Sachs the defining element of the crisis [15] Signs that have been missed - Currency & Maturity mismatch rapid expansion of commercial bank credit
growing short-term foreign debt [15] source: (Institute of International Finance) in [15] macro- and microeconomic effects
depreciation - nominal and real exchange rate [15]
interest rates soared Factors contributed to capital inflows
high economic growth - gave confidence to investors [13] nominal exchange rates pegged to the US$
predictable exchange rates reduced perceived risk source: [13] Effects of huge capital inflows [15]
real appreciation - loss of competitiveness
pressure on underdeveloped financial systems ... and the rapid reversal of private capital inflows according to [12] Beginning of the crisis was largely unforeseen [13]
July 2, 1997 - devaluation/floating of the Thai Baht [8; 10; 11]
speculators attacked the Thai baht by selling off
baht-denominated assets in the following months other Asian countries experienced similar debacles [8; 11] Contagion - the "Asian flu" [8] on July 11 - the Philippines peso
on July 14 - the Malaysian ringitt
on August 14 - the Indonesian rupiah

even South Korea [10]

on December 19 - the Japanese stock market collapsed
vicious cycle [11]

Singapore, Hong Kong, China and Taiwan
experienced slower growths

experts were surprised by this contagion [4] Effects of the Crisis source: (Bloomberg Financial Markets, LP; International Finance Corporation; and Reuters) in [7] The IMF Handling of the Crisis Indonesia, Thailand and Korea [5]
components of the strategy [5]
Financing, Macroeconomic policies and Structural reforms

six key actions [15]
immediate bank closures
restoration of the minimum adequacy standards
tight domestic credit
debt repayment
fiscal contraction
non-financial sector structural changes didn't improve the situation - sharp economic downturn [11; 15] Indonesia Thailand South Korea Malaysia Philippines Indonesia hit by contagion [15]
first they managed the crisis very well
but than hit the worst [11]
collapse of confidence in the nation's bank
rupiah had lost 85% of it's original value by 1998

mass unemployment
rising food prices and food shortages - lead to ethnic violence President Suhrato had to resign in May 1998 [10] End of the crisis currencies stabilized and interest rates decrease
crisis was "V-shaped" [11] but the crisis effected many other countries
fear of worldwide depression in Europe
even America was hit by contagion

in the end it reached Brazil LTCM got into trouble Lessons learned Have the lessons learned been applied? Could we have learned from the Asian crisis? policy recommendation for preventing [8; 1]
greater transparency and strengthen supervision
paying attention to currency and maturity mismatches
improved risk assessment & reduced leverage ratio
capital controls
international lender of last resort
private - sector credit lines
private - sector involvement in crisis resolution
greater flexibility in exchange rates from the viewpoint of the Asian countries [1]
never rely on Wall Street (capital inflows)
and Washington (social costs of restorting to IMF rescue) current account remained in surpluses [9, 11]
better external short-term debt ratio

improved economic data & corporate governance [1]

Asia's resilience during the global finance crisis [6] self - fulfilling prophecy [2] Bibliography [1] Ariyoshi, A. (2013). Lessons Learned, Lessons Not Learned and the Lessons to Be Learned: From the Asian Crisis to the European Crises. Tokyo: Springer Japan.
[2] Burnside, C., Eichenbaum, M., & Rebelo, S. (August 1999). Prospective Deficits and the Asian Currency Crisis.
[3] Corbett, J., & Vines, D. (1998). The Asian Crisis: Competing Explanations. CEPA Working Paper Series III .
[4] Girard, E. C., & Rahman, H. (2002). The Effect of the Asian Financial Crisis on Stock Returns, Volatility and Market Integration in the Region. Studies in Economics and FInance , Vol 20 (1), 51 - 75.
[5] IMF. (kein Datum). Asia and the IMF. Abgerufen am 10. May 2013 von IMF: https://www.imf.org/external/np/exr/facts/asia.htm
[6] IMF. (kein Datum). Recovery from the Asian Crisis and the Role of the IMF. Abgerufen am 08. May 2013 von http://www.imf.org/external/np/exr/ib/2000/062300.htm
[7] IMF. (June 1998). The Asian Crisis Causes and Cures. Finance & Development .
[8] HALE, G. (February 2011). Could We Have Learned from the Asian Financial Crisis of 1997–98? FRBSF Economic Letter .
[9] Kanaoka, M. (2012). Have The Lessons Learned from The Asian Financial Crisis Been Applied Effectively in Asian Economies? International Journal of Economics and Finance , Vol. 4 (2).
[10] Kaminsky, G. L., & Sergio, S. (1999). What triggers market jitters? World Bank article .
[11] Krugmann, P. R., Obstfeld, M., & Melitz, M. (2012). International Economics. Pearson Education Limited.
[12] Ohono, K. (kein Datum). The Asian Financial Crisis, 1997-98. Abgerufen am 08. May 2013 von http://www.grips.ac.jp/teacher/oono/hp/lecture_F/lec11.htm
[13] Pilbeam, K. (2001). The East Asian Financial Crisis: Getting to the Heart of the Issues. Managerial Finance , Vol. 27.
[14] Shen, C.-H., & Lin, M.-R. (2011). The determinants of cross-border consolidation in eight Asian countries: Before and after the Asian financial crisis. Journal of Multinational Financial Management .
[15] Radelet, S., & Sachs , J. (2000). The Onset of the East Asian Financial Crisis. In P. Krugmann, Currency Crisis (S. 105 - 162). Chicago: University of Chicago Press.
[16] The Federal Reserve Bank of San Francisco. (7. August 1998). The Federal Reserve Bank of San Francisco. Abgerufen am 10. 05 2013 von FRBSF Economic Letter - What Caused East Asia's Financial Crisis? Thank you for your attention!
Any questions? important differences [5; 6; 7; 8]
more mature and stricter regulation
more resilient to shocks - supervisory and insurance systems similarities - lessons that could have been learned [1]
crisis prevention: danger of incentives created by bank regulations and central bank policies
greater transparency and surveillance level of financial support
adverse spiral between fiscal and financial crisis
power of contagion crisis management: Weaknesses in the Economic Structure
Moral Hazard
Signs of Growing Risk
Capital Inflows
Signs that have been missed
Beginning of the Crisis
Contagion - the "Asian-flu"
Effects of the Crisis
End of the Crisis
Lessons learned - have they been applied?
Could we have learned from the Asian Crisis?
Bibliography "Original Sin" - foreign currency denominated debts [11] deficit = borrowing from abroad [11] (source: [5]) countries that were hit the hardest had high current account deficits financial deregulation - no adequate supervision [15] International Economics - Rosalie Dorn
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