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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.

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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 is this relevant

Why talk about a crisis that’s over now?

Anything we should learn from this?

Once upon a time

Once upon a time….

Summer of 1997

Bangkok, Thailand, East Asia

Before it started

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$

What happened in thailand

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….

What happened in thailand1

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

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

Who were hit…

What happened in indonesia

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

What happened in s korea

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

What happened in philippines

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

What happened in japan

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

What happened in us

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

Why it happened part 1

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

Why it happened part 2

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

Why it happened part 3

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$

Why it happened the complete story

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…..

Why it happened the complete story1

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

Can we explain this

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

Why relevant

Why Relevant….


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

Before we close

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




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”