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The Crisis in a Nutshell

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appreciation. Dollars purchased ... Domestic interest rates were high. 1995 - 1997 ... However, they make it incumbent upon us to avoid the kind of behavior or ... – PowerPoint PPT presentation

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Title: The Crisis in a Nutshell


1
The Crisis in a Nutshell
  • Too Much, Too Fast

2
1960s 1980s
  • Most FDI Rich to Rich
  • US investment in Europe
  • The American Challenge

3
Late 1980s 1990s
  • FDI shifts to developing countries
  • Many in Africa LA oppose FDI
  • Asia and former Soviet block countries favor
    welcome FDI

4
Early 1990s
  • Liberalize FDI laws
  • Privatization
  • Market friendly policies
  • Deregulation

5
1995 - 1997
East and Southeast Asia become favorite target
for banks, investors and speculators from the
world economy
6
1995 - 1997
The countries drown in floods of money credit.
Eight Asian countries receive over 2/3 of
world investment funds
7
TRANSITION FROM 1994(III,IV) to 1997(I,II)
  • THAILAND Increased weight of US in its basket
    of reserve currencies
  • HONG KONG TAIWAN Remained pegged to the US
  • INDONESIA, KOREA, MALAYSIA, SINGAPORE CHINA
    Managed float toward tighter ties to US

8
Currency Supply Demand in 1995-97
Growing excess supply of dollars Growing excess
demand for baht
Baht per Dollar
Dollars purchased by Bank of Thailand with
baht. Baht flow into Thai commercial banks
and their reserves R
Pressure toward baht appreciation
S1
S2
Growing dollar supply
Dollars traded
9
Commercial Bank Reserves
Bank reserves pay no interest Hence, massive
loans Excessive investments Excess capacity
10
1995 - 1997
  • Dollar BAHT, RUPIAH, PESO RINGGIT appreciated
    40 with respect to the yen
  • Strong purchasing power over foreign goods
    services
  • Domestic goods not competitive
  • Domestic interest rates were high

11
1995 - 1997
  • Current account deficits growing net interest
    payments to outland
  • Capital Account surpluses strong growth rates
    high interest rates gt heavy capital inflows
    (US)
  • Dollars accumulate as R banks awash with
    liquidity gt lending building

12
THAILAND EARLY 1997
  • Banks lent heavily to finance construction
  • Financiers borrowed abroad at low interest rates
    opened accounts in Thailand at high interest
  • Banks financiers lent heavily to investors and
    industry

13
THAILAND 1997
  • Correction! Foreign investors panic, try to
    repatriate profits
  • Reversal! Baht holders try to buy dollars from
    Thai banks and BOT
  • Exchange rate pressure! BOT tries to keep peg
    buys baht with dollars
  • Speculation! Interest rates rise BOT dollar
    reserves depleted

14
Thailand 1997 Sharp Reversal
Baht per Dollar
D2
D1
S2
NEW ER
S1
Exchange Rate rises baht depreciates.
SUPPLY FALLING
DEMAND RISING
INITIAL ER
Dollars Traded
15
THAILAND 1997
  • Shorting a currency Traders Albert Bill
    bargain on 15 May
  • BOT pegged ER at B25/1
  • Albert offers to sell baht to Bill in two months
    at the rate of B30/1. Bill agrees
  • BOT floats baht on 02 July baht value falls to
    B40/1 by 15 July
  • Albert can now buy 120 baht for 3 and sell them
    to Bill for 4.00

16
THAILAND 1997
  • Short selling enormous due to falling stock of
    BOT reserve dollars, low risk and high expected
    profits
  • Liquidity drying up. Capital intensive projects
    failing
  • Bank loans unpaid
  • Debt to foreigners due in dollars
  • The stock market was cannibalized

17
MALAYSIA, PHILIPPINES, INDONESIA
  • similar policies and vulnerabilities
  • Speculators gt expedited fall of currency values
  • Philippines were not hit so hard currency was
    more flexible some cronyism already been ousted
    with Marcos

18
SPECULATORS
  • Speculators, like the Paparazzi, exploit
    weakness or vulnerability
  • However, they make it incumbent upon us to avoid
    the kind of behavior or policies that create
    exploitable weaknesses
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