Asian crisis

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					               Asian crisis
                    &
                IMF’s role
MSc International Finance –
Course: International Finance
Course Leader: Dr. Michel Henry Bouchet
                              Group 2:
 Sigve Dyrnes, Ivar Moesman, Eirik Mjelde, Clint Hogestyn & Espen Øyen
                Asian crisis
   The floating of the Thai Bath 2nd July ’97
    was followed by an immediate fierce
    depreciation
   A series of speculative attacks on the Bath
   Realisation of the serious underlying
    economic conditions
   Stock and real-estate prices plummeted
   Panic and loss of confidence
   Capital flight
   Background



What happened?



IMF’s intervention


 Critisism of IMF’s
    intervention


 Lessons learned
     Countries directly involved
   Indonesia
   Thailand
   South Korea
   Philippines
   Malaysia
     Background on the asian region
   High growth because of optimism
    both from domestic and foreign
    investors, money pouring in
   Low inflation, solid growth in
    exports, healthy government
    economy, including huge reserves in
    foreign assets(capital account),
    current account surplus.
   High saving rate 30% of GDP
       Background of the crisis
   Failure to dampen overheating
    preassures
   Lax prudential rules and financial
    oversight
    • No collateralised loans
    • Large inflows
    • No risk assesment
   Moral hazard problem
   Fixed exhange-rates to the dollar
       Background of the crisis
   Dollar appreciated against yen ’95-’97
     • Tigers less competitive
     • CA deficits widened
   Realisation of the bad economic conditions-
    despite the previous high growth
    • Highly leveraged firms(unable to pay off the
      debt, red.exports)
    • Risky, non-profitable investments
    • Highly inflated prices on real-estate, stock-prices
      (moral hazard, explanation?)
    • Bad governance
   Short-term borrowing
   Yield




Spread                 Invest LT


           Borrow ST




                       Time
               Short term bank liabilities rose
                      before the crisis
             80000
                                   Philippines
             70000
                                   Indonesia
             60000                 Korea
millions $




             50000                 Thailand
                                   M alaysia
             40000

             30000

             20000

             10000

                0
                .86

                       .87

                              .88

                                      .89

                                               .90

                                                     .91

                                                           .92

                                                                  .93

                                                                         .94

                                                                                  5

                                                                                         6

                                                                                                7

                                                                                                       8

                                                                                                              9
                                                                                .9

                                                                                       .9

                                                                                              .9

                                                                                                     .9

                                                                                                            .9
                 c

                        c

                               c

                                      c

                                              c

                                                     c

                                                            c

                                                                   c

                                                                          c

                                                                                 c

                                                                                        c

                                                                                               c

                                                                                                      c

                                                                                                             c
              De

                     De

                            De

                                   De

                                           De

                                                  De

                                                         De

                                                                De

                                                                       De

                                                                              De

                                                                                     De

                                                                                            De

                                                                                                   De

                                                                                                          De
Source: Bouchet, Clark, Groslambert, 2001
   Background



What happened?



IMF’s intervention


 Critisism of IMF’s
    intervention


 Lessons learned
                  Outbreak
   Creditors refused to roll-over short term
    debt
   Foreign investors sold their Asian stocks
   Devaluation of the asian currencies
   Stock-prices, real-estate prices tumbled
   Panic spread rapidly with spill-over effects
    towards Eastern Europe and Latin America
   Bankruptcies
Currency depreciated




 Source: IMF
              Stock markets




Source: IMF
   Background



What happened?



IMF’s intervention


Critisism of IMF’s
   intervention


Lessons learned
              IMF’s role
   Crisis prevention and short-term
    financing of temporary balance of
    payments problems with macro-
    economic stabilization programs
      IMFs immediate response
   Helping Indonesia, Korea and
    Thailand by arranging programs of
    economic stabilisation and reforms
    that could restore confidence and be
    supported by the IMF
  The program consisted of 3 parts



            IMF’ program



Financial   Macroeconomic   Structural
      The IMF provided US$35B
   The IMF gave financial support to eliminate
    the liquidity squeeze in Indonesia, Korea
    and Thailand
    • Short term debt, roll-over problems
    • To avoid the liquidity problem to turn into
      solvency problems
   A further US$85B was provided by other
    sources
Source: IMF
        Monetary and fiscal policy
             was tightened
   Increase of the interest rate
    •   Prevent further depreciation
    •   Halt inflation
    •   Encourage equity financing
   Depreciation vs increase of interest rate
    •   Companies with foreign denominated debt is
        likely to suffer far more from a pro-longed
        currency depreciation than a temporary
        Increase of interest rates
   Fiscal tightening in Thailand to reverse
    an increase of the deficit
              Interest rates




Source: IMF
              Exhange rates




Source: IMF
      Structural reforms were
              initiated
   Financial sector reforms
    • the closure of insolvent financial institutions
    • the recapitalization of potentially viable
      financial institutions
    • close central bank supervision of weak
      financial institutions
    • a strengthening of financial supervision and
      regulation, to prevent a recurrence of the
      fragilities that had led to the crisis
   Corporate debt restructuring
      The signs of recovery came late
   The IMF programs were inititally less
    succesful than hoped
    • Capital outflows
    • Further depreciation
   The countries experienced much deeper
    recessions than projected
    • Collapse in domestic spending
   Financial markets stabilized early 1998 in
    Korea and Thailand, and in late 1999 in
    Indonesia
   Background



What happened?



IMF’s intervention



 Critisism of IMF’s
    intervention


 Lessons learned
         The IMF did not predict the
                   crisis
   Implied volatilities were same or
    higher than those at the height at
    Latin America crisis in early 1990
   International lenders weighted
    towards shorter maturities as an exit
    strategy
    • the crisis was expected by the market
      Reforms were too tough?
   Interest rates settled too high
   Strangled complete economy
   Standard IMF policy is not sufficient
    for huge crisis
   Fiscal policy too tight
    • Decline in private demand
    • Lost total confidence in growth
    • Deflationary effect in the region
   When the IMF acted, it reacted instinctively
    • without proper research to find the underlying reasons
      for the crisis
   The IMF tightened domestic credit
    • in economies already at risk from slumping demand,
      currencies in free fall and depleted reserves

   Standard IMF policy
    • This crisis had different characteristics from the crisis
      the IMF was used to dealing with. Usual crisis:
    • 1 !large! budged deficet (not the case)
    • 2 Hyper-inflation (not the case)

   Fiscal policy
    • The taxes were too high, or the government spending
      too low
           Inaccurate focus
   Program did not focus enough on the
    financial sector and corporate issues
   Capital controls were imposed too
    late, corporate governance
      IMF intervention leads to Moral
                 hazard?
   Far fetched notion
    • Country would not deliberately court
      such a crisis
    • Investors also bear losses
    • Firms and Financial institutions go
      bankrupt
    • Lenders forced to write down claims
       IMF does not have the adequate
      resources to deal with such a crisis

   The IMF functions are limited
    • Supervisory role
    • Temporary financing
   Much of the debt in Asia was private
   Governments were reluctant to take
    on the package provided by the IMF
    mostly due to the tough demands
   Background



What happened?



IMF’s intervention



 Critisism of IMF’s
    intervention


 Lessons learned
        Stronger efforts at crisis
              prevention
   Strengthened surveillance,
    particularly with regard to the
    vulnerability of the exchange rate
    and the financial system
   Greater transparency of economic
    and financial developments
          IMF did their best given
           available information
   IMF’s main role is to attack BoP problems
   IMF expected a minor slowdown
   When they realised that the region
    suffered from more serious problems, they
    eased the measures
   Should IMF in the future have greater
    responsiblility concerning private sector
    supervision?
    • More cooperation between the different
      supervisory institutions
Q & A’s

				
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posted:6/28/2012
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