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Asian Financial Crisis 1997 : 

Asian Financial Crisis 1997 PRESENTED BY NITYANAND ROY NHLI09PGDM056

The Asia Crisis : 

The Asia Crisis There is no basis for the claim that the Asian financial crisis was due to a lack of sound economic fundamentals. The currencies of the affected countries were forcibly devalued and their financial systems were brought to spoil by the activities of speculators. The crisis has, however, revealed one glaring weakness: the absence of a lender of last resort for the region

Countries Affected By the crisis : 

Countries Affected By the crisis Thailand, July, 1997 Indonesia, June to August, 1997 Korea, July, 1997 Japan had already been through its own crisis earlier and was in an economic depression Russia and Mexico followed a little later with crises of their own.

The crisis : 

The crisis The 1997 Asian crisis is the 4th international financial crisis. The first major blow to the international financial system took place in August 1982, when Mexico announced that it could not meet its regularly scheduled payments to international creditors. Shortly thereafter, Brazil and Argentina were in the same situation. By Spring 1983, about 25 developing countries could not make regularly scheduled payments and negotiated rescheduling with creditor banks. These countries accounted for two-thirds of the total debt owed by non-oil developing countries to private banks at the time.

Slide 5: 

As a result of financial liberalisation, there was a rapid and uncontrolled build up of short term debt by the private sector. The liabilities to non-residents as a proportion of total domestic credit of the banking system was estimated at more than 45%. (J P Morgan, April 1997). These non-resident 'investors' borrowed in local currency and bought dollars knowing that they would be able to repay the domestic loans with fewer dollars after a devaluation. Short term lenders asked to be repaid. In mid 1997, the problem in the second tier financial institutions in Thailand was being addressed and the crisis could have been contained. Other countries routinely have crashes in real estate and other asset markets without jeopardizing the whole economy. The Asian financial crisis should have stopped at the correction in Thailand.

Causes of Asian Financial Crisis : 

Causes of Asian Financial Crisis Foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 1993-96 Countries like Thailand, Indonesia, South Korea had large current account deficits. Financed by hot money flows (on capital account). Hot money flows were accumulated because of higher interest rates in the East. Financial deregulation encouraged more loans and helped to create asset bubbles. Booming economy and booming property markets encouraged expansive borrowing by firms. In the late 1990s, the US increased interest rates to reduce inflationary pressures. Higher interest rates in the US, made the East less attractive as a place to move hot money flows. As hot money flows into the east dried up, currencies started to fall and governments struggled to keep exchange rates at their fixed level against the US Dollar.

Cont… : 

Cont… Thailand was the first to have to float the Thai Bhat, this caused a rapid devaluation, which triggered a loss of confidence throughout the Asian economies. Soon, other countries were forced to devalue as investors wanted to get out of Asian currencies. The deflation caused debt to be even more difficult to repay and countries started to default. At this stage the IMF intervened to try and stabilise the crisis. However, their intervention has proved very controversial, with many arguing that their intervention made things worse. The IMF insisted on fiscal restraint – lower spending, higher taxes and privatisation. This contractionary fiscal policy caused the economic downturn to exacerbate and the economy plunged into recession. Bankruptcies increased and there was a flight of capital.

Cont… : 

Cont… Other factors were globalization, in this case, the spread of American- and European-style capitalism to the entire world after the end of the Cold War, whether the world was ready for it or not, and economic shifts that have made much of the traditional Asian approach to business obsolete. One such shift has been the move to merchandising in which the consumer, not the producer, determines the product, contrary to recent Japanese and Korean practice. Another longer-term influence has been the changing relationship between the United States and Japan, with the United States no longer openly supporting the highly artificial trade environment and exchange rates that governed economic relations between the two countries for almost four decades after World War II.

During crisis : 

During crisis

The Asian Crisis: BOOM AND BUST : 

The Asian Crisis: BOOM AND BUST Inflation should have produced some currency devaluations in these countries, but currencies were tied to US Dollar, which was appreciating at the time. Currencies were then overvalued.. A bubble starts to develop Banks not monitored.

The Asian Crisis: Finance and the Bubble : 

The Asian Crisis: Finance and the Bubble Japanese rice subsidies inflate the value of land to promote the real estate bubble. Huge real estate inflation and subsequent collapse. Japan trying to fight a depression so Japanese interest rates were at zero.

Asian Crisis: The Finance Problem : 

Asian Crisis: The Finance Problem Ultimately, long- and short-term investors notice the lack of returns. Then the crisis begins. With capital mobile, flight can occur with any provocation. (Modern version of a run on the bank.)

Asian Crisis: The Finance Problem : 

Asian Crisis: The Finance Problem Import prices (for productive materials and parts and for consumption goods) skyrocket. Severe recession begins as consumption and production expenditures falter and prompt layoffs.Foreign exchange is now so costly that needed production inputs and consumer goods cannot be afforded.

Three mistakes of Asian Lenders : 

Three mistakes of Asian Lenders The countries involved usually had some international gratitude, and Asian banks and borrowers used short-term credits to finance long-term loans. Asian borrowers (banks and firms) borrowed in foreign currencies and loaned in local currency. No hedging to counter foreign exchange risk.

Three mistakes of Asian Lenders : 

Three mistakes of Asian Lenders Asian bankers often did not ask to see consolidated balance sheets. They didn’t monitor the total assets and liabilities of the borrowers. The IMF paid the bills for such banks, finance ministries and countries. Moral hazard problems! Investors should pay for bad decisions.

Thank you : 

Thank you