Asian crisis

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Asian crisis IMFs 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
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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

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Background
What happened?
IMFs intervention
Critisism of IMFs intervention
Lessons learned
4
Countries directly involved

• Indonesia
• Thailand
• South Korea
• Philippines
• Malaysia

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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

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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

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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

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Yield
Invest LT
Spread
Borrow ST
Time
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Short term bank liabilities rose before the crisis
Source Bouchet, Clark, Groslambert, 2001
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Background
What happened?
IMFs intervention
Critisism of IMFs intervention
Lessons learned
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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

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Currency depreciated
Source IMF
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Stock markets
Source IMF
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Background
What happened?
IMFs intervention
Critisism of IMFs intervention
Lessons learned
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IMFs role

• Crisis prevention and short-term financing of
  temporary balance of payments problems with
  macro-economic stabilization programs

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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

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The program consisted of 3 parts
IMF program
Structural
Macroeconomic
Financial
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The IMF provided US35B

• 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 US85B was provided by other sources

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Source IMF
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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

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Interest rates
Source IMF
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Exhange rates
Source IMF
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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

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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

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Background
What happened?
IMFs intervention
Critisism of IMFs intervention
Lessons learned
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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

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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

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• 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

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Inaccurate focus

• Program did not focus enough on the financial
  sector and corporate issues
• Capital controls were imposed too late, corporate
  governance

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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

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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

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Background
What happened?
IMFs intervention
Critisism of IMFs intervention
Lessons learned
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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

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IMF did their best given available information

• IMFs 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

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Q As

• ???