1 / 21

East Asian Currency Crisis, 1997

East Asian Currency Crisis, 1997. Presented by Irene Saldanha Josh Brubaker Raj Debnath Troy Montgomery. Why is this relevant. Why talk about a crisis that’s over now? Anything we should learn from this?. Once upon a time…. Summer of 1997 Bangkok, Thailand, East Asia.

hasana
Download Presentation

East Asian Currency Crisis, 1997

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. East Asian Currency Crisis, 1997 Presented by Irene Saldanha Josh Brubaker Raj Debnath Troy Montgomery

  2. Why is this relevant Why talk about a crisis that’s over now? Anything we should learn from this?

  3. Once upon a time…. Summer of 1997 Bangkok, Thailand, East Asia

  4. Before it started… From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's currency, the baht From 1985 until July 1997, Baht was pegged at 25 US$

  5. What happened in Thailand… Mid-May ‘97: Thai Baht was hit by massive speculative attack Spark: End-June ‘97, Thai Prime Minister declared that he would not devaluate the Baht Thai Government failed to defend the Baht against International speculators Financial Crisis hits….

  6. What happened in Thailand… Booming Thai Economy ground to a halt, contracted by 1.9% Massive lay-offs in Finance, Real Estate & Construction: unemployment rate all-time high Huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers sent back Stock market dropped 75%, “Finance One” collapsed Baht reached 56 US$ in Jan ‘98

  7. 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 Who were hit…

  8. What happened in Indonesia… Drastic devaluation of the rupiah: from 2,000 to 18,000 for 1 US$ Sharp price increase Wake of widespread rioting: 500 deaths in Jakarta alone Governor, Bank Indonesia was sacked President Suharto was forced to step down in May 1998 after 30 years in power

  9. What happened in S.Korea… Drastic devaluation of the won: from 1,000 to 1,700 for 1 US$ Credit rating of the country (Moody’s): A1 to B2 National Debt-to-GDP ratio more than doubled Major setback in Automobile industry

  10. What happened in Philippines.. Growth dropped to virtually zero in 1998 Peso fell significantly, from 26/US$ to even 55/US$ President Joseph Estrada was forced to resign

  11. What happened in Japan… 40% of Japan’s export go to Asia, so it was affected even if the economy was strong Japanese Yen fall to 147 as mass selling began GDP real growth rate slowed from 5% to 1.6% Some companies went Bankrupt Being world’s largest currency holder, Japan could bounce back quickly

  12. What happened in US... Markets did not collapse, but were severely hit NYSE briefly suspended trading, for the first time Dow Jones Industrial Average suffered as 3rd biggest point losses ever Relationship with Japan changed forever: US stopped supporting the highly artificial Trade environment and Exchange Rate

  13. Why it happened… Part 1 Let’s hear to what Paul Krugman was trying to say since 1994… "Asian economic miracle”.. Result of capital investment (high interest rate to attract foreign investment) Growth in productivity, without much improvement in Total Factor productivity needed for long-term prosperity

  14. Why it happened… Part 2 Bubble Theory bubble fueled by "hot money” More and more was required as the size of the bubble grew short-term capital flow was expensive and often highly conditioned for quick profit Development money went in a largely uncontrolled manner to people closest to the political power

  15. Why it happened… Part 3 Real Estate Speculation Excessive real estate speculation Chinese effect Competition from China due to its export-oriented reforms in 90’s Western importers found cheaper manufacturers in China whose currency was depreciated relative to the US$

  16. Why it happened… the Complete Story Policy that distorts the incentives within the lender-borrower relationship Artificially high Interest rate to attract investors Large quantities of available credit Highly-Leveraged economic climate Asset prices pushed up to unsustainable level, and eventually collapse Default on Debt obligation Panic among Lenders Large withdrawal of credit Credit crunch and further bankruptcies Depreciative pressure on credit rates Potential Collapse of the market Government enters…..

  17. Why it happened… the complete story Policy that distorts the incentives within the lender-borrower relationship (continued) Government is forced to raise Domestic interest rate to exceedingly high Economy becomes more fragile Government buys excess domestic currency at fixed exchange rate Hemorrhaging foreign reserves of central banks Tide of fleeing capital does not stop Authority ceases to defend fixed exchange rate Currency floats and depreciates Foreign currency-denominated liabilities grew substantially (in domestic currency terms) More bankruptcies Further deepening of the crisis

  18. Can we explain this… 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

  19. Why Relevant…. Mistakes: Goals of raising interest rates, ideally: economic growth to combat unemployment and inflation to cool an otherwise overheated economy Contractionary Policy Incorrect Monetary Policy, artificially raising the Rate of Interest to exceedingly high Fiscal Policy related problem: incorrect distribution of wealth

  20. Before we close… 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

  21. Questions? References: Miles, Scott, “Understanding the Wealth of Nations” Krugman, Paul: “The Myth of Asia's Miracle: A Cautionary Fable” Palma, Gabriel: “The Three Routes to Financial Crises” Hughes , Helen: “Crony Capitalism & East Asian Currency Financial Crises” Bello, Walden: “IMF's Role in the Asian Financial Crisis” Yellen, Janet: “The Asian Financial Crisis Ten Years Later” Wikipedia.com newschool.edu

More Related