the asian debt crisis of the 1990's
DESCRIPTION
The Asian debt crisis of the 90\'s: A presentationTRANSCRIPT
![Page 1: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/1.jpg)
THE ASIAN DEBT CRISISNitesh Kumar
Sameer Verma
Ashutosh Bharadwaj
![Page 2: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/2.jpg)
THE STORY OF A BOOM AND A BUST AND THE CASCADE EFFECTCONTENTS:
The anatomy of a disaster The boom years and the end of the beginning The beginning of the end The bust: And it all came falling down Contagion and aftermath Lessons and reflections
![Page 3: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/3.jpg)
ASIAN TIGERS :THE ECONOMIC MIRACLE
![Page 4: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/4.jpg)
PROLOGUE: TIMES ARE GOOD IN THAILAND!
Emerged as a major Industrial centre for Japan in the 1980s.
Most investment is based on personal or institutional savings, less of debt and more of security.
The Thai Baht is pegged to the dollar in order to make investors confident and encourage trust.
![Page 5: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/5.jpg)
BUT WHY INVEST IN SOUTH EAST ASIA?
Low interest rates in the developed world: FII’s looking towards ‘emerging markets’
After the Latin American debt crisis, Investors looking for alternate, safer destinations
The end of the cold war makes foreign investments seem to be more secure
![Page 6: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/6.jpg)
AND SO THEY CAME IN DROVES!
Capital inflow 1997:$256 Billion
Capital inflow 1990:
$42 Billion
Availability of credit
Real estate boom
Economic
growth
![Page 7: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/7.jpg)
THE FUNDAMENTS OF PEGGING A CURRENCY:
THE FLOATING CURRENCY REGIME
Demand Supply
In a floating currency regime the value of a currency is decided by
the laws of demand and supply and is dynamic.
![Page 8: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/8.jpg)
THE FUNDAMENTS OF PEGGING A CURRENCY:
THE FIXED OR PEGGED CURRENCY REGIME
The government through a central bank maintains the value of the currency with reference to
another (Commonly the dollar)25 baht = 1 US $
![Page 9: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/9.jpg)
THE FUNDAMENTS OF PEGGING A CURRENCY:THE FIXED OR PEGGED CURRENCY REGIME
• FII’s convert their dollars to Baht so that they can invest in Thailand
Inflow of foreign funds
![Page 10: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/10.jpg)
THE END OF THE BEGINNING! 1996 A BUBBLE EMERGES
Investments and rise in affluence increased imports and hence the trade deficit
Rise in wages make Thai goods less competitive and exports affected
Dubious ‘Finance companies’ encourage real estate and stock bubbles
![Page 11: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/11.jpg)
THE BEGINNING OF THE END! 1996 - 1997
Devaluation of the Yen makes south east Asia less
attractive
Speculators start going bust and financial
companies go under, investor confidence slides
The housing and stock market bubbles burst,
investors start pulling out
![Page 12: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/12.jpg)
INTERLUDE: CRONY CAPITALISMTHE TOPI GAME AND THE PONZI SCHEME!
![Page 13: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/13.jpg)
THE THAI GOVERNMENT: IN BETWEEN A ROCK AND A HARD PLACE!
Option one: Increase interest rates to attract and retain investment• Will negatively affect the economy and
hit businesses that are already suffering
Option two: Let the currency slide• Dollar debts of Thai companies would
magnify, government reputation tarnished
![Page 14: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/14.jpg)
TO FLOAT OR NOT TO FLOAT, THAT IS THE QUESTION!
Indecision by the Thai government to devalue currency encourages speculation against the baht• Businessmen and hedge funds sell
Baht to buy dollars, buy US Bonds• Further pressure on the Baht and
central bank, foreign exchange reserves plunge
![Page 15: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/15.jpg)
THE ‘LONG’ AND ‘SHORT’ OF SPECULATION AND THE HEDGE FUND
Long: Stocks or real estate purchased at market price and sold when the rate rises to make a profit
Short: You borrow stocks for some time, sell them and invest the proceeds. If the stocks lose value you gain as you purchase them at a lower price
![Page 16: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/16.jpg)
INTERLUDE: HOW GEORGE SOROS CONQUERED BRITAIN! In 1990 as part of the European Monetary
Exchange Rate Mechanism (ERM) Britain forced to keep its currency pegged at a high rate. Due to a recession it was inevitable that the pound would float sooner or later
The Quantum fund with a credit line of $15 Billion establishes itself long in dollars and short in Pounds
A high profile media attack further hits the pound, Britain spends $50 billion to peg the Pound and has to give up and make the currency float
Soros gains $ 1 Billion!
![Page 17: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/17.jpg)
INTERLUDE: THE HONG KONG PUNTER PARTY! (HEAD I WIN, TAIL YOU LOSE)
Short in stocks and buy dollars, if interest rates
are raised stocks fall and
they gain
Long is dollars so if currency is devalued they gain as well
In 1998 Hong Kong is hit by the financial crisis, the government would either raise interest rates or make the currency float. Hedge funds take advantage of this
![Page 18: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/18.jpg)
THE BUST: AND IT ALL CAME FALLING DOWN
2nd July 1997 Thailand lets the baht go
The value plunges
50% (expected fall 15%)
Interest rates raised
sharply to avoid a
meltdown
![Page 19: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/19.jpg)
THE VICIOUS CIRCLE OF A FINANCIAL CRISISFinancial problems
for companies, banks, households
Plunging currency, rising interest
rates, slumping economy
Loss of Confidence
![Page 20: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/20.jpg)
CONTAGION AND THE RIPPLE EFFECT
Indonesian Rupiah plunges by 30 %Faces the worst financial crisis inworld history
Currency crisis in Malaysia
Crisis even spreads to South Korea
![Page 21: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/21.jpg)
REASONS FOR THE RIPPLE EFFECT
Direct trade links between
countries
Southeast Asian
investment funds lumped as ‘Emerging Market Funds’
The ‘Asian miracle’
perception collapses in the
mind of investors
![Page 22: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/22.jpg)
POSTMORTEM: SO WHY DID IT HAPPEN?
External factors •Devaluation of the Japanese and Chinese currency makes exports less competitive •Cheap Chinese labor
Cronyism and corruption •So called ‘financial companies’ affiliated to politicians, large scale scams and embezzlement
Panic! •Badly run economies more susceptible to panic•Flimsy economies crash like a pack of cards
![Page 23: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/23.jpg)
THE IMF BAILOUT PACKAGE Stepped in for US $ 40 billion package Conditional relief – Demanded for Reformed
Economic policies, Removing insolvent institutions
![Page 24: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/24.jpg)
INTROSPECTION AND REFLECTIONS
Crisis rose due to ‘Fast Track Capitalism’
![Page 25: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/25.jpg)
REFERENCES
Paul Krugman: The
Return of Depression Economics
Niall Ferguson: The
Ascent of Money
The economist
online edition
![Page 26: The Asian Debt Crisis of the 1990's](https://reader035.vdocuments.mx/reader035/viewer/2022062418/55630a21d8b42a6f598b579f/html5/thumbnails/26.jpg)
THANK YOU