‡ Why talk about a crisis that¶s over now?

‡ Anything we should learn from this?


‡ 6


 

@
‡ From 1985 to 1996
1996,, growth rate averaging almost 9%
annually - increased pressure on Thailand's currency,
the |


‡ From 1985 until July 1997, Baht was pegged at 25 US$

á
‡ Mid-May µ97: Thai Baht was hit by massive speculative
attack

‡ Spark: End-June µ97, Thai Prime Minister declared

that he would not devaluate the Baht

Thai Government failed to defend the Baht against

International speculators

Financial Crisis hits«.


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%,

³Finance One´ collapsed

Baht reached 56 US$ in

Jan µ98

3


 


 









 


  


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‡ 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

‡ Drastic devaluation of the 
: 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

d
‡ Growth dropped to virtually zero in 1998

‡ Peso fell significantly, from 26/US$ to even

55/US$

‡ President Joseph Estrada was forced to

resign

M
‡ 40% of Japan¶s export go to Asia, so it was
affected even if the economy was strong

‡ Japanese A
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
MM
‡ 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

M
6et¶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
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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

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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$

M
Policy that distorts the incentives within the lender-
lender-borrower
relationship
Artificially high Interest rate to attract investors

6arge quantities of available credit

Highly-6everaged economic climate

Asset prices pushed up to unsustainable level, and eventually collapse

Default on Debt obligation

Panic among 6enders

6arge withdrawal of credit

Credit crunch and further bankruptcies

Depreciative pressure on credit rates

Potential Collapse of the market Government enters«..

M3
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r
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r t i f r  t r i ti itrt r t t 
il i
     r fr il

 r t  

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 rt
 rri f ri rr f trl 

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‡ 6et¶s assume that foreign investors buy ³Thai 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

M
‡ Mistakes:

‡ 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 Md
‡ 6et¶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


‡ References:

‡ Miles, Scott, ³Understanding the Wealth of Nations´

‡ Krugman, Paul: ³The Myth of Asia's Miracle: A Cautionary Fable´

‡ Palma, Gabriel: ³The Three Routes to Financial Crises´

‡ Hughes , Helen: ³Crony Capitalism & East Asian Currency Financial Crises´

‡ Bello, Walden: ³IMF's Role in the Asian Financial Crisis´

‡ Yellen, Janet: ³The Asian Financial Crisis Ten Years 6ater´

‡ Wikipedia.com

‡ newschool.edu
M