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Financial Crises in 1990’s
Presented By : Jyoti Manda
Vivek Agarwal
Sandeep Mohan
Samaksh Malik
Introduction
v
Financial crises arises when some financial institutions or assets
suddenly lose a large part of their valu...
East Asian Financial Crisis
A series of currency declines in Asian
nations that started in the summer of
1997 in Thailand....
Crises Overview
May, 1997 : Foreign speculators attack the baht. Thailand spends 90% of
foreign reserves to defend the bah...
Dec.31,1997: The index of Thailand’s stock market (The SET), ultimately
declines from 787 in January 1997 to a low of 337 ...
Causes of Crises
External factors 1
Increasing trend of capital flow into emerging markets in Asia and
Latin America in th...
External factor 2External factor 2
Continuous deficits in the current account, exceeding 5% of GDP before
the crisis, affe...
ArticleArticle
The Financial Crises in Japan:
Causes and Policy Reactions by the Bank of Japan
The Financial Crises in Jap...
Continuing….Continuing….
Objective: Determine how severely Japan was affected by the 2012 financial
crisis and whether the...
Case study 1
A strong output decline led to much higher unemployment and more
poverty in South East Asia. Below chart and ...
Output and inflation in Asian crises countries, 1994-1998
(Percentage charge over previous year)
Output and inflation in A...
• In Indonesia, output contracted
even more sharply at an
annualized rate of almost 20
per cent in the second half of
1998...
The output decline caused unemployment to rise to a projected 15 per
cent in Indonesia and 7.5 and 6 per cent in the Repub...
q
Worst case estimates (which suggested that poverty would double)
seem to prove exaggerated but higher unemployment has
c...
Case study 2Case study 2
The direction and composition of trade adjusted to changes in the
exchange rate and in the econom...
Continuing….
q Above Table illustrates the overall fall in imports and the change in
import structure in the Republic of Korea between ...
Article from The Hindu
Who actually responsible for the 1991 balance of payments crises? RagEEv
Gandhi or V.P. Singh?
Who ...
q But Rajiv, reeling from the Bofors scandal in which he had been accused
of accepting a Rs. 64 crore bribe, was contempla...
q Credit to Indian dried up completely. Then, to make matters worse, the V.P.
Singh government fell and Rajiv agreed to su...
References
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  1. 1. Financial Crises in 1990’s Presented By : Jyoti Manda Vivek Agarwal Sandeep Mohan Samaksh Malik
  2. 2. Introduction v Financial crises arises when some financial institutions or assets suddenly lose a large part of their value. There are a number of different types of crises: q Banking crises (runs or related difficulties) q Speculative bubbles and crashes (stock markets, real estate) q Currency crises; isolated crises and contagion A large number of institutions or assets behave in a non-sustainable way.
  3. 3. East Asian Financial Crisis A series of currency declines in Asian nations that started in the summer of 1997 in Thailand. The crisis, also known as the Asian Contagion, spread to other Asian markets, affecting other markets throughout the world as well. .
  4. 4. Crises Overview May, 1997 : Foreign speculators attack the baht. Thailand spends 90% of foreign reserves to defend the baht against speculative attack. July 2, 1997: Thailand changes its exchange rate system from fixed exchange rate to Managed-floated. At the same time, the Thai government also requests "technical assistance" from the IMF. Aug. 5, 1997: Thailand receives a $17 billion loan from the IMF and agrees to adopt tough Economic measures in return. Dec. 8, 1997: 56 insolvent finance companies and one commercial bank are closed. The remaining financial institutions suffer from financial panic. May, 1997 : Foreign speculators attack the baht. Thailand spends 90% of foreign reserves to defend the baht against speculative attack. July 2, 1997: Thailand changes its exchange rate system from fixed exchange rate to Managed-floated. At the same time, the Thai government also requests "technical assistance" from the IMF. Aug. 5, 1997: Thailand receives a $17 billion loan from the IMF and agrees to adopt tough Economic measures in return. Dec. 8, 1997: 56 insolvent finance companies and one commercial bank are closed. The remaining financial institutions suffer from financial panic. Crises Overview
  5. 5. Dec.31,1997: The index of Thailand’s stock market (The SET), ultimately declines from 787 in January 1997 to a low of 337 in December of that year. Thai economy turns into recession. 1997-1998: Thai crisis spreads quickly from Thailand to other countries in the region including Malaysia, Indonesia, Philippines , South Korea and Japan. Continuing….
  6. 6. Causes of Crises External factors 1 Increasing trend of capital flow into emerging markets in Asia and Latin America in the 1990s Financial liberalization by Thailand: q No interest rate ceilings, Bangkok International Banking Facility (BIBF), non-resident baht account. q More direct borrowing from abroad by large businesses (not through banks) q Speculative investment in stock market and real estate External factors 1 Increasing trend of capital flow into emerging markets in Asia and Latin America in the 1990s Financial liberalization by Thailand: q No interest rate ceilings, Bangkok International Banking Facility (BIBF), non-resident baht account. q More direct borrowing from abroad by large businesses (not through banks) q Speculative investment in stock market and real estate
  7. 7. External factor 2External factor 2 Continuous deficits in the current account, exceeding 5% of GDP before the crisis, affecting the confidence in repayment ability. Continuous deficits in the current account, exceeding 5% of GDP before the crisis, affecting the confidence in repayment ability. External factor 3External factor 3 Stagnant exports in 1996 because: q The baht was overvalued: “real appreciation” of baht (higher price of nontrade goods to traded goods). q Slowdown in export markets for electronics q Competition from China q The era of “cheap labour” is over Stagnant exports in 1996 because: q The baht was overvalued: “real appreciation” of baht (higher price of nontrade goods to traded goods). q Slowdown in export markets for electronics q Competition from China q The era of “cheap labour” is over q Increase in international reserves, but more rapid increase in short- term Debts.
  8. 8. ArticleArticle The Financial Crises in Japan: Causes and Policy Reactions by the Bank of Japan The Financial Crises in Japan: Causes and Policy Reactions by the Bank of Japan AbstractAbstract q This paper describes the transmission of the 2012 financial crisis to Japan and compares the monetary policy reactions by the Bank of Japan (BoJ) with those during the 1990s, and with reactions by other major central banks. q q It first reviews the recent literature on the origins and transmission mechanism of financial crises. q q Considered how the financial crises was transmitted to Japan and described the response by BoJ (Bank of Japan). q q Analysed the lessons that have been learnt by the BoJ and other central banks from the financial crises of the 1990s. q This paper describes the transmission of the 2012 financial crisis to Japan and compares the monetary policy reactions by the Bank of Japan (BoJ) with those during the 1990s, and with reactions by other major central banks. q q It first reviews the recent literature on the origins and transmission mechanism of financial crises. q q Considered how the financial crises was transmitted to Japan and described the response by BoJ (Bank of Japan). q q Analysed the lessons that have been learnt by the BoJ and other central banks from the financial crises of the 1990s.
  9. 9. Continuing….Continuing…. Objective: Determine how severely Japan was affected by the 2012 financial crisis and whether the Japanese authorities reacted differently to the recent crisis, than during the 1990s or to the actions of authorities in other countries. Objective: Determine how severely Japan was affected by the 2012 financial crisis and whether the Japanese authorities reacted differently to the recent crisis, than during the 1990s or to the actions of authorities in other countries. Result: Research revealed that Japanese banks were barely involved in the production and distribution of subprime-related products and explained how the financial crisis was transmitted to Japan through capital outflows. Result: Research revealed that Japanese banks were barely involved in the production and distribution of subprime-related products and explained how the financial crisis was transmitted to Japan through capital outflows. Argument: Japanese authorities reacted differently to the recent financial crisis than other central banks, not because Japan was hit less severely by the current crisis, but because Japan had indeed learned from its experiences during the first crisis. Argument: Japanese authorities reacted differently to the recent financial crisis than other central banks, not because Japan was hit less severely by the current crisis, but because Japan had indeed learned from its experiences during the first crisis.
  10. 10. Case study 1 A strong output decline led to much higher unemployment and more poverty in South East Asia. Below chart and the graph illustrate the economic and social costs of the Asian crisis. A strong output decline led to much higher unemployment and more poverty in South East Asia. Below chart and the graph illustrate the economic and social costs of the Asian crisis. Economic and financial implications of the Asian financial crisesEconomic and financial implications of the Asian financial crises
  11. 11. Output and inflation in Asian crises countries, 1994-1998 (Percentage charge over previous year) Output and inflation in Asian crises countries, 1994-1998 (Percentage charge over previous year) • Real economic growth in the Republic of Korea, Malaysia, the Philippines and Thailand declined from a regional average of 7–8 per cent before the crisis to negative 7 per cent by the second and third quarter of 1998 before improving slowly in the fourth quarter of 1998. • Real economic growth in the Republic of Korea, Malaysia, the Philippines and Thailand declined from a regional average of 7–8 per cent before the crisis to negative 7 per cent by the second and third quarter of 1998 before improving slowly in the fourth quarter of 1998.
  12. 12. • In Indonesia, output contracted even more sharply at an annualized rate of almost 20 per cent in the second half of 1998. • The output decline caused unemployment to rise to a projected 15 per cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and Thailand, respectively. • In Indonesia, output contracted even more sharply at an annualized rate of almost 20 per cent in the second half of 1998. • The output decline caused unemployment to rise to a projected 15 per cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and Thailand, respectively. Continuing….
  13. 13. The output decline caused unemployment to rise to a projected 15 per cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and Thailand, respectively. q Growth is likely to remain very limited in 1999, and unemployment is not likely to fall significantly before 2000. q q Despite the considerable devaluations, inflation was successfully contained in the region, and remained at single digit levels in Malaysia, Thailand, the Republic of Korea and the Philippines. q q In Indonesia, the spectre of hyperinflation was probably eradicated by the end of 1998 as well, despite inflation reaching annualized rates of 80 per cent in the second half of that year. q q Before the crisis, the share of the population living below the poverty line was 11 to 16 per cent in the three countries for which data are available. q The output decline caused unemployment to rise to a projected 15 per cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and Thailand, respectively. q Growth is likely to remain very limited in 1999, and unemployment is not likely to fall significantly before 2000. q q Despite the considerable devaluations, inflation was successfully contained in the region, and remained at single digit levels in Malaysia, Thailand, the Republic of Korea and the Philippines. q q In Indonesia, the spectre of hyperinflation was probably eradicated by the end of 1998 as well, despite inflation reaching annualized rates of 80 per cent in the second half of that year. q q Before the crisis, the share of the population living below the poverty line was 11 to 16 per cent in the three countries for which data are available. q
  14. 14. q Worst case estimates (which suggested that poverty would double) seem to prove exaggerated but higher unemployment has certainly caused much hardship especially in urban areas, as each wage earner often has a large family to feed (World Bank,1999). q q Rural areas sometimes benefited from the devaluation’s impact on exportable food crop prices and rural-urban terms of trade. Continuing….
  15. 15. Case study 2Case study 2 The direction and composition of trade adjusted to changes in the exchange rate and in the economic climate. The direction and composition of trade adjusted to changes in the exchange rate and in the economic climate. q Illustrates that exports to the US and Western Europe as a share of total exports from the Republic of Korea, Malaysia and Thailand have increased considerably between 1996 and the first half of 1998. q q At the same time, the share of exports to Japan has fallen, probably both as a result of the falling yen and the recession in Japan. q q Exports to the other Asian crisis countries have also fallen, but again this is probably more the result of currency depreciation than of volume declines. q Illustrates that exports to the US and Western Europe as a share of total exports from the Republic of Korea, Malaysia and Thailand have increased considerably between 1996 and the first half of 1998. q q At the same time, the share of exports to Japan has fallen, probably both as a result of the falling yen and the recession in Japan. q q Exports to the other Asian crisis countries have also fallen, but again this is probably more the result of currency depreciation than of volume declines.
  16. 16. Continuing….
  17. 17. q Above Table illustrates the overall fall in imports and the change in import structure in the Republic of Korea between 1996 and 1998. While overall imports fell by almost 40 per cent, the import value of consumer durables and investment goods such as iron and steel, transport equipment and other capital goods fell most strongly by 50– 72 per cent (Can refer also JETRO, 1998). q q A reversal of this trend may start in 1999, as economic recovery sets in and companies have to start investing and retooling again. q Above Table illustrates the overall fall in imports and the change in import structure in the Republic of Korea between 1996 and 1998. While overall imports fell by almost 40 per cent, the import value of consumer durables and investment goods such as iron and steel, transport equipment and other capital goods fell most strongly by 50– 72 per cent (Can refer also JETRO, 1998). q q A reversal of this trend may start in 1999, as economic recovery sets in and companies have to start investing and retooling again. Continuing….
  18. 18. Article from The Hindu Who actually responsible for the 1991 balance of payments crises? RagEEv Gandhi or V.P. Singh? Who actually responsible for the 1991 balance of payments crises? RagEEv Gandhi or V.P. Singh? Published: April 4, 2013Published: April 4, 2013 T.C.A. Srinivas-RaghavanT.C.A. Srinivas-Raghavan A very senior officer of the RBI, Dr. T.K. Chakrabarty and Srinivas Raghavan interviewed around 40 officers from the bank and the finance Ministry. A very senior officer of the RBI, Dr. T.K. Chakrabarty and Srinivas Raghavan interviewed around 40 officers from the bank and the finance Ministry. Those tapes revealed a fascinating story about the 1991 crisis:Those tapes revealed a fascinating story about the 1991 crisis: q This is that Rajiv ignored the advise of two Finance Secretaries and V.P. Singh's Finance Secretary at a crucial time to tender the proper advice. By the time he made up his mind – to go to the International Monetary Fund(IMF)- It was too late. q q In turns out that in March 1988, the Managing Director of the IMF, Michael Camdessus, while in India told Rajiv that if India asked for the a loan, the IMF would take a sympathetic view. The Finance Ministry and the Prime Minister's Office advised Rajiv to go for it. q This is that Rajiv ignored the advise of two Finance Secretaries and V.P. Singh's Finance Secretary at a crucial time to tender the proper advice. By the time he made up his mind – to go to the International Monetary Fund(IMF)- It was too late. q q In turns out that in March 1988, the Managing Director of the IMF, Michael Camdessus, while in India told Rajiv that if India asked for the a loan, the IMF would take a sympathetic view. The Finance Ministry and the Prime Minister's Office advised Rajiv to go for it.
  19. 19. q But Rajiv, reeling from the Bofors scandal in which he had been accused of accepting a Rs. 64 crore bribe, was contemplated an October election. He decided not to ask IMF. q But Rajiv, reeling from the Bofors scandal in which he had been accused of accepting a Rs. 64 crore bribe, was contemplated an October election. He decided not to ask IMF. q By the middle of 1998, Rajiv had been persuaded by his political managers to stay the full term which would finish at that end of 1989. The Finance Ministry did ask him a couple of times more. q q Rajiv agreed that it would be prudent to approach the IMF. But he also said to wait till after the election. q q In the general election of November 1989, the Congress was defeated and V.P, Singh formed the nation Front government. It was supported by the Bharatiya Janata Party (BJP) and communists “from the outside”. q q By march 1990, it had become cleared that India was heading towards a serious problem and that only the IMF could help. q By the middle of 1998, Rajiv had been persuaded by his political managers to stay the full term which would finish at that end of 1989. The Finance Ministry did ask him a couple of times more. q q Rajiv agreed that it would be prudent to approach the IMF. But he also said to wait till after the election. q q In the general election of November 1989, the Congress was defeated and V.P, Singh formed the nation Front government. It was supported by the Bharatiya Janata Party (BJP) and communists “from the outside”. q q By march 1990, it had become cleared that India was heading towards a serious problem and that only the IMF could help. Continuing….
  20. 20. q Credit to Indian dried up completely. Then, to make matters worse, the V.P. Singh government fell and Rajiv agreed to support Chanra Shekar as Prime Minister “from the outside”. q Credit to Indian dried up completely. Then, to make matters worse, the V.P. Singh government fell and Rajiv agreed to support Chanra Shekar as Prime Minister “from the outside”. q By January, India was broke. It was then Yeswant Sinha, as Finance Ministers, went to Japan asking for financial help. q q The Finance Minister of Japan met him for a few seconds and rushed off, leaving sinha to talk to his deputy. No money materialsed. In 2000, it was Sinha's turn to make the Japanese wait. q By January, India was broke. It was then Yeswant Sinha, as Finance Ministers, went to Japan asking for financial help. q q The Finance Minister of Japan met him for a few seconds and rushed off, leaving sinha to talk to his deputy. No money materialsed. In 2000, it was Sinha's turn to make the Japanese wait. q So he did nothing for three crusial months. By August it was too late because the BJP had started the rath yatra and Saddam Hussein has invaded Kuwait, sending oil prices rocketing. q After that it was steadily downhill. By December, even the State Bank of India could not get its paper rolled over q So he did nothing for three crusial months. By August it was too late because the BJP had started the rath yatra and Saddam Hussein has invaded Kuwait, sending oil prices rocketing. q After that it was steadily downhill. By December, even the State Bank of India could not get its paper rolled over Continuing….
  21. 21. References

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