South East Crisis 1997

Measures to Face the Crisis

JORGE YESHAYAHU GONZALES-LARA
Several factors explain the fragility of the financial
and business sectors
Pre-existing failures in the portfolios of financial institutions; a debt in currencies
without coverage, which exposed the national entities to the risk of suffering
considerable losses in case of depreciation of the currency;
Excessive use of external credit in the short term, and risky investments with a
background of bubbles of prices of shares and real estate.
These factors were accumulating in an environment of great affluence of private
capital and accelerated expansion of domestic credit in liberalized financial systems, in
which the widespread presence of implicit public guarantees (in addition to those
represented by the monetary bond systems) and the regime of supervision and
regulation did not allow to face the challenges of a globalized financial market.
Financial support programs to face the crisis.
The strategy used in the face of the crisis had three main
components:
• Financing. The IMF provided financing of some US $ 35,000 million to support adjustment and reform programs
in Korea, Indonesia and Thailand; the assistance granted to Indonesia increased further in 1998-99. Other
multilateral and bilateral entities undertook to provide financing for some US $ 85,000 million, although the total
amount was not delivered. On the other hand, concerted measures were taken (in different stages, after the
initiation of these programs, in different countries) to check the exit of private capital.
• Macroeconomic policy. A more restrictive economic policy was adopted (at different stages depending on the
country) to stop the collapse of countries' exchange rates-a much more advanced process than could be justified
by the fundamental parameters of the economy-and prevent the depreciation of the currency would lead to an
inflationary spiral and an even greater depreciation. The restriction of monetary policy was, as it should be,
temporary: once confidence began to recover and market conditions stabilized, interest rates were reduced. In
essence, it was necessary to apply a firm fiscal policy in Korea and Indonesia, while in Thailand the adoption of
fiscal restriction measures was foreseen to reverse the process of increasing the deficit that had taken place the
year before the crisis.
• Structural reforms. Measures were taken to correct the flaws in the financial sector and the business sector.
Through other reforms, efforts were made to mitigate the social consequences of the crisis and lay the
foundations for the resumption of economic growth. Structural reforms more important than in the usual
programs of the IMF.
The authorities of each country and with the World Bank and
the Asian Development Bank
The details of these reforms were formulated in collaboration with the authorities of each
country and with the World Bank and the Asian Development Bank. The need for reform of the
financial sector it was especially pressing, given the causes of the crisis. In all three countries,
the programs had the following common components:
• Closing of insolvent financial institutions, to prevent additional losses.
• Recapitalization of potentially viable financial institutions, in many cases with government
assistance.
• Close supervision, by the central bank, of financial institutions in difficulties.
• Strict financial supervision and regulation to prevent the repetition of the difficulties that had
led to the crisis. The objectives were to restore the soundness of financial institutions and to
apply international supervision and regulation standards.
The following were other of the executed
reforms:
• Protection programs for poor and vulnerable segments of society in the face of the most
damaging aspects of the crisis, deepening and expanding security networks and (especially in
Indonesia) devoting considerable budgetary resources to the increase of commodity
subsidies, such as the rice.
• Measures aimed at greater transparency in the financial, business and public sectors.
• Measures aimed at making markets more efficient and increasing competition. The
continued exit of capital and the process of monetary devaluation made the recession, in the
countries in question, much deeper than expected.
This was mainly due to the collapse of domestic spending, especially of private investment
spending. The current account balance of the countries was subject to enormous
readjustments, mainly linked to a sharp decline in imports.
 The experience of the Asian crisis

The experience of the Asian crisis and the results of the applied economic policy
strategy gave rise to new ideas regarding the international financial system and the
appropriate economic policy response to financial crisis