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Asian Financial Crisis

Asian Financial Crisis. Group 8 Ali Ahadi Russell Kucinski Wu Meng Heng. Agenda. Asian financial crisis 1997 – 98 Data History events Causes Speculators Role of IMF Conclusion Q&A. Exchange rate (to dollar). Total GNP . Events in 97. Events in 98 . Causes.

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Asian Financial Crisis

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  1. Asian Financial Crisis Group 8 Ali Ahadi Russell Kucinski Wu MengHeng

  2. Agenda • Asian financial crisis 1997 – 98 • Data • History events • Causes • Speculators • Role of IMF • Conclusion • Q&A

  3. Exchange rate (to dollar)

  4. Total GNP

  5. Events in 97

  6. Events in 98

  7. Causes • Poor Regulation of the Economy • Macroeconomic Policy: Fixed Exchange Rates • Over-Inflated Asset Prices • Over-Dependence on Short-Term Foreign Funds • Unsustainable Current Account Deficits

  8. Speculation? Who are speculators? Large International financial institutions, banks and fund managers attacking central banks Why? They short sale currencies and make the central bank run out of foreign reserves. This breaks the equilibrium among currencies

  9. George Soros • Soros Fund Management (est. 1969) • Advises Quantum Group of Funds • “the Man Who Broke the Bank of England” • Blamed for sharp devaluation of southeastern currencies • If you had invested $1k in 1969, you would have $1 mil 25 years later (32% growth/yr.) • In July of 1997, Soros Fund Profits doubled!

  10. Speculators Take Actions When… Financial markets are ruled by humans emotional reactions than using logical calculation! When a developing country starts to financially liberalize before its institutions or knowledge base is prepared, it opens itself to the possibility of shocks and instability with inflows and outflows of funds!

  11. How Did Speculators Take Advantage of Asian Markets? • Macroeconomic indicators: • Large current account deficits • Declining exports • Excessive lending to certain economic sectors • Weak banking systems, coupled with inadequate national policies governing the outflow of capital • High levels of short-term debt

  12. Nations Under Speculation Attacks: • Thailand • Malaysia • Hong Kong ($1b=D, $80 b in FR) • Philippines • China (Non-Convertible Currency) • South Korea • Japan

  13. What Happened in Thailand? • On May 14 & 15, Soros attacked Thai Baht • Borrowed and sold Thai baht, receiving US dollars in exchange • Financial crises started when Baht was not defended • The baht fell, speculators needed much less dollars to repay the baht loans, thus making large profits • Thai government used US$20 billion of foreign reserves • The Central Bank ran out of Foreign Reserves

  14. Previous Financial Crises • What happened in East Asia is not peculiar, but has already happened to: • Many Latin American countries in 1980s • Sweden and Norway in the early 1990s • Mexico in 1994 • Southeast Asia in 1997 • Russia in 1998 They faced sudden currency depreciations due to speculative attacks or large outflows of funds

  15. IMF History and Background • 1944 – 44 governments establish a framework for global economic development. • 1973 – currencies of major powers allowed to float • 1997 – Asian Financial Crisis • 2008 – IMF faces budget shortfall • 2009 – G-20 London – members pledge to increase supplemental cash to $500B • 2010 – members agree to shift 6% voting shares to developing nations. • Currently 187 member nations

  16. IMF and the Asian Financial Crisis • Imposition of “Fast Track Capitalism” • Liberalization of financial sectors • Raise domestic interest rates bolstering bank capital • Peg national currencies to the dollar to protect foreign investors • - “Conditionalities” and austerity measures inhibit the ability of countries to develop their home economies • Encouraged devaluation of currencies making imports more expensive • Became known as “Lender of Last Resort.” • Interest rates above market average.

  17. Criticism of the IMF • Largely controlled by developed nations • “New Colonialism” austerity measures inhibit long term economic growth • Western style economic reforms and greater ownership by foreign firms • Monetarist priorities overlook public health, environment, and poverty • Repayment policies do not foster long-term growth

  18. Conclusion 1. A government should settle its own policies to protect its economy structure. 2. Speculators seek weakness 3. The IMF: an antiquated system

  19. Q & A ?!?

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