Derivative (finance)

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A derivative instrument is a contract between two parties that specifies conditionsin particular, dates and the resulting values of the underlying variablesunder which payments, or payoffs, are to be made between the parties.[1][2] One of the oldest derivatives is rice futures, which have been traded on the Dojima Rice Exchange since the eighteenth century.[3] Derivatives are broadly categorized by the relationship between the underlying asset and the derivative (e.g., forward, option, swap); the type of underlying asset (e.g., equity derivatives, foreign exchange derivatives, interest rate derivatives, commodity derivatives, or credit derivatives); the market in which they trade (e.g., exchangetraded or over-the-counter); and their pay-off profile. Derivatives can be used for speculating purposes ("bets") or to hedge ("insurance"). For example, a speculator may sell deep in-the-money naked calls on a stock, expecting the stock price to plummet, but exposing himself to potentially unlimited losses. Very commonly, companies buy currency forwards in order to limit losses due to fluctuations in the exchange rate of two currencies.

Contents
[hide]

1 Usage

1.1 Hedging 1.2 Speculation and arbitrage

2 Types

2.1 OTC and exchange-traded 2.2 Common derivative contract types 2.3 Examples 3.1 Market and arbitrage-free prices 3.2 Determining the market price 3.3 Determining the arbitrage-free price 4.1 Risk 4.2 Counter-party risk 4.3 Large notional value 4.4 Leverage of an economy's debt

3 Valuation

4 Criticism

5 Benefits 6 Government regulation 7 Glossary 8 See also 9 References 10 Further reading 11 External links

[edit] Usage
This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (March 2011) Derivatives are used by investors to:

provide leverage (or gearing), such that a small movement in the underlying value can cause a large difference in the value of the derivative; speculate and make a profit if the value of the underlying asset moves the way they expect (e.g., moves in a given direction, stays in or out of a specified range, reaches a certain level); hedge or mitigate risk in the underlying, by entering into a derivative contract whose value moves in the opposite direction to their underlying position and cancels part or all of it out; obtain exposure to the underlying where it is not possible to trade in the underlying (e.g., weather derivatives); create option ability where the value of the derivative is linked to a specific condition or event (e.g. the underlying reaching a specific price level).

[edit] Hedging
This section does not cite any references or sources. Please help improve this section by adding citations to reliable sources. Unsourced material may be challenged and removed. (October 2010) Derivatives allow risk related to the price of the underlying asset to be transferred from one party to another. For example, a wheat farmer and a miller could sign a futures contract to exchange a specified amount of cash for a specified amount of wheat in the future. Both parties have reduced a future risk: for the wheat farmer, the uncertainty of the price, and for the miller, the availability of wheat. However, there is still the risk that no wheat will be available because of events unspecified by the contract, such as the weather, or that one party will renege on the contract. Although a third party, called a clearing house, insures a futures contract, not all derivatives are insured against counter-party risk. From another perspective, the farmer and the miller both reduce a risk and acquire a risk when they sign the futures contract: the farmer reduces the risk that the price of wheat will fall below the price specified in the contract and acquires the risk that the price of wheat will rise above the price specified in the contract (thereby losing additional income that he could have earned). The miller, on the other hand, acquires the risk that the price of wheat will fall below the price specified in the contract (thereby paying more in the future than he otherwise would have) and reduces the risk that the price of wheat will rise above the price specified in the contract. In this sense, one party is the insurer (risk taker) for one type of risk, and the counter-party is the insurer (risk taker) for another type of risk. Hedging also occurs when an individual or institution buys an asset (such as a commodity, a bond that has coupon payments, a stock that pays dividends, and so on) and sells it using a futures contract. The individual or institution has access to the asset for a specified amount of time, and can then sell it in the future at a specified price according to the futures contract. Of course, this allows the individual or institution the benefit of holding the asset, while reducing the risk that the future selling price will deviate unexpectedly from the market's current assessment of the future value of the asset.

Derivatives traders at the Chicago Board of Trade Derivatives can serve legitimate business purposes. For example, a corporation borrows a large sum of money at a specific interest rate.[4] The rate of interest on the loan resets every six months. The corporation is concerned that the rate of interest may be much higher in six months. The corporation could buy a forward rate agreement (FRA), which is a contract to pay a fixed rate of

interest six months after purchases on a notional amount of money.[5] If the interest rate after six months is above the contract rate, the seller will pay the difference to the corporation, or FRA buyer. If the rate is lower, the corporation will pay the difference to the seller. The purchase of the FRA serves to reduce the uncertainty concerning the rate increase and stabilize earnings.

[edit] Speculation and arbitrage

Derivatives can be used to acquire risk, rather than to insure or hedge against risk. Thus, some individuals and institutions will enter into a derivative contract to speculate on the value of the underlying asset, betting that the party seeking insurance will be wrong about the future value of the underlying asset. Speculators look to buy an asset in the future at a low price according to a derivative contract when the future market price is high, or to sell an asset in the future at a high price according to a derivative contract when the future market price is low. Individuals and institutions may also look for arbitrage opportunities, as when the current buying price of an asset falls below the price specified in a futures contract to sell the asset. Speculative trading in derivatives gained a great deal of notoriety in 1995 when Nick Leeson, a trader at Barings Bank, made poor and unauthorized investments in futures contracts. Through a combination of poor judgment, lack of oversight by the bank's management and regulators, and unfortunate events like the Kobe earthquake, Leeson incurred a US$1.3 billion loss that bankrupted the centuries-old institution.[6]

[edit] Types
[edit] OTC and exchange-traded
In broad terms, there are two groups of derivative contracts, which are distinguished by the way they are traded in the market:

Over-the-counter (OTC) derivatives are contracts that are traded (and privately negotiated) directly between two parties, without going through an exchange or other intermediary. Products such as swaps, forward rate agreements, and exotic options are almost always traded in this way. The OTC derivative market is the largest market for derivatives, and is largely unregulated with respect to disclosure of information between the parties, since the OTC market is made up of banks and other highly sophisticated parties, such as hedge funds. Reporting of OTC amounts are difficult because trades can occur in private, without activity being visible on any exchange. According to the Bank for International Settlements, the total outstanding notional amount is US$684 trillion (as of June 2008).[7] Of this total notional amount, 67% are interest rate contracts, 8% are credit default swaps (CDS), 9% are foreign exchange contracts, 2% are commodity contracts, 1% are equity contracts, and 12% are other. Because OTC derivatives are not traded on an exchange, there is no central counterparty. Therefore, they are subject to counter-party risk, like an ordinary contract, since each counter-party relies on the other to perform. Exchange-traded derivative contracts (ETD) are those derivatives instruments that are traded via specialized derivatives exchanges or other exchanges. A derivatives exchange is a market where individuals trade standardized contracts that have been defined by the exchange.[8] A derivatives exchange acts as an intermediary to all related transactions, and takes initial margin from both sides of the trade to act as a guarantee. The world's largest[9] derivatives exchanges (by number of transactions) are the Korea Exchange (which lists KOSPI Index Futures & Options), Eurex (which lists a wide range of European products such as interest rate & index products), and CME Group (made up of the 2007 merger of the

Chicago Mercantile Exchange and the Chicago Board of Trade and the 2008 acquisition of the New York Mercantile Exchange). According to BIS, the combined turnover in the world's derivatives exchanges totaled USD 344 trillion during Q4 2005. Some types of derivative instruments also may trade on traditional exchanges. For instance, hybrid instruments such as convertible bonds and/or convertible preferred may be listed on stock or bond exchanges. Also, warrants (or "rights") may be listed on equity exchanges. Performance Rights, Cash xPRTs and various other instruments that essentially consist of a complex set of options bundled into a simple package are routinely listed on equity exchanges. Like other derivatives, these publicly traded derivatives provide investors access to risk/reward and volatility characteristics that, while related to an underlying commodity, nonetheless are distinctive.

[edit] Common derivative contract types

There are three major classes of derivatives:
1. Futures/Forwards are contracts to buy or sell an asset on or before a future date at a price

specified today. A futures contract differs from a forward contract in that the futures contract is a standardized contract written by a clearing house that operates an exchange where the contract can be bought and sold, whereas a forward contract is a nonstandardized contract written by the parties themselves.
2. Options are contracts that give the owner the right, but not the obligation, to buy (in the

case of a call option) or sell (in the case of a put option) an asset. The price at which the sale takes place is known as the strike price, and is specified at the time the parties enter into the option. The option contract also specifies a maturity date. In the case of a European option, the owner has the right to require the sale to take place on (but not before) the maturity date; in the case of an American option, the owner can require the sale to take place at any time up to the maturity date. If the owner of the contract exercises this right, the counter-party has the obligation to carry out the transaction.
3. Swaps are contracts to exchange cash (flows) on or before a specified future date based

on the underlying value of currencies/exchange rates, bonds/interest rates, commodities, stocks or other assets. More complex derivatives can be created by combining the elements of these basic types. For example, the holder of a swaption has the right, but not the obligation, to enter into a swap on or before a specified future date.

[edit] Examples
The overall derivatives market has five major classes of underlying asset:

interest rate derivatives (the largest) foreign exchange derivatives credit derivatives equity derivatives commodity derivatives CONTRACT TYPES ExchangeOTC swap OTC forward OTC option

Some common examples of these derivatives are: UNDERLYING Exchange-

Equity

Interest rate

Credit Foreign exchange Commodity

traded futures traded options DJIA Index Option on DJIA future Index future Equity swap Single-stock Single-share future option Option on Eurodollar Eurodollar Interest rate future future swap Euribor future Option on Euribor future Credit default Option on Bond swap Bond future future Total return swap Option on Currency Currency future currency future swap WTI crude oil Weather futures derivatives Commodity swap

Back-to-back Repurchase agreement Forward rate agreement

Stock option Warrant Turbo warrant Interest rate cap and floor Swaption Basis swap Bond option Credit default option Currency option Gold option

Repurchase agreement Currency forward Iron ore forward contract

Other examples of underlying exchangeables are:

Property (mortgage) derivatives Economic derivatives that pay off according to economic reports[10] as measured and reported by national statistical agencies Freight derivatives Inflation derivatives Weather derivatives Insurance derivatives[citation needed] Emissions derivatives[11]

[edit] Valuation

Total world derivatives from 19982007[12] compared to total world wealth in the year 2000[13]

[edit] Market and arbitrage-free prices

Two common measures of value are:

Market price, i.e., the price at which traders are willing to buy or sell the contract; Arbitrage-free price, meaning that no risk-free profits can be made by trading in these contracts; see rational pricing.

[edit] Determining the market price

For exchange-traded derivatives, market price is usually transparent ( making it difficult to automatically broadcast prices. In particular with OTC contracts, there is no central exchange to collate and disseminate prices.

[edit] Determining the arbitrage-free price

The arbitrage-free price for a derivatives contract can be complex, and there are many different variables to consider. Arbitrage-free pricing is a central topic of financial mathematics. For futures/forwards the arbitrage free price is relatively straightforward, involving the price of the underlying together with the cost of carry (income received less interest costs), although there can be complexities. However, for options and more complex derivatives, pricing involves developing a complex pricing model: understanding the stochastic process of the price of the underlying asset is often crucial. A key equation for the theoretical valuation of options is the BlackScholes formula, which is based on the assumption that the cash flows from a European stock option can be replicated by a continuous buying and selling strategy using only the stock. A simplified version of this valuation technique is the binomial options model. OTC represents the biggest challenge in using models to price derivatives. Since these contracts are not publicly traded, no market price is available to validate the theoretical valuation. And most of the model's results are input-dependant (meaning the final price depends heavily on how we derive the pricing inputs).[14] Therefore it is common that OTC derivatives are priced by

Independent Agents that both counterparties involved in the deal designate upfront (when signing the contract).

[edit] Criticism
Derivatives are often subject to the following criticisms:

[edit] Risk
See also: List of trading losses The use of derivatives can result in large losses because of the use of leverage, or borrowing. Derivatives allow investors to earn large returns from small movements in the underlying asset's price. However, investors could lose large amounts if the price of the underlying moves against them significantly. There have been several instances of massive losses in derivative markets, such as:

American International Group (AIG) lost more than US$18 billion through a subsidiary over the preceding three quarters on Credit Default Swaps (CDS).[15] The US federal government then gave the company US$85 billion in an attempt to stabilize the economy before an imminent stock market crash. It was reported that the gifting of money was necessary because over the next few quarters, the company was likely to lose more money. The loss of US$7.2 Billion by Socit Gnrale in January 2008 through mis-use of futures contracts. The loss of US$6.4 billion in the failed fund Amaranth Advisors, which was long natural gas in September 2006 when the price plummeted. The loss of US$4.6 billion in the failed fund Long-Term Capital Management in 1998. The loss of US$1.3 billion equivalent in oil derivatives in 1993 and 1994 by Metallgesellschaft AG.[16] The loss of US$1.2 billion equivalent in equity derivatives in 1995 by Barings Bank.
[17]

[edit] Counter-party risk

Some derivatives (especially swaps) expose investors to counter-party risk. Different types of derivatives have different levels of counter-party risk. For example, standardized stock options by law require the party at risk to have a certain amount deposited with the exchange, showing that they can pay for any losses; banks that help businesses swap variable for fixed rates on loans may do credit checks on both parties. However, in private agreements between two companies, for example, there may not be benchmarks for performing due diligence and risk analysis.

[edit] Large notional value

Derivatives typically have a large notional value. As such, there is the danger that their use could result in losses that the investor would be unable to compensate for. The possibility that this could lead to a chain reaction ensuing in an economic crisis, has been pointed out by famed investor Warren Buffett in Berkshire Hathaway's 2002 annual report. Buffett called them 'financial weapons of mass destruction.' The problem with derivatives is that they control an increasingly larger notional amount of assets and this may lead to distortions in

the real capital and equities markets. Investors begin to look at the derivatives markets to make a decision to buy or sell securities and so what was originally meant to be a market to transfer risk now becomes a leading indicator. (See Berkshire Hathaway Annual Report for 2002)

[edit] Leverage of an economy's debt

Derivatives massively leverage the debt in an economy, making it ever more difficult for the underlying real economy to service its debt obligations, thereby curtailing real economic activity, which can cause a recession or even depression. In the view of Marriner S. Eccles, U.S. Federal Reserve Chairman from November, 1934 to February, 1948, too high a level of debt was one of the primary causes of the 1920s30s Great Depression. (See Berkshire Hathaway Annual Report for 2002)

[edit] Benefits
The use of derivatives also has its benefits:

Derivatives facilitate the buying and selling of risk, and many financial professionals consider this to have a positive impact on the economic system. Although someone loses money while someone else gains money with a derivative, under normal circumstances, trading in derivatives should not adversely affect the economic system because it is not zero sum in utility.

[edit] Government regulation

In the context of a 2010 examination of the ICE Trust, an industry self-regulatory body, Gary Gensler, the chairman of the Commodity Futures Trading Commission which regulates most derivatives, was quoted saying that the derivatives marketplace as it functions now "adds up to higher costs to all Americans." More oversight of the banks in this market is needed, he also said. Additionally, the report said, "[t]he Department of Justice is looking into derivatives, too. The departments antitrust unit is actively investigating 'the possibility of anticompetitive practices in the credit derivatives clearing, trading and information services industries,' according to a department spokeswoman."[18]

[edit] Glossary

Bilateral netting: A legally enforceable arrangement between a bank and a counter-party that creates a single legal obligation covering all included individual contracts. This means that a banks obligation, in the event of the default or insolvency of one of the parties, would be the net sum of all positive and negative fair values of contracts included in the bilateral netting arrangement. Credit derivative: A contract that transfers credit risk from a protection buyer to a credit protection seller. Credit derivative products can take many forms, such as credit default swaps, credit linked notes and total return swaps. Derivative: A financial contract whose value is derived from the performance of assets, interest rates, currency exchange rates, or indexes. Derivative transactions include a wide assortment of financial contracts including structured debt obligations and deposits, swaps, futures, options, caps, floors, collars, forwards and various combinations thereof. Exchange-traded derivative contracts: Standardized derivative contracts (e.g., futures contracts and options) that are transacted on an organized futures exchange.

Gross negative fair value: The sum of the fair values of contracts where the bank owes money to its counter-parties, without taking into account netting. This represents the maximum losses the banks counter-parties would incur if the bank defaults and there is no netting of contracts, and no bank collateral was held by the counter-parties. Gross positive fair value: The sum total of the fair values of contracts where the bank is owed money by its counter-parties, without taking into account netting. This represents the maximum losses a bank could incur if all its counter-parties default and there is no netting of contracts, and the bank holds no counter-party collateral. High-risk mortgage securities: Securities where the price or expected average life is highly sensitive to interest rate changes, as determined by the FFIEC policy statement on high-risk mortgage securities. Notional amount: The nominal or face amount that is used to calculate payments made on swaps and other risk management products. This amount generally does not change hands and is thus referred to as notional. Over-the-counter (OTC) derivative contracts: Privately negotiated derivative contracts that are transacted off organized futures exchanges. Structured notes: Non-mortgage-backed debt securities, whose cash flow characteristics depend on one or more indices and / or have embedded forwards or options. Total risk-based capital: The sum of tier 1 plus tier 2 capital. Tier 1 capital consists of common shareholders equity, perpetual preferred shareholders equity with noncumulative dividends, retained earnings, and minority interests in the equity accounts of consolidated subsidiaries. Tier 2 capital consists of subordinated debt, intermediate-term preferred stock, cumulative and long-term preferred stock, and a portion of a banks allowance for loan and lease losses.

[edit] See also

Book: Finance
Wikipedia books are collections of articles that can be downloaded or ordered in print.

Dual currency deposit Forward contract FX Option

[edit] References
1. ^ Rubinstein, Mark (1999). Rubinstein on derivatives. Risk Books. ISBN 1899332537. 2. ^ Hull, John C. (2006). Options, Futures and Other Derivatives, Sixth Edition. Prentice Hall. pp. 1. 3. ^ Kaori Suzuki and David Turner (December 10, 2005). "Sensitive politics over Japan's staple crop delays rice futures plan". The Financial Times. http://www.ft.com/cms/s/0/d9f45d80-6922-11da-bd30-0000779e2340.html. Retrieved October 23, 2010. 4. ^ Chisolm, Derivatives Demystified (Wiley 2004)

5. ^ Chisolm, Derivatives Demystified (Wiley 2004) Notional sum means there is no actual principal. 6. ^ News.BBC.co.uk, "How Leeson broke the bank BBC Economy" 7. ^ BIS survey: The Bank for International Settlements (BIS) semi-annual OTC derivatives statistics report, for end of June 2008, shows US$683.7 billion total notional amounts outstanding of OTC derivatives with a gross market value of US$20 trillion. See also Prior Period Regular OTC Derivatives Market Statistics. 8. ^ Hull, J.C. (2009). Options, futures, and other derivatives . Upper Saddle River, NJ : Pearson/Prentice Hall, c2009 9. ^ Futures and Options Week: According to figures published in F&O Week 10 October 2005. See also FOW Website. 10.^ "Biz.Yahoo.com". Biz.Yahoo.com. 2010-08-23. http://biz.yahoo.com/c/e.html. Retrieved 2010-08-29. 11.^ FOW.com, Emissions derivatives, 1 December 2005 12.^ "Bis.org". Bis.org. 2010-05-07. http://www.bis.org/statistics/derstats.htm. Retrieved 201008-29. 13.^ "Launch of the WIDER study on The World Distribution of Household Wealth: 5 December 2006". http://www.wider.unu.edu/events/past-events/2006-events/en_GB/05-122006/. Retrieved 9 June 2009. 14.^ Boumlouka, Makrem (2009),"Alternatives in OTC Pricing", Hedge Funds Review, 10-302009. http://www.hedgefundsreview.com/hedge-funds-review/news/1560286/otc-pricingdeal-struck-fitch-solutions-pricing-partners 15.^ Kelleher, James B. (2008-09-18). ""Buffett's Time Bomb Goes Off on Wall Street" by James B. Kelleher of Reuters". Reuters.com. http://www.reuters.com/article/newsOne/idUSN1837154020080918. Retrieved 2010-08-29. 16.^ Edwards, Franklin (1995), "Derivatives Can Be Hazardous To Your Health: The Case of Metallgesellschaft", Derivatives Quarterly (Spring 1995): 817, http://www0.gsb.columbia.edu/faculty/fedwards/papers/DerivativesCanBeHazardous.pdf 17.^ Whaley, Robert (2006). Derivatives: markets, valuation, and risk management. John Wiley and Sons. p. 506. ISBN 0471786322. http://books.google.com/books?id=Hb7xXywqiYC&printsec=frontcover&source=gbs_ge_summary_r&cad=0#v=onepage&q&f=false. 18.^ Story, Louise, "A Secretive Banking Elite Rules Trading in Derivatives", The New York Times, December 11, 2010 (December 12, 2010 p. A1 NY ed.). Retrieved 2010-12-12.

[edit] Further reading

John C. Hull (2011), Options, Futures and Other Derivatives, Pearson Education, 8th Edition Michael Durbin (2011), All About Derivatives, McGraw-Hill, 2nd Edition Mehraj Mattoo (1997), Structured Derivatives: New Tools for Investment Management A Handbook of Structuring, Pricing & Investor Applications (Financial Times) BBC News Derivatives simple guide European Union proposals on derivatives regulation 2008 onwards

[edit] External links

Derivatives in Africa Derivatives Litigation

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In calculus, a branch of mathematics, the derivative is a measure of how a function changes as its input changes. Loosely speaking, a derivative can be thought of as how much one quantity is changing in response to changes in some other quantity; for example, the derivative of the position of a moving object with respect to time is the object's instantaneous velocity. The derivative of a function at a chosen input value describes the best linear approximation of the function near that input value. For a real-valued function of a single real variable, the derivative at a point equals the slope of the tangent line to the graph of the function at that point. In higher dimensions, the derivative of a function at a point is a linear transformation called the linearization.[1] A closely related notion is the differential of a function. The process of finding a derivative is called differentiation

What Does Derivative Mean? A security whose price is dependent upon or derived from one or more underlying assets. The derivative itself is merely a contract between two or more parties. Its value is determined by fluctuations in the underlying asset. The most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. Most derivatives are characterized by high leverage.

Investopedia explains Derivative Futures contracts, forward contracts, options and swaps are the most common types of derivatives. Derivatives are contracts and can be used as an underlying asset. There are even derivatives based on weather data, such as the amount of rain or the number of sunny days in a particular region. Derivatives are generally used as an instrument to hedge risk, but can also be used for speculative purposes. For example, a European investor purchasing shares of an American company off of an American exchange (using U.S. dollars to do so) would be exposed to exchange-rate risk while holding that stock. To hedge this risk, the investor could purchase currency futures to lock in a specified exchange rate for the future stock sale and currency conversion back into Euros.

Read more: http://www.investopedia.com/terms/d/derivative.asp#ixzz1WUB0NOGp

Definition of DERIVATIVE
1 : a word formed by derivation 2 : something derived 3 : the limit of the ratio of the change in a function to the corresponding change in its independent variable as the latter change approaches zero 4 a : a chemical substance related structurally to another substance and theoretically derivable from it b : a substance that can be made from another substance 5 : a contract or security that derives its value from that of an underlying asset (as another security) or from the value of a rate (as of interest or currency exchange) or index of asset value (as a stock index)
See derivative defined for English-language learners See derivative defined for kids

Examples of DERIVATIVE
1. The word childish is a derivative of child. 2. Tofu is one of many soybean derivatives

Did you know that the foreign exchange market (also known as FX or forex) is the largest market in the world? In fact, more than $3 trillion is traded in the currency markets on a daily basis as of 2009. This article is certainly not a primer for currency trading, but it will help you understand exchange rates and why some fluctuate while others do not. What Is an Exchange Rate? An exchange rate is the rate at which one currency can be exchanged for another. In other words, it is the value of another country's currency compared to that of your own. If you are traveling to another country, you need to "buy" the local currency. Just like the price of any asset, the exchange rate is the price at which you can buy that currency. If you are traveling to Egypt, for example, and the exchange rate for U.S. dollars 1:5.5 Egyptian pounds, this means that for every U.S. dollar, you can buy five and a half Egyptian pounds. Theoretically, identical assets should sell at the same price in different countries, because the exchange rate must maintain the inherent value of one currency against the other. Fixed Exchange Rates There are two ways the price of a currency can be determined against another. A fixed, or pegged, rate is a rate the government (central bank) sets and maintains as the official exchange rate. A set price will be determined against a major world currency (usually the U.S. dollar, but also other major currencies such as the euro, the yen or a basket of currencies). In order to maintain the local exchange rate, the central bank buys and sells its own currency on the foreign exchange market in return for the currency to which it is pegged. (To learn more, read What Are Central Banks? and Get To Know The Major Central Banks.) If, for example, it is determined that the value of a single unit of local currency is equal to US$3, the central bank will have to ensure that it can supply the market with those dollars. In order to maintain the rate, the central bank must keep a high level of foreign reserves. This is a reserved amount of foreign currency held by the central bank that it can use to release (or absorb) extra funds into (or out of) the market. This ensures an appropriate money supply, appropriate fluctuations in the market (inflation/deflation), and ultimately, the exchange rate. The central bank can also adjust the official exchange rate when necessary. Floating Exchange Rates Unlike the fixed rate, a floating exchange rate is determined by the private market through supply and demand. A floating rate is often termed "self-correcting", as any differences in supply and demand will automatically be corrected in the market. Take a look at this simplified model: if demand for a currency is low, its value will decrease, thus making imported goods

more expensive and stimulating demand for local goods and services. This in turn will generate more jobs, causing an autocorrection in the market. A floating exchange rate is constantly changing. In reality, no currency is wholly fixed or floating. In a fixed regime, market pressures can also influence changes in the exchange rate. Sometimes, when a local currency does reflect its true value against its pegged currency, a "black market", which is more reflective of actual supply and demand, may develop. A central bank will often then be forced to revalue or devalue the official rate so that the rate is in line with the unofficial one, thereby halting the activity of the black market. In a floating regime, the central bank may also intervene when it is necessary to ensure stability and to avoid inflation; however, it is less often that the central bank of a floating regime will interfere. The World Once Pegged Between 1870 and 1914, there was a global fixed exchange rate. Currencies were linked to gold, meaning that the value of a local currency was fixed at a set exchange rate to gold ounces. This was known as the gold standard. This allowed for unrestricted capital mobility as well as global stability in currencies and trade; however, with the start of World War I, the gold standard was abandoned. (For more on the gold standard, see The Gold Standard Revisited.) At the end of World War II, the conference at Bretton Woods, an effort to generate global economic stability and increase global trade, established the basic rules and regulations governing international exchange. As such, an international monetary system, embodied in the International Monetary Fund (IMF), was established to promote foreign trade and to maintain the monetary stability of countries and therefore that of the global economy. (For further reading on the IMF, see What Is The International Monetary Fund?) It was agreed that currencies would once again be fixed, or pegged, but this time to the U.S. dollar, which in turn was pegged to gold at US$35 per ounce. What this meant was that the value of a currency was directly linked with the value of the U.S. dollar. So, if you needed to buy Japanese yen, the value of the yen would be expressed in U.S. dollars, whose value in turn was determined in the value of gold. If a country needed to readjust the value of its currency, it could approach the IMF to adjust the pegged value of its currency. The peg was maintained until 1971, when the U.S. dollar could no longer hold the value of the pegged rate of US$35 per ounce of gold. From then on, major governments adopted a floating system, and all attempts to move back to a global peg were eventually abandoned in 1985. Since then, no major economies have gone back to a peg, and the use of gold as a peg has been completely abandoned. Why Peg? The reasons to peg a currency are linked to stability. Especially in today's developing nations, a country may decide to peg its currency to create a stable atmosphere for foreign investment. With a peg, the investor will always know what his or her investment's value is, and therefore will not have to worry about daily fluctuations. A pegged currency can also help to lower inflation rates and generate demand, which results from greater confidence in the stability of the currency. Fixed regimes, however, can often lead to severe financial crises since a peg is difficult to maintain in the long run. This was seen in the Mexican (1995), Asian (1997) and Russian (1997) financial crises: an attempt to maintain a high value of the local currency to the peg resulted in the currencies eventually becoming overvalued. This meant that the governments could no longer meet the demands to convert the local currency into the foreign currency at the pegged rate. With speculation and panic, investors scrambled to get their money out and convert it into foreign currency before the local currency was devalued against the peg; foreign reserve supplies eventually became depleted. In Mexico's case, the government was forced to devalue the peso by 30%. In Thailand, the government eventually had to allow the currency to float, and by the end of 1997, the Thai bhat had lost 50% of its as the market's demand and supply readjusted the value of the local currency. (For more insight, see What Causes A Currency Crisis?) Countries with pegs are often associated with having unsophisticated capital markets and weak regulating institutions. The peg is therefore there to help create stability in such an environment. It takes a stronger system as well as a mature market to maintain a float. When a country is forced to devalue its currency, it is also required to proceed with some form of economic reform, like implementing greater transparency, in an effort to strengthen its financial institutions. Some governments may choose to have a "floating," or "crawling" peg, whereby the government reassesses the value of the peg periodically and then changes the peg rate accordingly. Usually this causes devaluation, but it is controlled to avoid market panic. This method is often used in the transition from a peg to a floating regime, and it allows the government to "save face" by not being forced to devalue in an uncontrollable crisis.

Conclusion Although the peg has worked in creating global trade and monetary stability, it was used only at a time when all the major economies were a part of it. And while a floating regime is not without its flaws, it has proved to be a more efficient means of determining the long-term value of a currency and creating equilibrium in the international market.

Read more: http://www.investopedia.com/articles/03/020603.asp#ixzz1WUE6ICPf

What Does Gold Standard Mean? A monetary system in which a country's government allows its currency unit to be freely converted into fixed amounts of gold and vice versa. The exchange rate under the gold standard monetary system is determined by the economic difference for an ounce of gold between two currencies. The gold standard was mainly used from 1875 to 1914 and also during the interwar years.

Investopedia explains Gold Standard The use of the gold standard would mark the first use of formalized exchange rates in history. However, the system was flawed because countries needed to hold large gold reserves in order to keep up with the volatile nature of supply and demand for currency. After World War II, a modified version of the gold standard monetary system, the Bretton Woods monetary system, was created as its successor. This successor system was initially successful, but because it also depended heavily on gold reserves, it was abandoned in 1971 when U.S President Nixon "closed the gold window".

Read more: http://www.investopedia.com/terms/g/goldstandard.asp#ixzz1WUIAQM9p

Since the early 1990s, there have been many cases of currency investors who have been caught off guard, which lead to runs on currencies and capital flight. What makes currency investors and international financiers respond and act like this? Do they evaluate the minutia of an economy, or do they go by gut instinct? In this article, we'll look at currency instability and uncover what really causes it. What Is a Currency Crisis? A currency crisis is brought on by a decline in the value of a country's currency. This decline in value negatively affects an economy by creating instabilities in exchange rates, meaning that one unit of the currency no longer buys as much as it used to in another. To simplify the matter, we can say that crises develop as an interaction between investor expectations and what those expectations cause to happen. (Still learning about currencies? Check out Common Questions About Currency Trading and our Forex Special Feature.) Government Policy, Central Banks and the Role of Investors

When faced with the prospect of a currency crisis, central bankers in a fixed exchange rate economy can try to maintain the current fixed exchange rate by eating into the country's foreign reserves, or letting the exchange rate fluctuate. Why is tapping into foreign reserves a solution? When the market expects devaluation, downward pressure placed on the currency can really only be offset by an increase in the interest rate. In order to increase the rate, the central bank has to shrink the money supply, which in turn increases demand for the currency. The bank can do this by selling off foreign reserves to create a capital outflow. When the bank sells a portion of its foreign reserves, it receives payment in the form of the domestic currency, which it holds out of circulation as an asset. Propping up the exchange rate cannot last forever, both in terms of a decline in foreign reserves as well as political and economic factors, such as rising unemployment. Devaluing the currency by increasing the fixed exchange rate results in domestic goods being cheaper than foreign goods, which boosts demand for workers and increases output. In the short run devaluation also increases interest rates, which must be offset by the central bank through an increase in the money supply and an increase in foreign reserves. As mentioned earlier, propping up a fixed exchange rate can eat through a country's reserves quickly, and devaluing the currency can add back reserves. Unfortunately for banks, but fortunately for you, investors are well aware that a devaluation strategy can be used, and can build this into their expectations. If the market expects the central bank to devalue the currency, which would increase the exchange rate, the possibility of boosting foreign reserves through an increase in aggregate demand is not realized. Instead, the central bank must use its reserves to shrink the money supply, which increases the domestic interest rate. Anatomy of a Crisis If investors' confidence in the stability of an economy is eroded, then they will try to get their money out of the country. This is referred to as capital flight. Once investors have sold their domestic-currency denominated investments, they convert those investments into foreign currency. This causes the exchange rate to get even worse, resulting in a run on the currency, which can then make it nearly impossible for the country to finance its capital spending. Predicting when a country will run into a currency crisis involves the analysis of a diverse and complex set of variables. There are a couple of common factors linking the more recent crises:

The countries borrowed heavily (current account deficits) Currency values increased rapidly Uncertainty over the government's actions made investors jittery

Let's take a look at a few crises to see how they played out for investors: Example 1: Latin American Crisis of 1994 On December 20, 1994, the Mexican peso was devalued. The Mexican economy had improved greatly since 1982, when it last experienced upheaval, and interest rates on Mexican securities were at positive levels. Several factors contributed to the subsequent crisis: Economic reforms from the late 1980s, which were designed to limit the country's oft-rampant inflation, began to crack as the economy weakened. The assassination of a Mexican presidential candidate in March of 1994 sparked fears of a currency sell off. The central bank was sitting on an estimated $28 billion in foreign reserves, which were expected to keep the peso stable. In less than a year, the reserves were gone. The central bank began converting short-term debt, denominated in pesos, into dollar-denominated bonds. The conversion resulted in a decrease in foreign reserves and an increase in debt.

A self-fulfilling crisis resulted when investors feared a default on debt by the government.

When the government finally decided to devalue the currency in December of 1994, it made major mistakes. It did not devalue the currency by a large enough amount, which showed that while still following the pegging policy, it was unwilling to take the necessary painful steps. This led foreign investors to push the peso exchange rate drastically lower, which ultimately forced the government to increase domestic interest rates to nearly 80%. This took a major toll on the country's GDP, which also fell. The crisis was finally alleviated by an emergency loan from the United States.

Example 2: Asian Crisis of 1997 Southeast Asia was home to the "tiger" economies, and the Southeast Asian crisis. Foreign investment had poured in for years. Underdeveloped economies experience rapid rates of growth and high levels of exports. The rapid growth was attributed to capital investment projects, but the overall productivity did not meet expectations. While the exact cause of the crisis is disputed, Thailand was the first to run into trouble. (Keep reading about these economies in Dragons, Samurai Warriors And Sushi On Wall Street and What Is An Emerging Market Economy?) Much like Mexico, Thailand relied heavily on foreign debt, causing it to teeter on the brink of illiquidity. Primarily, real estate dominated investment was inefficiently managed. Huge current account deficits were maintained by the private sector, which increasingly relied on foreign investment to stay afloat. This exposed the country to a significant amount of foreign exchange risk. This risk came to a head when the United States increased domestic interest rates, which ultimately lowered the amount of foreign investment going into Southeast Asian economies. Suddenly, the current account deficits became a huge problem, and a financial contagion quickly developed. (For more insight, read Current Account Deficits.) The Southeast Asian crisis stemmed from several key points: As fixed exchange rates became exceedingly difficult to maintain, many Southeast Asian currencies dropped in value. Southeast Asian economies saw a rapid increase in privately-held debt, which was bolstered in several countries by overinflated asset values. Defaults increased as foreign capital inflows dropped off. Foreign investment may have been at least partially speculative, and investors may not have been paying close enough attention to the risks involved.

Lessons Learned There several key lessons from these crises:

An economy can be initially solvent and still succumb to a crisis. Having a low amount of debt is not enough to keep policies functioning. Trade surpluses and low inflation rates can diminish the extent at which a crisis impacts an economy, but in case of financial contagion, speculation limits options in the short run. Governments will often be forced to provide liquidity to private banks, which can invest in short-term debt that will require near-term payments. If the government also invests in short-term debt, it can run through foreign reserves very quickly. Maintaining the fixed exchange rate does not make a central bank's policy work simply on face value. While announcing intentions to retain the peg can help, investors will ultimately look at the central bank's ability to maintain the policy. The central bank will have to devalue in a sufficient manner in order to be credible.

(To keep reading about this, see Forces Behind Exchange Rates.) Conclusion Growth in developing countries is generally positive for the global economy, but growth rates that are too rapid can create instability and a higher chance of capital flight and runs on the domestic currency. Efficient central bank management can help, but predicting the route an economy will ultimately take is a tough journey to map out.

Read more: http://www.investopedia.com/articles/economics/08/currency-crises.asp#ixzz1WUJHNWal

What Does Crawling Peg Mean? A system of exchange rate adjustment in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The par value of the stated currency is also adjusted frequently due to market factors such as inflation. This gradual shift of the currency's par value is done as an alternative to a sudden and significant devaluation of the currency.

Investopedia explains Crawling Peg For example, in the 1990s, Mexico had fixed its peso with the U.S. dollar. However, due to the significant inflation in Mexico, as compared to the U.S., it was evident that the peso would need to be severely devalued. Because a rapid devaluation would create instability, Mexico put into place a crawling peg exchange rate adjustment system, and the peso was slowly devalued toward a more appropriate exchange rate.

Read more: http://www.investopedia.com/terms/c/crawlingpeg.asp#ixzz1WUJcTlfw

1997 Asian financial crisis

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Countries most affected by the Asian 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. 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.[1] Though there has been general agreement on the existence of a crisis and its consequences, what is less clear are the causes of the crisis, as well as its scope and resolution. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hurt by the slump. The People's Republic of China, India, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a loss of demand and confidence throughout the region. Foreign debt-to-GDP ratios rose from 100% to 167% in the four large ASEAN economies in 199396, then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise.[2] Although most of the governments of Asia had seemingly sound fiscal policies, the International Monetary Fund (IMF) stepped in to initiate a $40 billion program to stabilize the currencies of South Korea, Thailand, and Indonesia, economies particularly hard hit by the crisis. The efforts to stem a global economic crisis did little to stabilize the domestic situation in Indonesia, however. After 30 years in power, President Suharto was forced to step down on 21 May 1998 in the wake of widespread rioting that followed sharp price increases caused by a drastic devaluation of the rupiah. The effects of the crisis lingered through 1998. In 1998 the Philippines growth dropped to virtually zero. Only Singapore and Taiwan proved relatively insulated from the shock, but both suffered serious hits in passing, the former more so due to its size and

geographical location between Malaysia and Indonesia. By 1999, however, analysts saw signs that the economies of Asia were beginning to recover.[3]

Contents
[hide]

1 History 2 IMF Role

2.1 IMF and high interest rates

3 Thailand 4 Indonesia 5 South Korea 6 Philippines 7 Hong Kong 8 Malaysia 9 Singapore 10 China 11 United States and Japan 12 Consequences

12.1 Asia 12.2 Outside Asia

13 See also 14 References 15 External links

[edit] History
Until 1997, Asia attracted almost half of the total capital inflow into developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 812% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the "Asian economic miracle". In 1994, noted economist Paul Krugman published an article attacking the idea of an "Asian economic miracle".[4] He argued that East Asia's economic growth had historically been the result of increasing capital investment. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman's views would be seen by many

as prescient after the financial crisis had become apparent, though he himself stated that he had not predicted the crisis nor foreseen its depth.[5] The causes of the debacle are many and disputed. Thailand's economy developed into a bubble fueled by "hot money". More and more was required as the size of the bubble grew. The same type of situation happened in Malaysia, and Indonesia, which had the added complication of what was called "crony capitalism".[6] The short-term capital flow was expensive and often highly conditioned for quick profit. Development money went in a largely uncontrolled manner to certain people only, not particularly the best suited or most efficient, but those closest to the centers of power.[7] At the time of the mid-1990s, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of fixed exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. In the mid-1990s, two factors began to change their economic environment. As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia, which had been attracting hot money flows through high short-term interest rates, and raised the value of the U.S. dollar. For the Southeast Asian nations which had currencies pegged to the U.S. dollar, the higher U.S. dollar caused their own exports to become more expensive and less competitive in the global markets. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position. Some economists have advanced the growing exports of China as a contributing factor to ASEAN nations' export growth slowdown, though these economists maintain the main cause of the crises was excessive real estate speculation.[8] China had begun to compete effectively with other Asian exporters particularly in the 1990s after the implementation of a number of exportoriented reforms. Other economists dispute China's impact, noting that both ASEAN and China experienced simultaneous rapid export growth in the early 1990s.[9] Many economists believe that the Asian crisis was created not by market psychology or technology, but by policies that distorted incentives within the lenderborrower relationship. The resulting large quantities of credit that became available generated a highly leveraged economic climate, and pushed up asset prices to an unsustainable level.[10] These asset prices eventually began to collapse, causing individuals and companies to default on debt obligations. The resulting panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunch and further bankruptcies. In addition, as foreign investors attempted to withdraw their money, the exchange market was flooded with the currencies of the crisis countries, putting depreciative pressure on their exchange rates. To prevent currency values collapsing, these countries' governments raised domestic interest rates to exceedingly high levels (to help diminish flight of capital by making lending more attractive to investors) and to intervene in the exchange market, buying up any excess domestic currency at the fixed exchange rate with foreign reserves. Neither of these policy responses could be sustained for long. Very high interest rates, which can be extremely damaging to an economy that is healthy, wreaked further havoc on economies in an already fragile state, while the central banks were hemorrhaging foreign reserves, of which they had finite amounts. When it became clear that the tide of capital fleeing these countries was not to be stopped, the authorities ceased defending their fixed exchange rates and allowed their currencies to float. The resulting depreciated value of those currencies meant that foreign currency-denominated liabilities grew substantially in domestic currency terms, causing more bankruptcies and further deepening the crisis.

Other economists, including Joseph Stiglitz and Jeffrey Sachs, have downplayed the role of the real economy in the crisis compared to the financial markets. The rapidity with which the crisis happened has prompted Sachs and others to compare it to a classic bank run prompted by a sudden risk shock. Sachs pointed to strict monetary and contractory fiscal policies implemented by the governments on the advice of the IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a "herd mentality" among investors that magnified a small risk in the real economy. The crisis has thus attracted interest from behavioral economists interested in market psychology. Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on 1 July 1997. During the 1990s, hot money flew into the Southeast Asia region but investors were often ignorant of the actual fundamentals or risk profiles of the respective economies. The uncertainty regarding the future of Hong Kong led investors to shrink even further away from Asia, exacerbating economic conditions in the area (subsequently leading to the depreciation of the Thai baht on 2 July 1997).[11] The foreign ministers of the 10 ASEAN countries believed that the well co-ordinated manipulation of their currencies was a deliberate attempt to destabilize the ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamad accused George Soros of ruining Malaysia's economy with "massive currency speculation." (Soros claims to have been a buyer of the ringgit during its fall, having sold it short in 1997.) Mahathir's claims were couched in antisemitic terms,[12] and in 2006 he apologized and withdrew the accusations.[13] At the 30th ASEAN Ministerial Meeting held in Subang Jaya, Malaysia, the foreign ministers issued a joint declaration on 25 July 1997 expressing serious concern and called for further intensification of ASEAN's cooperation to safeguard and promote ASEAN's interest in this regard.[14] Coincidentally, on that same day, the central bankers of most of the affected countries were at the EMEAP (Executive Meeting of East Asia Pacific) meeting in Shanghai, and they failed to make the 'New Arrangement to Borrow' operational. A year earlier, the finance ministers of these same countries had attended the 3rd APEC finance ministers meeting in Kyoto, Japan on 17 March 1996, and according to that joint declaration, they had been unable to double the amounts available under the 'General Agreement to Borrow' and the 'Emergency Finance Mechanism'. As such, the crisis could be seen as the failure to adequately build capacity in time to prevent Currency Manipulation. This hypothesis enjoyed little support among economists, however, who argue that no single investor could have had enough impact on the market to successfully manipulate the currencies' values. In addition, the level of organization necessary to coordinate a massive exodus of investors from Southeast Asian currencies in order to manipulate their values rendered this possibility remote.[citation needed]

[edit] IMF Role

Such was the scope and the severity of the collapses involved that outside intervention, considered by many as a new kind of colonialism,[15] became urgently needed. Since the countries melting down were among not only the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to the crisis had to be cooperative and international, in this case through the International Monetary Fund (IMF). The IMF created a series of bailouts ("rescue packages") for the most affected economies to enable affected nations to avoid default, tying the packages to reforms that were intended to make the restored Asian currency, banking, and financial systems as much like those of the United States and Europe as possible. In other words, the IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a "structural adjustment

package" (SAP). The SAPs called on crisis-struck nations to cut back on government spending to reduce deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favored parties receiving funds by preference. In at least one of the affected countries the restrictions on foreign ownership were greatly reduced.[16] There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. In short, exactly the same kinds of financial institutions found in the United States and Europe had to be created in Asia, as a condition for IMF support. In addition, financial systems had to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions.[17] However, the greatest criticism of the IMF's role in the crisis was targeted towards its response. [18] As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditors. The dynamics of the situation were closely similar to that of the Latin American debt crisis. The effects of the SAPs were mixed and their impact controversial. Critics, however, noted the contractionary nature of these policies, arguing that in a recession, the traditional Keynesian response was to increase government spending, prop up major companies, and lower interest rates. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic loss. They pointed out that the U.S. government had pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States itself entered a recession in 2001, and arguably the same in the fiscal and monetary policies during the 20082009 Global Financial Crisis. Although such reforms were, in most cases, long needed[citation needed]), the countries most involved ended up undergoing an almost complete political and financial restructuring. They suffered permanent currency devaluations, massive numbers of bankruptcies, collapses of whole sectors of once-booming economies, real estate busts, high unemployment, and social unrest. For most of the countries involved, IMF intervention has been roundly criticized. The role of the International Monetary Fund was so controversial during the crisis that many locals called the financial crisis the "IMF crisis".[19] Many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (elimination of restrictions on capital flows); maintenance of high domestic interest rates to attract portfolio investment and bank capital; and pegging of the national currency to the dollar to reassure foreign investors against currency risk.[18]

[edit] IMF and high interest rates

The conventional high-interest-rate economic wisdom is normally employed by monetary authorities to attain the chain objectives of tightened money supply, discouraged currency speculation, stabilized exchange rate, curbed currency depreciation, and ultimately contained inflation. In the Asian meltdown, highest IMF officials rationalized their prescribed high interest rates as follows:

From then IMF First Deputy Managing Director, Stanley Fischer (Stanley Fischer, "The IMF and the Asian Crisis," Forum Funds Lecture at UCLA, Los Angeles on March 20, 1998): When their governments "approached the IMF, the reserves of Thailand and South Korea were perilously low, and the Indonesian Rupiah was excessively depreciated. Thus, the first order of business was... to restore confidence in the currency. To achieve this, countries have to make it more attractive to hold domestic currency, which in turn, requires increasing interest rates temporarily, even if higher interest costs complicate the situation of weak banks and corporations... "Why not operate with lower interest rates and a greater devaluation? This is a relevant tradeoff, but there can be no question that the degree of devaluation in the Asian countries is excessive, both from the viewpoint of the individual countries, and from the viewpoint of the international system. Looking first to the individual country, companies with substantial foreign currency debts, as so many companies in these countries have, stood to suffer far more from currency (depreciation) than from a temporary rise in domestic interest rates. Thus, on macroeconomics monetary policy has to be kept tight to restore confidence in the currency..." From the then IMF Managing Director Michel Camdessus himself ("Doctor Knows Best?" Asiaweek, 17 July 1998, p. 46): "To reverse (currency depreciation), countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this (hurts) weak banks and corporations."

[edit] Thailand
Further information: Economy of Thailand From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. Inflation was kept reasonably low within a range of 3.45.7%.[20] The baht was pegged at 25 to the US dollar. On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June 1997, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies in which the U.S. dollar was the main component, [21] against international speculators. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and 600,000 foreign workers being sent back to their home countries.[22] The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%. Finance One, the largest Thai finance company until then, collapsed.[23] The Thai government was eventually forced to float the Baht, on 2 July 1997. On 11 August 1997, the IMF unveiled a rescue package for Thailand with more than $17 billion, subject to conditions such as passing laws relating to bankruptcy (reorganizing and restructuring) procedures and establishing strong regulation frameworks for banks and other financial institutions. The IMF approved on 20 August 1997, another bailout package of $3.9 billion. By 2001, Thailand's economy had recovered. The increasing tax revenues allowed the country to balance its budget and repay its debts to the IMF in 2003, four years ahead of schedule. The Thai baht continued to appreciate to 29 Baht to the Dollar in October 2010.

[edit] Indonesia
See also: Fall of Suharto and Economy of Indonesia In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20 billion, and a good banking sector. But a large number of Indonesian corporations had been borrowing in U.S. dollars. During the preceding years, as the rupiah had strengthened respective to the dollar, this practice had worked well for these corporations; their effective levels of debt and financing costs had decreased as the local currency's value rose. In July 1997, when Thailand floated the baht, Indonesia's monetary authorities widened the rupiah trading band from 8% to 12%. The rupiah suddenly came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, and strong demand for dollars. The rupiah and the Jakarta Stock Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's long-term debt to 'junk bond'.[24] Although the rupiah crisis began in July and August 1997, it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars through selling rupiah, undermining the value of the latter further. In February 1998, President Suharto sacked Bank Indonesia Governor J. Soedradjad Djiwandono, but this proved insufficient. Suharto resigned under public pressure in May 1998 and Vice President B. J. Habibie was elevated in his place. Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2,600 rupiah to 1 USD.[25] The rate plunged to over 11,000 rupiah to 1 USD on 9 January 1998, with spot rates over 14,000 during January 23 26 and trading again over 14,000 for about six weeks during JuneJuly 1998. On 31 December 1998, the rate was almost exactly 8,000 to 1 USD.[26] Indonesia lost 13.5% of its GDP that year.

[edit] South Korea

Further information: Economy of South Korea

Economy of South Korea

History Miracle on the Han River 1997 financial crisis Companies List of companies Chaebol

Samsung (Chaebol) Hyundai (Chaebol) LG (Chaebol) SK (Chaebol) Industry Currency Communications Tourism Transportation Real estate Financial services Nuclear power Rankings Regions by GDP per capita International rankings Related topics Science and technology Cities This box: view talk edit

Macroeconomic fundamentals in South Korea were good but the banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. During that time, there was a haste to build great conglomerates to compete on the world stage. Many businesses ultimately failed to ensure returns and profitability. The South Korean conglomerates, more or less completely controlled by the government, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers. For example, in July 1997, South Korea's third-largest car maker, Kia Motors, asked for emergency loans. In the wake of the Asian market downturn, Moody's lowered the credit rating of South Korea from A1 to A3, on 28 November 1997, and downgraded again to B2 on 11 December. That contributed to a further decline in South Korean shares since stock markets were already bearish in November. The Seoul stock exchange fell by 4% on 7 November 1997. On 8 November, it plunged by 7%, its biggest one-day drop to that date. And on 24 November, stocks fell a further 7.2% on fears that the IMF would demand tough reforms. In 1998, Hyundai Motors took over Kia Motors. Samsung Motors' 5 billion dollar venture was dissolved due to the crisis, and eventually Daewoo Motors was sold to the American company General Motors (GM). The South Korean Won, meanwhile, weakened to more than 1,700 per dollar from around 800. Despite an initial sharp economic slowdown and numerous corporate bankruptcies, South Korea has managed to triple its per capita GDP in dollar terms since 1997. Indeed, it resumed its role as the world's fastest-growing economysince 1960, per capita GDP has grown from $80 in nominal terms to more than $21,000 as of 2007. However, like the chaebol, South Korea's government did not escape unscathed. Its national debt-to-GDP ratio more than doubled (app. 13% to 30%) as a result of the crisis. In South Korea, the crisis is also commonly referred to as the IMF crisis.

[edit] Philippines

Further information: Economy of the Philippines The Philippine central bank raised interest rates by 1.75 percentage points in May 1997 and again by 2 points on 19 June. Thailand triggered the crisis on 2 July and on 3 July, the Philippine Central Bank was forced to intervene heavily to defend the peso, raising the overnight rate from 15% to 32% right upon the onset of the Asian crisis in mid-July 1997. The peso fell significantly, from 26 pesos per dollar at the start of the crisis, to 38 pesos as of mid-1999, and to 54 pesos as of first half August 2001. The Philippine economy recovered from a contraction of 0.6% in GDP during the worst part of the crisis to GDP growth of some 3% by 2001, despite scandals of the administration of Joseph Estrada in 2001, most notably the "jueteng" scandal, causing the PSE Composite Index, the main index of the Philippine Stock Exchange, to fall to some 1000 points from a high of some 3000 points in 1997. The peso fell even further, trading at levels of about 55 pesos to the US dollar. Later that year, Estrada was on the verge of impeachment but his allies in the senate voted against the proceedings to continue further. This led to popular protests culminating in the "EDSA II Revolution", which finally forced his resignation and elevated Gloria MacapagalArroyo to the presidency. Arroyo managed to lessen the crisis in the country, which led to the recovery of the Philippine peso to about 50 pesos by the year's end and traded at around 41 pesos to a dollar by end 2007. The stock market also reached an all time high in 2007 and the economy is growing by at least more than 7 percent, its highest in nearly 2 decades.

[edit] Hong Kong

Further information: Economy of Hong Kong In October 1997, the Hong Kong dollar, which had been pegged at 7.8 to the U.S. dollar since 1983, came under speculative pressure because Hong Kong's inflation rate had been significantly higher than the U.S.'s for years. Monetary authorities spent more than US$1 billion to defend the local currency. Since Hong Kong had more than US$80 billion in foreign reserves, which is equivalent to 700% of its M1 money supply and 45% of its M3 money supply,[citation needed] the Hong Kong Monetary Authority (effectively the city's central bank) managed to maintain the peg. Stock markets became more and more volatile; between 20 October and 23 October the Hang Seng Index dropped 23%. The Hong Kong Monetary Authority then promised to protect the currency. On 15 August 1998, it raised overnight interest rates from 8% to 23%, and at one point to 500%.[citation needed] The HKMA had recognized that speculators were taking advantage of the city's unique currency-board system, in which overnight rates automatically increase in proportion to large net sales of the local currency. The rate hike, however, increased downward pressure on the stock market, allowing speculators to profit by short selling shares. The HKMA started buying component shares of the Hang Seng Index in mid-August. The HKMA and Donald Tsang, then the Financial Secretary, declared war on speculators. The Government ended up buying approximately HK$120 billion (US$15 billion) worth of shares in various companies,[27] and became the largest shareholder of some of those companies (e.g. the government owned 10% of HSBC) at the end of August, when hostilities ended with the closing of the August Hang Seng Index futures contract. In 1999, the Government started selling those shares by launching the Tracker Fund of Hong Kong, making a profit of about HK$30 billion (US$4 billion).

[edit] Malaysia

Further information: Economy of Malaysia Before the crisis, Malaysia had a large current account deficit of 5% of its GDP. At the time, Malaysia was a popular investment destination, and this was reflected in KLSE activity which was regularly the most active stock exchange in the world (with turnover exceeding even markets with far higher capitalization like the NYSE). Expectations at the time were that the growth rate would continue, propelling Malaysia to developed status by 2020, a government policy articulated in Wawasan 2020. At the start of 1997, the KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the overnight rate was below 7%. In July 1997, within days of the Thai baht devaluation, the Malaysian ringgit was "attacked" by speculators. The overnight rate jumped from under 8% to over 40%. This led to rating downgrades and a general sell off on the stock and currency markets. By end of 1997, ratings had fallen many notches from investment grade to junk, the KLSE had lost more than 50% from above 1,200 to under 600, and the ringgit had lost 50% of its value, falling from above 2.50 to under 4.57 on (Jan 23, 1998) to the dollar. The then premier, Mahathir Mohammad imposed strict capital controls and introduced a 3.80 peg against the US dollar In 1998, the output of the real economy declined plunging the country into its first recession for many years. The construction sector contracted 23.5%, manufacturing shrunk 9% and the agriculture sector 5.9%. Overall, the country's gross domestic product plunged 6.2% in 1998. During that year, the ringgit plunged below 4.7 and the KLSE fell below 270 points. In September that year, various defensive measures were announced to overcome the crisis. The principal measure taken were to move the ringgit from a free float to a fixed exchange rate regime. Bank Negara fixed the ringgit at 3.8 to the dollar. Capital controls were imposed while aid offered from the IMF was refused. Various task force agencies were formed. The Corporate Debt Restructuring Committee dealt with corporate loans. Danaharta discounted and bought bad loans from banks to facilitate orderly asset realization. Danamodal recapitalized banks. Growth then settled at a slower but more sustainable pace. The massive current account deficit became a fairly substantial surplus. Banks were better capitalized and NPLs were realised in an orderly way. Small banks were bought out by strong ones. A large number of PLCs were unable to regulate their financial affairs and were delisted. Compared to the 1997 current account, by 2005, Malaysia was estimated to have a US$14.06 billion surplus.[28] Asset values however, have not returned to their pre-crisis highs. In 2005 the last of the crisis measures were removed as the ringgit was taken off the fixed exchange system. But unlike the pre-crisis days, it did not appear to be a free float, but a managed float, like the Singapore dollar.

[edit] Singapore
Further information: Economy of Singapore As the financial crisis spread the economy of Singapore dipped into a short recession. The short duration and milder effect on its economy was credited to the active management by the government. For example, the Monetary Authority of Singapore allowed for a gradual 20% depreciation of the Singapore dollar to cushion and guide the economy to a soft landing. The timing of government programs such as the Interim Upgrading Program and other construction related projects were brought forward. Instead of allowing the labor markets to work, the National Wage Council pre-emptively agreed to Central Provident Fund cuts to lower labor costs, with limited impact on disposable income and local demand. Unlike in Hong Kong, no attempt was made to directly intervene in the capital markets and the Straits Times Index was

allowed to drop 60%. In less than a year, the Singaporean economy fully recovered and continued on its growth trajectory.[29]

[edit] China
Further information: Economy of the People's Republic of China The Chinese currency, the renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994. Having largely kept itself above the fray throughout 19971998 there was heavy speculation in the Western press that China would soon be forced to devalue its currency to protect the competitiveness of its exports vis-a-vis those of the ASEAN nations, whose exports became cheaper relative to China's. However, the RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia. The currency peg was partly scrapped in July 2005 rising 2.3% against the dollar, reflecting pressure from the United States. Unlike investments of many of the Southeast Asian nations, almost all of China's foreign investment took the form of factories on the ground rather than securities, which insulated the country from rapid capital flight. While China was unaffected by the crisis compared to Southeast Asia and South Korea, GDP growth slowed sharply in 1998 and 1999, calling attention to structural problems within its economy. In particular, the Asian financial crisis convinced the Chinese government of the need to resolve the issues of its enormous financial weaknesses, such as having too many non-performing loans within its banking system, and relying heavily on trade with the United States.

[edit] United States and Japan

Further information: Economy of the United States and Economy of Japan The "Asian flu" had also put pressure on the United States and Japan. Their markets did not collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial plunged 554 points or 7.2%, amid ongoing worries about the Asian economies. The New York Stock Exchange briefly suspended trading. The crisis led to a drop in consumer and spending confidence (see 27 October 1997 mini-crash). Indirect effects included the dot-com bubble, and years later the housing bubble and the Subprime mortgage crisis. Japan was affected because its economy is prominent in the region. Asian countries usually run a trade deficit with Japan because the latter's economy was more than twice the size of the rest of Asia together; about 40% of Japan's exports go to Asia. The Japanese yen fell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. GDP real growth rate slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition from cheapened rivals. The Asian financial crisis also led to more bankruptcies in Japan. In addition, with South Korea's devalued currency, and China's steady gains, many companies complained outright that they could not compete.[30] Another longer-term result was the changing relationship between the U.S. and Japan, with the U.S. no longer openly supporting the highly artificial trade environment and exchange rates that governed economic relations between the two countries for almost five decades after World War II.[31]

[edit] Consequences
[edit] Asia

The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries.[32] The nominal US dollar GDP of ASEAN fell by US$9.2 billion in 1997 and $218.2 billion (31.7%) in 1998. In South Korea, the $170.9 billion fall in 1998 was equal to 33.1% of the 1997 GDP.[33] Many businesses collapsed, and as a consequence, millions of people fell below the poverty line in 19971998. Indonesia, South Korea and Thailand were the countries most affected by the crisis. Exchang e rate (per US$1)[34] July June 199 1997 8 GNP (US$1 billion)[34] July June 199 1997 8

Currency

Change

Country

Change

Thai baht Indonesian rupiah Philippine peso Malaysian ringgit South Korean won

24.5 41 40.2% 2,38 14, 0 150 83.2% 26.3 42 37.4% 2.5 4.1 39.0% 850 1,2 90 34.1%

Thailand Indonesia Philippines Malaysia South Korea

170 102 40.0% 205 75 90 34 83.4% 47 37.3% 55 38.9%

430 283 34.2%

The above tabulation shows that despite the prompt raising of interest rates to 32% in the Philippines upon the onset of crisis in mid-July 1997, and to 65% in Indonesia upon the intensification of crisis in 1998, their local currencies depreciated just the same and did not perform better than those of South Korea, Thailand, and Malaysia, which countries had their high interest rates set at generally lower than 20% during the Asian crisis. This created grave doubts on the credibility of IMF and the validity of its high-interest-rate prescription to economic crisis. The economic crisis also led to a political upheaval, most notably culminating in the resignations of President Suharto in Indonesia and Prime Minister General Chavalit Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with George Soros and the IMF in particular singled out as targets of criticisms. Heavy U.S. investment in Thailand ended, replaced by mostly European investment, though Japanese investment was sustained.[citation needed] Islamic and other separatist movements intensified in Southeast Asia as central authorities weakened.[35] More long-term consequences included reversal of the relative gains made in the boom years just preceding the crisis. Nominal US dollar GDP per capital fell 42.3% in Indonesia in 1997, 21.2% in Thailand, 19% in Malaysia, 18.5% in South Korea and 12.5% in the Philippines.[33] The CIA World Factbook reported that the per capita income (measured by purchasing power parity) in Thailand declined from $8,800 to $8,300 between 1997 and 2005; in Indonesia it declined from $4,600 to $3,700; in Malaysia it declined from $11,100 to $10,400. Over the same period, world per capita income rose from $6,500 to $9,300.[36] Indeed, the CIA's analysis asserted that the economy of Indonesia was still smaller in 2005 than it had been in 1997, suggesting an impact on

that country similar to that of the Great Depression. Within East Asia, the bulk of investment and a significant amount of economic weight shifted from Japan and ASEAN to China and India.[37] The crisis has been intensively analyzed by economists for its breadth, speed, and dynamism; it affected dozens of countries, had a direct impact on the livelihood of millions, happened within the course of a mere few months, and at each stage of the crisis leading economists, in particular the international institutions, seemed a step behind. Perhaps more interesting to economists was the speed with which it ended, leaving most of the developed economies unharmed. These curiosities have prompted an explosion of literature about financial economics and a litany of explanations why the crisis occurred. A number of critiques have been leveled against the conduct of the IMF in the crisis, including one by former World Bank economist Joseph Stiglitz. Politically there were some benefits. In several countries, particularly South Korea and Indonesia, there was renewed push for improved corporate governance. Rampaging inflation weakened the authority of the Suharto regime and led to its toppling in 1998, as well as accelerating East Timor's independence.[38]

[edit] Outside Asia

After the Asian crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of about $11 per barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters. This reduction in oil revenue contributed to the 1998 Russian financial crisis, which in turn caused Long-Term Capital Management in the United States to collapse after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of New York organized a $3.625 billion bail-out. Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s (see Argentine debt crisis).
[39]

The crisis in general was part of a global backlash against the Washington Consensus and institutions such as the IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the anti-globalization movement in 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancn, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasingly turning toward regional or bilateral free trade agreements (FTAs) as an alternative to global institutions. Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency swaps were introduced in the event of another crisis. However, interestingly enough, such nations as Brazil, Russia, and India as well as most of East Asia began copying the Japanese model of weakening their currencies, restructuring their economies so as to create a current account surplus to build large foreign currency reserves. This has led to an ever increasing funding for US treasury bonds, allowing or aiding housing (in 20012005) and stock asset bubbles (in 19962000) to develop in the United States.

[edit] See also

Financial crisis Liquidity crisis Financial contagion List of finance topics

Stock disasters in Hong Kong

[edit] References
Books

Kaufman, GG., Krueger, TH., Hunter, WC. (1999) The Asian Financial Crisis: Origins, Implications and Solutions. Springer. ISBN 0-7923-8472-5 Pettis, Michael (2001). The Volatility Machine: Emerging Economies and the Threat of Financial Collapse. Oxford University Press. ISBN 0-19-514330-2. Blustein, Paul (2001). The Chastening: Inside the Crisis that Rocked the Global Financial System and Humbled the IMF. PublicAffairs. ISBN 1-891620-81-9. Fengbo Zhang: Opinion on Financial Crisis, 6. Defeating the World Financial Storm China Youth Publishing House (2000) Noland, Markus, Li-gang Liu, Sherman Robinson, and Zhi Wang. (1998) Global Economic Effects of the Asian Currency Devaluations. Policy Analyses in International Economics, no. 56. Washington, DC: Institute for International Economics. Pempel, T. J. (1999) The Politics of the Asian Economic Crisis. Ithaca, NY: Cornell University Press. Ries, Philippe. (2000) The Asian Storm: Asia's Economic Crisis Examined. Tecson, Marcelo L. (2005) Puzzlers: Economic Sting (The Case Against IMF, Central Banks, and IMF-Prescribed High Interest Rates) Makati City, Philippines: Raiders of the Lost Gold Publication Muchhala, Bhumika, ed. (2007) Ten Years After: Revisiting the Asian Financial Crisis. Washington, DC: Woodrow Wilson International Center for Scholars Asia Program. Ito, Takatoshi and Andrew K. Rose (2006). financial sector development in the Pacific Rim. University of Chicago Press. ISBN 978-0-226-38684-3. Ngian Kee Jin (March 2000). Coping with the Asian Financial Crisis: The Singapore Experience. Institute of Southeast Asian Studies. ISSN 0219-3582 Tiwari, Rajnish (2003). Post-crisis Exchange Rate Regimes in Southeast Asia, Seminar Paper, University of Hamburg. Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the Asian crisis? S. Radelet, J.D. Sachs, R.N. Cooper, B.P. Bosworth (1998). The East Asian Financial Crisis: Diagnosis, Remedies, Prospects. Brookings Papers on Economic Activity. Stiglitz, Joseph (1996). Some Lessons From The East Asian Miracle. The World Bank Research Observer. Weisbrot, Mark (August 2007). Ten Years After: The Lasting Impact of the Asian Financial Crisis. Center for Economic and Policy Research. Tecson, Marcelo L. (2009), "IMF Must Renounce Its Weapon of Mass Destruction: High Interest Rates" (4-part paper on high-interest-rate fallacies and alternatives, emailed to IMF and others on 27 January 2009)

Papers

Other

Is Thailand on the road to recovery, article by Australian photo-journalist John Le Fevre that looks at the effects of the Asian Economic Crisis on Thailand's construction industry Women bear brunt of crisis, article by Australian photo-journalist John Le Fevre examining the effects of the Asian Economic Crisis on Asia's female workforce The Crash (transcript only), from the PBS series Frontline
1. ^ Kaufman: pp. 1956 2. ^ http://www.adb.org/Documents/Books/Key_Indicators/2003/pdf/rt29.pdf 3. ^ Pempel: pp 118143 4. ^ Krugman, Paul. "The Myth of Asia's Miracle" Foreign Affairs 73, no. 6 (Nov-Dec 1994): 62-78 5. ^ The Myth of Asia's Miracle A Cautionary Fable by Paul Krugman. 6. ^ Hughes, Helen. Crony Capitalism and the East Asian Currency Financial 'Crises'. Policy. Spring 1999. 7. ^ Blustein: p. 73 8. ^ The Three Routes to Financial Crises: The Need for Capital Controls. Gabriel Palma (Cambridge
University). Center for Economic Policy Analysis. November 2000.

Specific

9. ^ Bernard Eccleston, Michael Dawson, Deborah J. McNamara (1998). The Asia-Pacific Profile. Routledge
(UK). ISBN 0-415-17279-9. http://books.google.com/books?visbn=0415172799&id=l07akyd6DAC&pg=RA1-PA311&lpg=RA1-PA311&ots=XgqmmGV3CC&dq=%22Bangkok+Declaration %22+ASEAN&ie=ISO-8859-1&output=html&sig=u2ddDhzn-yVhEn5Fwu3d8iih0OA.

10. ^ FIRE-SALE FDI by Paul Krugman. 11. ^ Stiglitz: pp. 1216 12. ^ "Mahathir's dark side". The Daily Telegraph (London). 24 October 2003.
http://www.telegraph.co.uk/comment/telegraph-view/3597972/Mahathirs-dark-side.html.

13. ^ http://www.abc.net.au/news/newsitems/200612/s1812946.htm 14. ^ Joint Comminuque The 30th ASEAN Ministerial Meeting (AMM) The Thirtieth ASEAN Ministerial
Meeting was held in Subang Jaya, Malaysia from 24 to 25 July 1997.

15. ^ Halloran, Richard. China's Decisive Role in the Asian Financial Crisis. Global Beat Issue Brief No. 24.
27 January 1998.

16. ^ Woo-Cumings, Meredith (July 2003), "South Korean Anti-Americanism", Working Paper No. 93 (Japan
Policy Research Institute), http://www.jpri.org/publications/workingpapers/wp93.html Korea:"[T]he ceiling on foreign ownership of publicly traded companies was raised to 50 percent from 26 percent; and the ceiling on individual foreign ownership went up from 7 percent to 50 percent."

17. ^ Noland: pp. 98103 18. ^ a b IMF's Role in the Asian Financial Crisis by Walden Bello. 19. ^ The IMF Crisis Editorial. Wall Street Journal. 15 April 1998. 20. ^ http://www.columbia.edu/cu/thai/html/financial97_98.html 21. ^ Haider A. Khan, Global Markets and Financial Crises in Asia, University of Denver 2004 22. ^ Kaufman: pp. 1938 23. ^ Liebhold, David. Thailand's Scapegoat? Battling extradition over charges of embezzlement, a financier
says he's the fall guy for the 1997 financial crash. TIME.com. 27 December 1999.

24. ^ Raghavan, Anita (26 December 1997). "Japan Stocks Slide Again On Fears About Stability". Wall Street
Journal Online. http://online.wsj.com/article/SB882840058627490500.html?mod=googlewsj. Retrieved 2 September 2009.

25. ^ http://www.oanda.com/convert/fxhistory August 13 = 2673; August 14 = 2790; August 15 = 2900;

August 31 = 2930; October 31 = 3640; December 31 = 5535. Accessed 2009-08-20. Archived 2009-09-04.

26. ^ http://www.oanda.com/convert/fxhistory January 31 = 10,100; March 31 = 8,650; May 31 = 11,350; July

31 = 13,250; September 30 = 10,800. Accessed 2009-08-20. Archived 2009-09-04.

27. ^ Bayani Cruz, We will hold on to blue-chip shares: Tsang, The Standard, 29 August 1998. 28. ^ The CIA World Factbook - Malaysia 29. ^ Ngian Kee Jin: p. 12 30. ^ Pettis: pp. 5560 31. ^ Pettis: p. 79 32. ^ Tiwari: pp. 13 33. ^ a b http://www.adb.org/Documents/Books/Key_Indicators/2001/rt11_ki2001.xls 34. ^ a b Cheetham, R. 1998. Asia Crisis. Paper presented at conference, U.S.-ASEAN-Japan policy Dialogue.
School of Advanced International Studies of Johns Hopkins University, June 79, Washington, D.C.

35. ^ Radelet: pp. 56 36. ^ The Asian financial crisis ten years later: assessing the past and looking to the future. Janet L. Yellen.
Speech to the Asia Society of Southern California, Los Angeles, California, 6 February 2007

37. ^ Kilgour, Andrea (1999). The changing economic situation in Vietnam: A product of the Asian crisis? 38. ^ Weisbrot: p. 6 39. ^ The Crash transcript. PBS Frontline.

[edit] External links