Before Summer of 1997

 Misc
o Their inflation rates were quite low [2]

[2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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 Fiscal Policy
o On the eve of the crisis all of the governments were more or less in fiscal balance [2]

[2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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 Monetary Policy
o None of the governments were engaged in irresponsible monetary expansion [2]
o SE Asian economies had high interest rates to attract short-term loans
 [2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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 Asian Pegs
o Early 1990s: US recovers from recession  Greenspan raises interest rates to prevent inflation = investors then want to
get their hands on US bucks (rise of US dollar value) to buy US T-bills
 lowered the amount of foreign investment going into Southeast Asian economies [1]
o Thai & Indonesian currencies are pegged to the dollar. Dollar in 1990s was increasing in value = Thai & Indonesian
exports are more expensive

[1] http://www.investopedia.com/articles/economics/08/currency-crises.asp
[2] Steven Radelet & Jeffrey Sachs; January 4, 1999; What Have We Learned, So Far, From the Asian Financial Crisis?

 Private-Sector / Non-Bank lenders

o In Thailand …“finance companies” … borrowed short-term money [and] then lent [the borrowed money] to
speculative investors …Unrestrained risky lending by these institutions caused inflation of asset prices [2]
o The proliferation of risky lending drove up asset prices making the collateral position of [these] lending institutions
seem stronger than it actually was [2]
o In each country, an increasing share of bank loans went towards construction, real estate, finance, and other services. In
Thailand, both property and equity share prices soared, then began to plummet in late 1996, putting pressure on
financial institutions that had lent to these activities and thereby helping to set the crisis in motion [1]
 o In Korea, overinvestment was focussed more on certain manufacturing sectors, such as semiconductors and steel, rather
than on real estate and services. [1]

 Foreign lenders
o financial liberalization policies introduced in each of the crisis economies in the late 1980s and early 1990s that led to a
very rapid expansion of the financial sector, and enthusiastic lending by foreign creditors. [2]
o much of the domestic credit expansion was financed by domestic banks and other financial institutions borrowing
offshore. [2]
o A second moral hazard argument is that creditors felt secure that they would be repaid for lending to specific projects
that were controlled by companies with close connections to the government. [Ex: Firms owned by members of the
Suharto family in Indonesia] [2]

 Domestic Banks
o many basic prudential regulations (such as lending to affiliated companies) were regularly broken, with little penalty
[1]

 Exports
o Perceptions about Asia’s growth prospects may have begun to shift after export growth slowed abruptly in 1996.
Several factors apparently combined to weaken export performance.
  According to data compiled by Werner International (1996), wage rates in the apparel sector in Malaysia,
Indonesia, and Thailand all grew by 12 percent per year or more between 1990-95
 over production led to a glut in some sectors and thereby to falling export prices.
 Third, competition from China and Mexico put some moderate pressure on Asian exporters,
o In turn, slower export growth may have created concerns on the part of creditors about future growth prospects and the
ability of Asian firms to continue to service their debts. [1]

[1] Steven Radelet & Jeffrey Sachs; January 4, 1999; What Have We Learned, So Far, From the Asian Financial Crisis?
[2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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Summer 1997
 While the exact cause of the crisis is disputed, Thailand was the first to run into trouble [1]
[1] http://www.investopedia.com/articles/economics/08/currency-crises.asp

 Lending / Borrowing
o High asset prices eventually began to collapse … causing individuals and companies to default on debt obligations …
resulting panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunch and
further bankruptcies.
o One reason that such a large amount of capital was able to leave so quickly was that a substantial portion was
structured with very short-term maturities. [1]
o the crisis hit several countries with widely varying economic structures and fundamentals within a relatively short
period of time. Korea and Indonesia had relatively little in common at the time of the crisis, except the levels of short-
term debt and a common geographical region. [1]
o these countries were in an exceedingly vulnerable financial position, with very high levels of short-term debt in
comparison with (depleted) foreign exchange reserves. [1]
[1] Steven Radelet & Jeffrey Sachs; January 4, 1999; What Have We Learned, So Far, From the Asian Financial Crisis?
[4] Emerging-market sovereign debt, Risk redefined, Feb 25th 2010, The Economist

 Currency Pegs
o SE Asian countries were running out of reserves (to maintain their pegs) , so countries dropped the peg to the US
dollar…the value of their currencies drastically drops [3]
 o the devaluations, though unavoidable once the reserves were deplected, amounted to a broken promise. The …broken
promise …therefore became a focal point for financial panic. [4]
[1] http://www.investopedia.com/articles/economics/08/currency-crises.asp
[3] http://www.washingtonpost.com/wp-srv/business/longterm/asiaecon/timeline.htm
[4] Steven Radelet & Jeffrey Sachs; January 4, 1999; What Have We Learned, So Far, From the Asian Financial Crisis?

 Assets
 Everyone starts selling SEAsian assets/stocks
 lots of unwanted SEAsian currencies flood the markets [3]
 Never underestimate the effect of psychological panic
[3] http://www.washingtonpost.com/wp-srv/business/longterm/asiaecon/timeline.htm
 After Summer of 1997

 Bankruptcies
o Major bankruptcies all over Asia [3]
[3] http://www.washingtonpost.com/wp-srv/business/longterm/asiaecon/timeline.htm

 Debts
o but many ppl (govts included) in those countries had debts denominated in US bucks [2]…they had to default on their
obligations
[2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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 Assets
o Falling asset prices quickly made financial institutions insolvent forcing them to cease lending which led to a further
acceleration of asset depreciation [2]
o This reinforcing circular decline can explain the contagious nature of the crisis to countries without visible economic
links …Other countries (where the asset bubble had not yet burst) suffered a decline of investor confidence because of
the suddenness, severity and unpredictableness of the Thai crises [2]
 [2]http://74.125.95.132/search?q=cache:2oS_QsGuipAJ:www2.hawaii.edu/~asschea/ECON461/Lecture%2520Notes/
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 IMF
o The IMF created a series of bailouts ("rescue packages") for the most affected economies to enable affected nations to
avoid default, tying the packages to reforms ("structural adjustment packages")
o The SAPs called on crisis-struck nations to
 cut back on government spending to reduce deficits to restore confidence in a country’s solvency
 In Asia, the austerity approach, far from reassuring investors and building confidence, served to deepen the
economic contraction that was already in its early stages. On fiscal policy, the IMF recognized the mistake
within a few months and eased the fiscal targets in its programs, but much damage had already been done. [1]
o Another problem with the IMF’s approach to the Asia crisis was its poorly-thought-out approach to the banking system.
Its initial approach was to close a series of banks and financial institutions as a means for the Asian governments to
signal that they intended to introduce tough reform measures. There is little doubt that these banks, as well as others,
were in poor shape and needed to be merged, closed, or recapitalized. The problem was that the banks were closed very
abruptly and without a comprehensive and well-thought-out financial restructuring plan in place. The IMF’s initial
program failed to include provisions for deposit insurance, for managing the performing and nonperforming assets of
these and other banks, or for securing and strengthening the rest of the banking system. The closures set off a bank run
that began to undermine the rest of the banking system, including healthy banks. In the months that followed, the
Indonesian central bank was forced to provide huge lines of credit to keep the banking system liquid. [1]
o aggressively raise interest rates to protect currency values
 High interest rates meant that local companies must default on their loans….the banks who had loaned the
money then collapse

[1] Steven Radelet & Jeffrey Sachs; January 4, 1999; What Have We Learned, So Far, From the Asian Financial Crisis?