Description
south east financial crisis of 1997, impact of the crisis and what were the proposed solution of the crisis
The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a
worldwide
economic
meltdown
due
to
financial contagion(financial shock).
The
crisis
started
in
Thailand
with
the
financial collapse of the Thai baht caused by the decision of the Thai government to float
the baht, cutting its peg to the USD, after
exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven.
At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt
The debt crisis in East Asia stemmed from inappropriate borrowing by the private sector. Due to high rates of economic growth and a booming economy, private firms and corporations looked to finance speculative investment projects. However, firms overstretched themselves and a combination of factors caused a depreciation in the exchange rate as they struggled to meet the payments
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.
?
?
?
?
Fixed exchange rate system pegged to the USD. When the Dollar rose,consequently the ASEAN currencies grew too, resulting in lower exports Decline in Export competitiveness particularly in Electrical goods. The decrease in exports resulted in increased Trade and Current Account deficit.
?
The crisis first emerged in Thailand when as a crisis of loan repayment. This led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions. The withdrawal of ST credit led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF. The contagion then spread to Philippines, Malaysia and Indonesia.
?
?
Weakness of Macro-Economic fundamentals ? Low productivity and competitiveness ? Inadequate supervision of Financial institutions worsened the situation.
?
Weak governments lacked the political autonomy.
Overvalued Exchange Rate & Openness of Capital Account ? Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves
?
The crisis led to weaker, unstable exchange rates and weakened Financial Institutions. To tackle this, the Government imposed higher domestic Interest rates, which led to a slowdown in manufacturing and industrial activity. This brought about huge unemployment and an undesirable social impact – on food, healthcare and education.
From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's currency, the baht
From 1985 until July 1997, Baht was pegged at 25 US$
12
Mid-May „97: Thai Baht was hit by massive speculative attack Spark: End-June „97, Thai Prime Minister declared that he would not devaluate the Baht Thai Government failed to defend the Baht against International speculators
Financial Crisis hits….
13
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%, “Finance One” collapsed Baht reached 56 US$ in Jan „98
14
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
15
Drastic devaluation of the won: 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
16
Growth dropped to virtually zero in 1998 Peso fell significantly, from 26/US$ to even 55/US$ President Joseph Estrada was forced to resign
17
40% of Japan?s export go to Asia, so it was affected even if the economy was strong
Japanese Yen 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
18
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
19
?
?
The countries involved usually had some international indebtedness, 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.
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.
?
?
1. Stabilizing the Exchange Rate and Debt Management- The idea here is to stabilize the exchange rate. The firms should not be allowed to take any further debt which would imply Debt Standstill. 2. Dealing with the Social impact- deal with the Social Impact the availability of food and healthcare at affordable prices.
? ? ?
?
3. Strengthening the Financial sector 4. Adjustment of Industrial Structures 5. International Financial marketssurveillance system to monitor flow of capital. 6. Revitalizing the Financial Markets
doc_536168958.pptx
south east financial crisis of 1997, impact of the crisis and what were the proposed solution of the crisis
The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a
worldwide
economic
meltdown
due
to
financial contagion(financial shock).
The
crisis
started
in
Thailand
with
the
financial collapse of the Thai baht caused by the decision of the Thai government to float
the baht, cutting its peg to the USD, after
exhaustive efforts to support it in the face of a severe financial overextension that was in part real estate driven.
At the time, Thailand had acquired a burden of foreign debt that made the country effectively bankrupt even before the collapse of its currency. As the crisis spread, most of Southeast Asia and Japan saw slumping currencies, devalued stock markets and other asset prices, and a precipitous rise in private debt
The debt crisis in East Asia stemmed from inappropriate borrowing by the private sector. Due to high rates of economic growth and a booming economy, private firms and corporations looked to finance speculative investment projects. However, firms overstretched themselves and a combination of factors caused a depreciation in the exchange rate as they struggled to meet the payments
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.
?
?
?
?
Fixed exchange rate system pegged to the USD. When the Dollar rose,consequently the ASEAN currencies grew too, resulting in lower exports Decline in Export competitiveness particularly in Electrical goods. The decrease in exports resulted in increased Trade and Current Account deficit.
?
The crisis first emerged in Thailand when as a crisis of loan repayment. This led to fears of loan defaults and foreign short-term creditors withdrew funds from Thai financial institutions. The withdrawal of ST credit led to pressure on forex reserves and the value of Baht. The Bank of Thailand in its attempt to save the Baht lost all its Reserves and had to request assistance from the IMF. The contagion then spread to Philippines, Malaysia and Indonesia.
?
?
Weakness of Macro-Economic fundamentals ? Low productivity and competitiveness ? Inadequate supervision of Financial institutions worsened the situation.
?
Weak governments lacked the political autonomy.
Overvalued Exchange Rate & Openness of Capital Account ? Overvalued exchange rates tied to an appreciating U.S. dollar led to large current account deficits and inadequate or declining long-term capital inflows resulted in heavy dependence on short-term external debt and the depletion of foreign exchange reserves
?
The crisis led to weaker, unstable exchange rates and weakened Financial Institutions. To tackle this, the Government imposed higher domestic Interest rates, which led to a slowdown in manufacturing and industrial activity. This brought about huge unemployment and an undesirable social impact – on food, healthcare and education.
From 1985 to 1996, growth rate averaging almost 9% annually - increased pressure on Thailand's currency, the baht
From 1985 until July 1997, Baht was pegged at 25 US$
12
Mid-May „97: Thai Baht was hit by massive speculative attack Spark: End-June „97, Thai Prime Minister declared that he would not devaluate the Baht Thai Government failed to defend the Baht against International speculators
Financial Crisis hits….
13
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%, “Finance One” collapsed Baht reached 56 US$ in Jan „98
14
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
15
Drastic devaluation of the won: 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
16
Growth dropped to virtually zero in 1998 Peso fell significantly, from 26/US$ to even 55/US$ President Joseph Estrada was forced to resign
17
40% of Japan?s export go to Asia, so it was affected even if the economy was strong
Japanese Yen 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
18
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
19
?
?
The countries involved usually had some international indebtedness, 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.
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.
?
?
1. Stabilizing the Exchange Rate and Debt Management- The idea here is to stabilize the exchange rate. The firms should not be allowed to take any further debt which would imply Debt Standstill. 2. Dealing with the Social impact- deal with the Social Impact the availability of food and healthcare at affordable prices.
? ? ?
?
3. Strengthening the Financial sector 4. Adjustment of Industrial Structures 5. International Financial marketssurveillance system to monitor flow of capital. 6. Revitalizing the Financial Markets
doc_536168958.pptx