Asian financial crisis 1997 98

Data

Causes

Speculators IMF Conclusion

Indonesia-short term nominal interest rose above 50%, the stock market lost about 90% of its value Rupiah fall against dollar by more than 80%. Real GDP in Indonesia fell about 13% in 1998 making the downturn larger than any U.S. recession.

Asian governments more involved in allocation of resources. Asian banks had been extending loans to those with the most political clout rather than to those with profitable investment projects.

Poor Regulation of the Economy Macroeconomic Policy: Fixed Exchange Rates Over-Inflated Asset Prices Over-Dependence on Short-Term Foreign Funds Unsustainable Current Account Deficits

Who are speculators? Large International financial institutions, banks and fund managers attacking central banks Why? They short sale currencies and make the central bank run out of foreign reserves. This breaks the equilibrium among currencies

Macroeconomic indicators:
Large current account deficits Declining exports Excessive lending to certain economic

sectors Weak banking systems, coupled with inadequate national policies governing the outflow of capital High levels of short-term debt

Thailand Malaysia Hong Kong Philippines China South Korea Japan

Financial crises started when Baht was not defended The baht fell, speculators needed much less dollars to repay the baht loans, thus making large profits Thai government used US$20 billion of foreign reserves The Central Bank ran out of Foreign Reserves

 Devaluation of currencies making imports more expensive. Became known as Lender of Last Resort.

Interest rates above market average.

Largely controlled by developed nations New Colonialism austerity measures inhibit long term economic growth Western style economic reforms and greater ownership by foreign firms Repayment policies do not promote long-term growth

1. A government should settle its own policies to protect its economy structure. 2. Speculators seek weakness

3. The IMF: an obsolete system