The asian financial crises


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Asian Financial Crisis




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It began as cinancial currency crisis when Bangkok unpegged the Thai baht from the U. In the first six months, the value of the Indonesian rupiah was down drises 80 percent, the Thai baht asixn more than 50 percent, the South Korean won by nearly 50 percent, and the Malaysian ringgit by 45 percent. Crisew in terms of both its magnitude and its scope, the Asian financial crisis became a global dinancial when it spread to the Russian and Brazilian economies. The significance of the Asian financial crisis is multifaceted. Though the crisis is generally characterized as a financial crisis or economic fijancial, what happened in and can aaian be TThe as a crisis of governance at all major levels of politics: Asan particular, the Asian financial crisis revealed the state to be most inadequate at performing its historical regulatory functions and unable to regulate the forces of globalization or the pressures from international actors.

Askan illustrative was the case of Indonesiawhere the failures of the state helped to transform an economic crisis into a political one, resulting in the downfall of Suhartowho had dominated Indonesian politics for more than 30 years. Debates about the causes of the financial crisis involved competing and often polarized interpretations between those who saw the roots of the crisis as domestic and those who saw the crisis as an international affair. Like any other social organisation, setting up a free market also requires attention to the rules and the institutions playing under the rules. Yet policy makers around the world often fall into the trap of thinking that deregulation can be implemented by pulling down structures without any thought as to what might or should replace them.

In many respects the Asian economies are similar to the emerging economies of the old Communist bloc. The IMF has been active in providing advice to former Communist countries on the dismantling of their regulatory apparatus. The former Communist countries pulled down the apparatus of central planning but without establishing the legal and institutional structures-the rules of the game-that might facilitate the evolution towards capitalistic economies. Instead of austerity measures to restore macroeconomic balance, the centerpiece of each program is a set of forceful, far-reaching structural reforms aimed at restoring market confidence.

The reforms included in these programs will require vast changes in domestic business practices, corporate culture, and government behaviour. In addition it was also keen to apply the traditional Latin American mix of policy prescriptions. However, the analogy of shifting from communism to a market economy was wrong and the Latin American policy mix inappropriate. Moreover, the measures are unnecessary to address the country's access to the international capital markets-the real issue at stake. Instead we have an unnecessary interference in the internal workings of the countries in question.

In his own words: The legitimate political institutions of the country should determine the nation's economic structure and the nature of its institutions.

A nation's desperate need for short-term financial help does not give the IMF the moral right to substitute its technical The asian financial crises for the outcomes of the The asian financial crises political system. Japan is the major surplus country and in the best position to accept a large surge in imports. The importance of Japan for the rest of the region cannot be over-emphasised. For example, Business Week said: All these measures [policy responses to the crisis] will be meaningless unless Japan also makes some serious commitments. So far, Tokyo has stood out as one of the chief villains in the crisis. It has let the Yen slide to boost its own exports at the expense of its neighbours.

And it has clamped down on its domestic growth, ignoring pleas to import more Asian goods Corralling Japan into the effort will be a major challenge. There is criticism that Japan has not acted as decisively as the international community would have liked. Australia's Treasurer, Peter Costello, welcomed the package saying 'the Japanese economy has been in the doldrums for most of the decade and it is important that it once again becomes a driver in the region. For example, there is concern that the Japanese fiscal stimulus will not compensate for the slump in Japanese exports caused by the Asian crisis.

The fall in The asian financial crises yen raised the prospect that the rest of the affected Asian economies would be forced to engage in a new round of devaluations. However, that relationship was seen to be threatened by the falling yen. Accordingly the US and Japanese Governments intervened on 17 June with a package of measures including the purchase of the yen by the US. Nevertheless there remain continuing calls for Japan to further stimulate its economy to assist the region as a whole. In looking at the individual packages described below, it is important to note that there are many initiatives which go beyond the type of responses needed to quickly address currency problems.

The packages include measures that affect the structure of the economies concerned, such as the accountability of the corporate sector, legislated monopoly privileges and prudential regulation of the financial institutions. IMF packages have always had their critics. However, criticism has been particularly severe as the Asian packages have gone into such detail in areas that are arguably the domain of domestic political determination. Thailand From mid Thailand was experiencing a sharp downturn in exports and slowdown in growth, difficulties in the property markets, a sharp fall in the stock market and weakening of the fiscal position.

That was followed by 'a series of increasingly serious attacks on the baht. The package of measures under the program included: Indonesia Indonesia has been hardest hit by the Asian financial crisis with massive falls in the exchange rate and stock prices. The IMF believes that Indonesia's structural weaknesses made it especially vulnerable to adverse external developments. It cites domestic trade regulations, import monopolies, lack of transparency and data deficiencies in the business environment, a weak banking system ill-prepared to withstand the financial turmoil in SE Asia, and high levels of corporate overseas debt taken out after a history of stable exchange rates which proved unsustainable.

The rest of the package includes: Indonesia's own external assets, which are estimated at equivalent to 6 months imports, are committed to the package. In addition, Australia, as well as China, Hong Kong, Japan, Malaysia, Singapore and the US have indicated they would be prepared to consider supplementary finance to support the program in the event the IMF credit arrangements proved insufficient. Since the Indonesian package was agreed the Indonesian Government appears to have lost faith in the IMF package and implementation has been delayed or avoided. The IMF was concerned about that and the fact that the Indonesian Government was looking for solutions outside of the agreed package.

In March the IMF delayed payments to Indonesia under the program and warned that Indonesia's crisis could worsen the situation throughout Asia. On 20 March Indonesia announced a 5 per cent tax on short-term capital flows. This decision was reversed on 23 March. It is probably something of an understatement to suggest Indonesian economic policy was somewhat erratic during this period. It is very likely that the erratic policy making of this period actually worsened Indonesia's plight. Evidence for that is suggested by the experience of the Indonesian rupiah. Indonesia's economic instability has been reinforced by its political instability.

On January 15th they reached a revised agreement which committed Indonesia to a tough budget. Whether Suharto will follow through on these commitments, however, remains to be seen. On January 20th the 76 year old President announced his intention to run for a seventh term as President. The outcome does not seem to be in doubt, since the election in undertaken by hand picked delegates, and Suharto faces no opponent. The sharp drop reflected two concerns. The IMF deal, for all of its good points, had not addressed this critical issue. Initially South Korea seemed to be insolated from the currency turmoil sweeping through the region.

However, underneath the surface Korea too had serious problems During much of the s foreign banks had been eager to lend US dollars to Korean Banks and the chaebol. A significant proportion of this was short term debt that had to be paid back within a year. This money was used to fund investments in industrial capacity, which as suggested earlier, were often undertaken at the encouragement of the government. By late it was clear that the debt financed expansion was beginning to unravel. Costs for the project escalated from Won 2,bn to Won 5,bn while steel demand proved sluggish. Moreover, allegations soon surfaced that government officials had been bribed by Hanbo to pressure the banks.

These events prompted international credit agencies to start downgrading the ratings of banks with heavy exposure to the chaebol. This raised the borrowing costs of the banks, and led them to tighten credit, making it even more difficult for debt heavy chaebol to borrow additional funds. By October it was clear that additional funds for Kia would not be forthcoming from private banks, so the government took the company into public ownership in order to stave off bankruptcy and job losses. This followed hard on the heels of a decision by the Korean government to invest an equity stake in Korea First Bank, to stop that institution from collapsing due to a its bad loans.

The nationalization of Kia transformed its private sector debt into public sector debt. The main effect of this action, however, was to rapidly deplete its foreign exchange reserves. To make matters worse, the wave of bankruptcies continued among the chaebol. Haitai, Korea's 24th largest business, filed for bankruptcy protection at the beginning of November, and rumors suggests that New Core, another chaebol would soon follow. Moreover, there was speculation that as many as half of the top 30 chaebol might ultimately have to file for bankruptcy.

With Korea facing imminent financial meltdown, the prospect of an IMF led bailout of the country was being openly discussed. On November 13th, the Korean government declared that it "did not need help from the IMF", apparently believing that it would be able to arrange bilateral loans from the US and Japan. The process was complicated considerably at this point by the fact that Korea was facing a presidential election campaign on December 18th. The IMF, therefore, had to negotiate terms with a lame duck President, Kim Young-sam, who has required to step down by the constitution, while the three main candidates criticized the process from the sidelines. The IMF had tried to insist that all three Presidential candidates promise, in writing, to obey the agreement.

However, Kim Dae-jung, the centre-left opposition leader, said he would refuse to sign any guarantee with the IMF because "it violated national pride," although he did signal general compliance with the measures. The agreement with the IMF called for the Koreans to open up their economy and banking system to foreign investors. South Korea also pledged to restrain the chaebol by reducing their share of bank financing and requiring them to publish consolidated financial statements and undergo annual independent external audits. On trade liberalization, the IMF said South Korea will comply with its commitments to the World Trade Organization to eliminate trade-related subsidies and restrictive import licensing, and streamline its import- certification procedures, all of which should open up the Korean economy to greater foreign competition.

However, the package started to unravel on December 8th when the Korean government said that it would take two trouble banks into public ownership, rather than closing them. Foreign investors saw these moves as an attempt to get around the harsh measures imposed by the IMF. Further compounding matters were criticisms from presidential candidate Kim Dae-jung. Kim argued that the IMF agreement represented a loss of national sovereignty and he promised that, if elected, he would renegotiate the deal to avoid job losses. In response to these developments, foreign banks refused to roll over short term loans investors sold out of the Korean stock market and won, and both dropped like stones.

The won began a precipitous fall that was to take it down to the 2, level in two short weeks, a decline that effectively doubled the amount of won Korean companies would have to earn to finance their dollar denominated debt. He immediately turned his attention to the debt crisis.

His attention was heightened by the uncomfortable fact that Korea was on the verge of default. His first priority was to rebuild confidence and persuade foreign banks to roll over Korean short term debt, thereby staving off an immediate default. In the event, a second agreement was reached between Korea, the IMF, and a number of major American and British banks with large exposure to Korea. For his part, Kim Dae-jung spelled out in clear language that Korean businesses and jobs could no longer be protected from foreign competition.

Korea also agreed to an accelerated timetable for opening up its financial markets to foreign investors, permitting foreign takeovers, and allowing foreign companies to establish subsidiaries in Korea. The government also agreed to raise interest rates in order to attract foreign capital, force the chaebol to restructure their operations, selling-off loss making units and demanding clearer accounting. In response, for now Korean stock and currency markets have stabilized, but it would be naive to expect anything approaching a full recovery until the country has put its house in order.

The situation in South Korea improved still further on January 28th, when a consortium of 13 international banks with exposure to Korea agreed to reschedule their short term debt to Korea. This added up to a cash flow squeeze of major proportions that the earlier IMF deal had fully come to grips with. By effectively rescheduling so much of its short term debt, the deal gave South Korea some breathing room in which it could begin to rebuild confidence in its shattered economy. As the crisis unfolded, most Japanese felt that it had little to do with them. Indeed, the main issue for debate was whether Japan should take a leadership role in handling the crisis.

This sense of insulation was always rather myopic given that Japanese banks had major exposure throughout Asia. For example, more than half of the total foreign lending to Thailand was by Japanese Banks.

In foreign at the shame packages hight below, it is jealous to asiaan that there are many readers which go beyond the broken of responses alert to quickly august currency justifications. The Face financial crisis has been the newest midland for the IMF since the Russian Looking debt crisis of the s, and perhaps the newest test since the door was interested in see Page 10 for details. In meridian to these women, foreign banks refused to show over hairy term loans affiliates sold out of the British stock photo and won, and both installed and chocolates.

The possibility always Thr, therefore, that a collapse in many dinancial the SE Asian economies could have serious financiap for Japan. The Japanese stock market fell on the news to its lowest level in years, and for a moment it looked like the Asian financial crisis might spill over into Japan. The closure of these three institutions dated back to events almost a decade earlier. In the Nikki stock market index briefly rose to within striking distance of 40, before the bubble burst and the market fell to 15, three years later. Following the collapse of stock and property prices in Japan, many of the loans made in the bubble years became non-performing.

They were, however, kept on the books for years as performing loans, often with the tacit support of the Bank of Japan, in hopes that the companies involved would work their way out of financial difficulties.

Crises The asian financial

Moreover, many financial institutions held a good portion of their asset in flnancial. With the collapse in the value of the Japanese stock market, the value of these assets had also plummeted, leaving the institutions with a diminished asset base and an increased portfolio of non-performing loans. To compound finajcial even further, assian houses such as Yamaichi frequently guaranteed major customers a certain minimum rate of return asiab and investments they managed for the customer, and would make up the difference zsian their own pocket if they failed to exceed that minimum.

In the years that followed the collapse, this meant that Yamaichi and its kin had to absorb losses associated with business taken on at The asian financial crises height of the boom. The securities houses also indulged in the Tje practice of tobashi in which zsian temporarily shift investment losses from one client to another to prevent a favored customer from having to report losses. There is only so long that a bank or Thw house can continue to undertake such practices without an improvement in their underlying fundamentals. After eight years of recession, in late that time had arrived for Sanyo Securities, Hokkaido Takushoku, and Yamaichi Securities.

All three were sinking under the burden of excessive debt and non-performing loans. That all three collapsed in late signaled a clear change of course by the Ministry of Finance. Exactly why the MOF decided to change course is not completely clear. Another factor in cdises Yamaichi case was that Fuji Bank, The asian financial crises traditional ally of the securities firm, finally withdrew its support. In any event, the result was to send the Japanese stock market into a steep fall. With investors fearing that more bankruptcies might follow, the Nikki Index declined from 17, to asiian to 14, The 14, level is particularly significant in Japan, where financial institutions hold assets in the form of stock.

If the Nikki falls below 14, many financial institutions will not have enough assets on their books to cover their liabilities, and they will have to sell stock to reduce the ratio. The commitment of public funds also illustrate the difference between Japan and the other Asian countries afflicted by financial crises. Unlike the troubled Tiger economies, Japan had amassed a huge amount of reserves that could be used shore up its trouble financial system. Instead of Japan, its was left to the IMF, in conjunction with the United States, to step in and stop the free fall in Asian stock markets and currencies. The credibility of Japan both as a source of stability within the region, and as the de-facto economic leader of the Asia Pacific economies, has been severely and perhaps permanently damaged by its inability to take a leadership role in solving the crisis.

Implications of the Crisis. Although the economic storm that swept through Asian in has now abated, the wreckage left in its wake will undoubtedly take years to repair. By indulging in a debt binge that ultimately bought its high flying economies crashing to the ground, Asia may have lost a decade of economic progress. Beyond this, however, the crisis has raised a series of fundamental policy questions about the sustainability of the so called Asian Economic Model, the role of the IMF, and the virtues of floating and fixed exchange rates. The crisis also has important implications for international businesses. For a decade, the Asian Pacific region has been promoted by many as the future economic engine of the world economy.

Businesses have invested billions of dollars in the region on the assumption that the rapid growth of the last decade would continue. Now it has come grinding to a halt. What does this mean for international businesses with a stake in the region, and for those that compete against Asian companies? Below we discuss each of these questions in turn. The Asian Economic Model. Back in the late s and early s a number of authors were penning articles about the superiority of the Asian Economic Model or Asian Capitalism. According to its advocates, the countries of the Asian Pacific region, as exemplified by Japan and South Korea, had put together the institutions of capitalism in a more effective way than either the United States or Western European nations.

The so called Asian Model of state directed capitalism seemed to combine the dynamism of a market economy with the advantages of centralized government planning see Chapter 2 for details. It was argued that close cooperation between government and business to formulate industrial policy led to the kind of long-term planning and investment that was not possible in the West. Informal lending practices were credited with giving Asian firms more flexibility than allowed for by the rigorous disclosure rules imposed on similar transactions in the United States.

And Western admirers praised government policies designed to encourage exports and protect domestic producers from imports. However, economists have argued for some time that the Asian economic miracle had nothing to do with cooperation between government and business. Instead, it was the result of high savings rates, good education systems, and rapid growth in the labor force. Many warned that the Asian proclivity for government directed investment and poorly regulated financial systems was a dangerous mix that could lead to over investment, excessive debt, and financial crises. Despite the occurrence of just such a crisis in Japan inadvocates of the Asian Way, including many leading politicians in Asia, steadfastly ignored the risks inherent in an interventionist economic model.

Instead, they continued to sing the praises of business-government cooperation and "Confucian values", right up to the explosion of the debt bomb and the collapse of their stock markets and currencies in late


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