Ecology Unit- part 2 Modified by Beth Roland Jacobs Fork Middle School.
Rinku Part Modified
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The Asian financial crisis, according to the UN, was perhaps
the most serious financial crisis since the breakdown of theBreton Woods system in the early 1970s, in terms of both itsscope and its effects
The effects of the crisis were farreaching, as this image (produced byBBC news) shows. The crisis startedin Thailand, but spread to much of
Asia, and indirectly hit Europe, LatinAmerica, and North America.
Ultimately, the damage was limited,but, for a time, there was fear that the
crisis would cause a globaldepression.
http://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stmhttp://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stm -
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The Asian Financial Crisis was a period of Financial Crisis that gripped
mainly five Countries of Asia which included Thailand, Indonesia, Malaysia,Philippines and Korea in July 1997 and raised fears of a worldwide economicmeltdown due to Financial Contagion.
The Asian financial Crisis basically involved following basic problems
1. Rapid reversal of private capital inflows into Asia.
2. Bank Lending's not protected by lender-of-last-resort facilities.
3. Depreciation of pegged exchange rates and increase in Interest Rates.
4. Panic in the Domestic Markets.
5. Role of IMF that added to the Crisis.
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Economies of South East Asia Fixed exchange rate system
pegged to the USD
Liberalized economy Fully capital convertibility
Exports were attractivebecause of lower value ofDollar during early 1990s
Massive capital inflowsattracted in the region duringthe 1990s.(major exposure ofshort term debt by private
sector)
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Maintained High Interest Rates attractive to foreigninvestors looking for a high rate of Return.
Regional economies of South east Asia experienced HighGrowth Rates in the late 1980s and early 1990s(8%- 12%GDP)
Asset prices were pushed up because of availability ofeasy foreign credit
Thailand, Indonesia and Korea had large CurrentAccount Deficits.
It led to excessive exposure to foreign exchange risk in
both the financial and corporate sectors.
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As the U.S. economy recovered from a recession in the
early 1990s
This made the U.S. relative a more attractiveinvestment destination.
The higher U.S. dollar caused their own exports tobecome more expensive and less competitive in theglobal markets
Increase in current account deficit was to made up byborrowing overseas
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Decline of roll over of short term loans led to financeCurrent account deficit by its foreign reserves
Resulted in few dollars to maintain the Peg
Investors started selling their assets to redeem dollar at
fixed rate & accelerated reserve loss
Speculators started shorting the currency
Above constituted a speculative attack
Thailand let Baht float in July 1997
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The transmission of shocks to other countries or the
cross-country correlation, beyond any fundamentallink among the countries and beyond commonshocks.
This definition is usually referred to as herd behavior.
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4060
80
100
120
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180
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Indonesia Korea, Rep. Malaysia Thailand
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10
20
30
40
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60
70
80
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Indonesia South korea Philippines Thailand Taiwan
Proportion of loans with maturity of one
year or less at the end of 1996
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TotalOutstanding
Banks PublicSector
NonbankPrivate
ShortTerm
Reserves
Indonesia 58.7 12.4 6.5 39.7 34.7 20.3
Malaysia 28.8 10.5 1.9 16.5 16.3 26.6
Philippines
14.1 5.5 1.9 6.8 8.3 9.8
Thailand 69.4 26.1 2.0 41.3 45.6 31.4
Korea 103.4 67.3 4.4 31.7 70.2 34.1
International Claims Held By Foreign Banks--Distribution by maturity and sector(mid 1997)
Billions of dollar
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Openness of capital account
Short term debt by private sector
Large proportion of non performing loans
Absence of lender of last resort for that region
Non resident borrowed in local currency and boughtUS $
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Domestic Level
Contraction of Economy
Stock Market Plunged
Widespread default/NPAs
Expensive Imports Inflation
Trade Surplus
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International Level Japan Affected, Depreciation of Yen
Singapore Currency Depreciation
Hongkong Stock Market plunged
Dow Jones Industrial avg plummet by 554 pts
Big institutes failure in Japan
Russian stock market crash
Japan in Recession
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Country June 97 June 98
Thailand 11% 24%
Malaysia 7% 11%
Singapore 3% 7%
Indonesia 16% 47%
Philippines 11% 14%
Taiwan 5% 7%
S. Korea 14% 17%
China 8% 8%
Hong Kong 6% 10%
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The countries maintained good budgetary positions
Domestic savings and investment rates were very high
Interest rate were usually less in rest of the world(US andJapan)
Massive capital inflows were attracted into the regionduring the 1990s
Healthy Forex reserves Thailand reached $ 38$ billion in1996 equivalent to over 7.7 months of imports
Data on capital flows, risk premium, credit ratings, IMFreports, and other indicators
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The IMF had made some recommendations to theSouth East Asian Economies to get any financialassistance from them, but that only helped incite morepanic in these economies.
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The IMF programs had declared the followingmain objectives prevent outright default on foreign obligations;
limit the extent of currency depreciation;
preserve a fiscal balance;
limit the rise in inflation; rebuild foreign exchange reserves;
restructure and reform the banking sector;
remove monopolies and otherwise reform the
domestic non-financial economy; preserve confidence and creditworthiness;
limit the decline of output
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Fiscal Policy
Bank Closures
Enforcement of Capital Adequacy Standards
Tight Domestic Credit
Debt Repayment
Non Financial Structures
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Difference in economies and stages of growth &
liberalization
Floating Exchange rate system
Partial Capital account convertibility
Very Less Non-Performing Asset
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-0.50%
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
1990 1991 1992 1993 1994 1995 1996India
EA Average
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Importance of central Bank
Enforce regulation policies in financial sectors
Manage External Debt Well and Short term debt
Transparency in Financial Transaction
Act against corruption