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The Asian financial crisis

Crisis, reform and recovery

Shalendra D. Sharma

The Asian financial crisis of 1997-98 shook the foundations of the global economy and what began as a localised currency crisis soon engulfed the entire Asian region. This book explores what went wrong and how did the Asian economies long considered 'miracles' respond, among other things. The combined effects of growing unemployment, rising inflation, and the absence of a meaningful social safety-net system, pushed large numbers of displaced workers and their families into poverty. Resolving Thailand's notorious non-performing loans problem will depend on the fortunes of the country's real economy, and on the success of Thai Asset Management Corporation (TAMC). Under International Monetary Fund's (IMF) oversight, the Indonesian government has also taken steps to deal with the massive debt problem. After Indonesian Debt Restructuring Agency's (INDRA) failure, the Indonesian government passed the Company Bankruptcy and Debt Restructuring and/or Rehabilitation Act to facilitate reorganization of illiquid, but financially viable companies. Economic reforms in Korea were started by Kim Dae-Jung. the partial convertibility of the Renminbi (RMB), not being heavy burdened with short-term debt liabilities, and rapid foreign trade explains China's remarkable immunity to the "Asian flu". The proposed sovereign debt restructuring mechanism (SDRM) (modeled on corporate bankruptcy law) would allow countries to seek legal protection from creditors that stand in the way of restructuring, and in exchange debtors would have to negotiate with their creditors in good faith.

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Korea

Crisis, reform and recovery

Shalendra D. Sharma

outflows from Korea amounted to about US$9.8 billion, the more sophisticated version of this argument interprets the crisis as a classic liquidity crisis – where Korean banks had insufficient reserves and insufficient access to funds, and where investors, suddenly seized with panic, refused to roll over short-term debt, besides demanding immediate payment (Radelet and Sachs 1998). From the perspective of actual experience, analytical distinctions between the “fundamentalist” and the “panic” perspectives are less sharp than they are made in the literature. Indeed, it is

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Beyond the Asian crisis

The evolving international financial architecture

Shalendra D. Sharma

important to the health of the global financial system” (IMF 2001, 3). The IMF and the World Bank plan to conduct FSAP assessments of all member countries at least once in the next five years. Third, there is now agreement that the IMF, in collaboration with other institutions such as the World Bank and the Bank for International Settlements,16 should closely monitor developments in global capital markets, which involves – keeping a watchful eye on the risks of potential large reversals of capital flows and the contagion effects; on the rapid accumulation of short-term debts

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Thailand

Crisis, reform and recovery

Shalendra D. Sharma

rates for more than a quartercentury before the financial meltdown in July 1997. Rather, this chapter argues that it was the volatile convergence of a mounting current account deficit, a sharp export slowdown, currency and maturity mismatches among Thai commercial banks, the maintenance of a rigid exchange rate, a rapid build-up of private short-term foreign-debt liabilities, an overheated investment bubble in real estate and stock markets, and an external environment that unexpectedly turned sour in 1996–97, that led to the crisis. All that this convergence needed was

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The domino that did not fall

Why China survived the financial crisis

Shalendra D. Sharma

debt-service ratio (i.e. debt service vs percentage of exports) at 8.5 per cent in 1998. As was noted earlier, the debt also has long maturity, with short-term debt making up only 19.7 per cent of total debt in 1996.17 Given this, it is not surprising that China is amongst a handful of developing economies with an investmentgrade rating on its sovereign external debt. Finally, the evidence is unequivocal: the fruits of post-reform economic development have trickled down to broad segments of the Chinese population. For example, per capita consumption has increased

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Conclusion

Post-crisis Asia – economic recovery, September 11, 2001 and the challenges ahead

Shalendra D. Sharma

banking crisis resulting in credit contraction. During the Asian crisis, the swing of international capital from inflows to outflows amounted to more than 20 per cent of GDP in Thailand. Currency depreciation further worsened the balance-sheets of corporations by inflating the value of liabilities in domestic currency terms, thereby precipitating a currency and banking crisis. Further, there was an imbalance between high levels of short-term foreign debt and low foreign-exchange reserves. However, as investor panic (both foreign and domestic) that partly triggered the

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Indonesia

Crisis, reform and recovery

Shalendra D. Sharma

approximately US$33 billion was short-term debt with maturities due within one year (IMF 1997a). In addition to this amount, Indonesian firms also took out large lines of short-term credit in foreign currencies both directly from foreign lenders and from Indonesian banks – greatly adding to their foreign currency exposure. By contrast, foreign exchange reserves in mid1997 stood at about US$20 billion. In other words, short-term debts owed to foreign commercial banks were about 1.75 times the size of Indonesia’s total foreign exchange reserves (Radelet 1999, 3). The massive

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Introduction

Issues, debates and an overview of the crisis

Shalendra D. Sharma

stability and productivity growth and reducing inflation between 1994 and 1998 (after decades of out-of-control inflation), it failed to contain the fiscal deficit adequately. The fiscal deficit, estimated at 8 per cent of GDP in 1998, also contributed to a widening of the external current account deficit to 4.5 per cent of GDP in 1998.15 These substantial fiscal and trade deficits and the structure of public debt (which makes the government’s finances extremely sensitive to changes in short-term interest rates and the exchange rate), made Brazil highly vulnerable to changes in

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Oonagh McDonald

at that time used a high-risk, high-leverage model, which depended on retaining the confidence of the counterparties. Lehman maintained about $700bn of assets and corresponding liabilities on capital of about $25bn. Lehman borrowed heavily to meet its cash needs, creating a high debt-to-equity ratio. The assets were generally long-term, whilst the liabilities were short-term; for example, Lehman financed most of its balance sheet in the short-term repo market to the tune of over $200m. per day in 2008. It relied on short-term secured financing to conduct its daily

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Oonagh McDonald

portfolios used cash-flow models to value their mortgage-related securities by the third or fourth quarter of 2007’. 24 Hedge funds and ‘special investment vehicles’ saw a huge outflow of capital in mid-2007. As a consequence, Bear Stearns, BNP Paribas and others stopped withdrawals and refused redemptions of their investment funds, arguing that it was impossible to value the assets in these funds, as there were ‘just no prices’ for some of these securities. These actions were also taken because the funds had been largely financed with short-term debt and with falling