3. Group-1
Name
Sunanda Sarker
Md. Foysal Ahmed
A.S.M. Misbaul Islam
Md. Ataur Rahman
A. B. M. Kalim Ullah
Ahsanul Karim
Roll No.
161201
161204
161220
161221
161245
161251
4. Agenda..
Crisis in Thailand
Crisis timeline
The dilemma
Asian
Weaknesses
Impact of Asian
Crisis on different
countries
Case Questions
5. Countries involved..
Thailand
Singapore
Philippine
Taiwan
Indonesia
Hong Kong
Russia
South Korea
China
Japan
Latin America
Europe
6. Thailand Case
May 1997: Thailand spends billions of its foreign reserves to defend the
Thai baht against speculative attacks
In case of Thailand:
Allowing too many short-term capital flows to accumulate with a high
degree of currency speculation,
Outflow of funds expedited the weakening of the bath, as foreign
investors exchanged theirbaht fortheirhome currencies,
Sustaining a fixed exchange rate when it was no longersuitable,
Lack of sufficient risk management system at the national level as well
as regional level in case of bank lending (defaulted loan piled up over
$30 billion),
Products were not priced as competitively to US importers,
Concerns of large current account deficits,
Weakness in the Thai financial system, Thai govt.’s heavy borrowing
made the debt expensive to public.
Speculative attacks brings down investor confidence causing- “capital
flight”
7. Crisis Timeline..
July 1997
Thailand is forced to devalue the baht, which
drops the value of the baht by as much as 20%--
a record (had actually attempted a 15%
controlled devaluation)
Malaysia’s central bank intervenes to defend
the ringgit.
The Philippine peso is devalued. Indonesia
widens its trading band forthe rupiah in a move
to discourage speculators
The Singapore dollar starts a gradual decline.
9. Crisis timeline..Contd/.
August1997
Thailand agrees to adopt tough economic
measures proposed by the IMF in return for a
$17 billion loan from the international lender
and Asian nations. The Thai government
closes 42 ailing finance companies and
imposes tax hikes as part of the IMF's
insistence on austerity
Indonesia abandons the rupiah's trading band
and allows the currency to float freely,
triggering a plunge in the currency
10. Crisis timeline..Contd/.
October1997
Indonesia asks the IMFand World Bank forhelp after
the rupiah falls more than 30% in two months,
despite interventions by the country's central bank to
prop up the currency
Hong Kong's stock index falls 10.4% afterit raises
bank lending rates to 300% to fend off speculative
attacks on the Hong Kong dollar. The plunge on the
Hong Kong Stock Exchange wipes $29.3 billion off the
value of stock shares.
The South Korean won begins to weaken
The IMFagrees to a loan package forIndonesia that
eventually swells to $40 billion. In return, the
government closes 16 financially insolvent banks and
11. Crisis timeline..Contd/.
November1997
Bank of Korea allows the won to fall below 1000 against
the dollar(record low)
December1997
IMF approves a $57 billion bailout package to the South
Korea
As part of IMF economic restructuring plan, the Thai
government closes 56 insolvent finance companies (30,000
white collarjobs lost)
South Korea’s first president elected from country’s
opposition party. In days the won hits new low.
$3 billion emergency loan released by the world bank ,
12. Crisis timeline..Contd/.
January 1998:
Release of Indonesia budget plan pulls the rupiah to an all-
time low
Inflation rises. Prices for basic food staples in Indonesia
increase by as much as 80%
The rupiah plunges to 12,000 rupiah against the dollar
June 1998
Japan announces that its economy is in a recession
Yen falls to levels near 144 to the dollar. US treaury and
Federal reserve intervenes to prop up the yen
August 1998
Wall Street reacts; the Dow plunges 300 points in its third
biggest loss
14. How Interest rates changed during the Asian Crisis
(Annualized interest rates as of June 1997 and of
June 1998 are represented by Number before
slash and Number after slash respectively)
15. Dilemma..
Drop in currencies
Raise import prices leading to
inflation threat
Threat that potentially viable banks
and companies may become bankrupt
Defend the currency
would mean to raise interest rates
Threat of economic slump resulting in
the failure of banks
16. Asian Weaknesses..
Weaknessesthat becameapparent after thecrisis:
1. Productivity: economic expansion beforecrisis
later explained by therapid growth of production
inputs(capital and labor) – but relatively little
increasein productivity
2. Banking Regulation: Ineffectivegovernment
supervision
3. Exchange rate regimes- Mostly pegged exchange
ratesystem
4. Legal Framework: lack of structured legal
framework to deal with bankruptcy
17. Impact of Asian Crisis All Over
the World ..
Currency value declined
Interest rate increased
Demand and national income reduced
Bad loans piled up
Cost of borrowing increased
Stock prices reduced in Hong Kong
Large firms in Japan announced shut down
Export oriented countries rely on Asian products
heavily affected by this crisis
Bond rating as well as bond price reduced in
Latin America
18. Case Questions..
1. Was the depreciation of the Asian currencies during
the Asian crisis due to trade flows or capital flows?
Why do think the degree of movement over a short
period may depend on whether the reason is trade
flows or capital flows?
2. Why do you think the Indonesia rupiah was more
exposed to an abrupt decline in value than the
Japanese yen during the Asian crisis (even if their
economies experienced the same degree of
weakness)?
3. During the Asian crisis, direct intervention did not
prevent depreciation of currencies. Offer your
explanation for why the interventions did not work.
19. 4. During the Asian crisis, some of the local firms in Asia
borrowed dollars rather than local currency to support local
operations. Why would they borrow dollars when they really
needed their local currency to support operations? Why did
this strategy backfire?
5. The Asian crisis showed that a currency crisis could affect
interest rates. Why did the crisis put upward pressure on
interest rates in Asian countries? Why did it put downward
pressure on U.S. interest rates?
6. It is commonly argued that high interest rates reflect the
expectation of high inflation. Based on this theory, how
would expectations of Asian exchange rates change after
interest rates in Asia increased? Why? Is the underlying
reason logical?
Case Questions..
20. 7. During the Asian crisis, why did the discount of the forward rate of
Asian currencies change? Do you think it increased or decreased?
Why?
8. During the Hong Kong crisis, the Hong Kong stock market declined
substantially over a four-day period due to concerns in the foreign
exchange market. Why would stock prices decline due to concerns
in the foreign exchange market? Why would some countries be
more susceptible to this type of situation than others?
9. On August 26, 1998, the day that Russia decided to let the ruble
float freely, the ruble declined by about 50 percent. N the following
day, called bloody Thursday, stock markets around the world
(including the U.S.) declined by more than 4 percent. Why do you
think the decline in the ruble had such a global impact on stock
prices? Was the market’s reaction rational? Would the effect have
been different if the ruble’s plunge had occurred in an earlier time
period, such as four years earlier?
Case Questions..
21. 10. Normally, a weak local currency is expected to stimulate the
local economy. Yet, it appeared that the weak currencies of
Asia adversely affected their economies. Why do you think
the weakening of the currencies did not initially improve the
economies during the Asian crisis?
11. During the Asian crisis, Hong Kong and China successfully
intervened (by raising their interest rates) to protect their
local currencies from depreciating. Nevertheless, these
countries were also adversely affected by the Asian crisis.
Why do you think the actions to protect the values of their
currencies affected these countries’ economies. Why do
you think the weakness of other Asian currencies against
the dollar and the stability of the Chinese and Hong Kong
currencies against the dollar adversely affected their
economies?
Case Questions..
22. 12. Why do you think the values of bonds issued by Asian governments
declined during the Asian crisis? Why do you think the values of
Latin American bonds declined in response to the Asian crisis?
13. Why do you think the depreciation of the Asian currencies adversely
affected U.S. firms? (There are at least three reasons, each related
to a different type of exposure of some U.S. firms to exchange rate
risk.)
14. During the Asian crisis, the currencies of many Asian countries
declined even though their governments attempted to intervene with
direct intervention or by raising interest rates. Given that the abrupt
depreciation of the currencies was attributed to an abrupt outflow of
funds in the financial markets, what alternative Asian government
action might have been more successful in preventing a substantial
decline in the currencies’ values? Are there any possible adverse
effects of your proposed solution?
Case Questions..
East Asia was a booming part of the world. With high rates of saving and investment; rapidly improving educational levels among the work force; and if not free trade, at least a high degree of openness to and integration with world markets. Capital Market liberalizations 1900s, increased financial transactions through the banks. Shift from an inward-looking, import-substitution development strategy to one that emphasized exports. During the 1990s: massive capital inflows were accumulated progressively along with a high interest rate differential and under fixed exchange rate regime, including capital account deregulation
Although the capital markets were liberalized, the financial sector was poorly managed and underdeveloped. The circumstances worsened through short-term borrowing abroad, primarily to finance long-term projects, leading to currency and maturity mismatches. As a result, a balance-sheet crisis occurred due to sudden capital outflows. The foreign short-term liabilities had exceeded international reserves in 1996. As soon as the baht was floated, foreign debt in local currency overshot, the sovereign rate of Thailand decreased, and then investors’ sentiments were adversely affected. The banks held many short-term liabilities denominated in foreign currencies, and the sharp increase in the value of the liabilities after the devaluation led to a further deterioration in the banks’ balance sheet. In all this, the IMF stepped in and the countries were able to prevent a bank panic by the cushion in aid provided that protected depositors. In all the ability of the bank to lend was sharply reduced. The cost of the bailout for the banking system was more than 15% of GDP in these countries and more than 50% of GDP in Indonesia, about 13% in Philippines. Liquidity crunch from capital flight
Thailand: real estate bubble burst, then the stock market tumbled. It began with a currency crisis even though the nations had weaknesses that only worsened the crisis. George Soros bets on the baht- speculation about a devaluation let to an accelerating loss of foreign reserves. This leads to the speculation against neighboring country currencies- Malaysia, Indonesia and Korea. Crisis worsened by the economic slump in Japan. The economies were highly dependent on trade, partly from the fact that domestic banks and companies had large debts denominated in dollars. Faced with the dilemma that allowing their currencies to drop would raise import prices, leading to inflation As a counterpart to the large capital inflows several of the Asian countries began running large current account deficits
South Korea was the world’s 8 th largest economy, and one of the strongest. But as it had failed to deal with its banking problems, and the market knew that its banks were wea
January 12: Asia’s largest private investment bank, the Hong Kong- based Peregrine Investments, files for liquidation. The company is left badly exposed from its loan in investments in Indonesia. June: Japan and the US spend some $6 billion to buy yen in order to strengthen it. IMF’s efforts of advice on tighter fiscal and monetary policies were intended to stem the capital outflow but actually caused bankruptcies and killed the growth that was essential for private sector recovery.
Drop in currencies make exports attractive but imports more expensive. The east Asian countries were highly dependent on trade. Also domestic banks and companies had large debts denominated in dollars. So a drop in the domestic currency means foreign currency becomes more expensive, relatively increasing the value of the dollar denominated debts even though the debts are the same. The huge influx of foreign capital happened with the market liberalization. The differential in interest rates played in favor of the domestic market and investor began to spend more and more in these economies.
lack of supervision by bank regulators and lack of expertise in screening and monitoring borrowers at banking institutions, losses on the loans began to mount ( An estimated 15% to 35% of all bank loans turned sour in Thailand, Indonesia, Malaysia, and south Korea), causing an erosion of bank’s net worth (capital). As a result of this erosion, banks had fewer resources to lend and this lack of lending eventually led to a contraction in economic activity. Corruption..close ties between business interests and government officials appear to have helped foster considerable moral hazard in lending. All wanted financial liberalization but lacked proper government supervision. Heavy reliance on banks due to underdeveloped capital markets Pegged exchange rate made the adjustment process more difficult