Title: The Crisis in a Nutshell
1The Crisis in a Nutshell
21960s 1980s
- Most FDI Rich to Rich
- US investment in Europe
- The American Challenge
3Late 1980s 1990s
- FDI shifts to developing countries
- Many in Africa LA oppose FDI
- Asia and former Soviet block countries favor
welcome FDI
4Early 1990s
- Liberalize FDI laws
- Privatization
- Market friendly policies
- Deregulation
51995 - 1997
East and Southeast Asia become favorite target
for banks, investors and speculators from the
world economy
61995 - 1997
The countries drown in floods of money credit.
Eight Asian countries receive over 2/3 of
world investment funds
7TRANSITION 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
8Currency 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
9Commercial Bank Reserves
Bank reserves pay no interest Hence, massive
loans Excessive investments Excess capacity
101995 - 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
111995 - 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
12THAILAND 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
13THAILAND 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
14Thailand 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
15THAILAND 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
16THAILAND 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
17MALAYSIA, 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
18SPECULATORS
- 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