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Crisis, reform and recovery

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.

Why China survived the financial crisis

Republic of Korea (South Korea), Thailand, Malaysia and Indonesia – namely, fragile bank-dominated financial systems, poor prudential surveillance and weak central bank regulation and supervision of commercial banks, a large build-up of non-performing loans due in part to excessive lending to inefficient, over-leveraged state enterprises, and a largely state-owned financial sector that may be almost insolvent – led many observers to conclude that the contagion’s virulent spread to China was imminent. However, the Middle Kingdom beat the odds. Although the Asian flu affected

in The Asian financial crisis
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Post-crisis Asia – economic recovery, September 11, 2001 and the challenges ahead

interest rates have been broadly unchanged since mid-1999, at levels significantly below those observed before the crisis.6 Lower interest rates helped reduce the pressure on heavily indebted corporations and contain the non-performing loans problem.7 with regard to fiscal policy, in Korea a supplementary budget adopted in August 1999 provided a much-needed additional stimulus, while targeting a consolidated central government deficit of 5 per cent of GDP for 1999. And sixth, luck has played an important role in Asia’s recovery, just as it compounded underlying problems in

in The Asian financial crisis
Open Access (free)
Crisis, reform and recovery

the central bank’s forward commitment. Moreover, commercial banks were advised to refrain from accommodating foreign speculators’ demand for foreign exchange, and the onshore and offshore foreign-exchange markets were split, with credit restrictions imposed upon non-residents. The resultant domestic credit squeeze reduced asset prices and collateral values and increased the levels of non-performing loans. This only served to put additional pressure on the already weak financial institutions, and several more finance companies collapsed. Nevertheless, the BOT

in The Asian financial crisis
Open Access (free)
Crisis, reform and recovery

both explicit and implicit pressure exerted by members of the Suharto family, their cronies and other highranking military and government officials to make loans to favored borrowers. Indeed, the practice of making loans based on political pressure became known as “memo lending,” because such loans were extended on the basis of a “memo” sent by the powerful and well-connected. Soon memo lending and other illegal practices led to high levels of non-performing loans at the state-owned banks. The case of a government-owned development bank, Bank Pembangunan Indonesia

in The Asian financial crisis
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Crisis, reform and recovery

. For example, Korea, like many other Asian economies, provided implicit guarantees to the banking system. This meant that banks were often engaged in lending practices that favored financially connected (and not always unqualified) borrowers – in particular, the chaebols or big family-controlled conglomerates. These implicit guarantees led banks to lend recklessly. This, in conjunction with poor corporate governance, created a stock of non-performing loans, thereby risking bank collapses (Corsetti, Pesenti and Roubini 1998). The Economist (1997, November 15, 33) is

in The Asian financial crisis
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Issues, debates and an overview of the crisis

totaling 17 trillion yen in April 1998, a further 17 trillion yen in 1999, including 6 trillion yen in tax cuts (Horiuchi 2000, 30–1). So far, these measures have failed to resolve the roots of Japan’s economic malaise: the US$800 billion to US$1 trillion in non-performing loans.45 As the next section illustrates, Japan’s long recession has had a significant impact on the crisis-hit countries in the region. During the late 1980s and 1990s, with the very rapid and sustained appreciation of the yen, Japanese manufacturers recognized that they needed to transfer a large

in The Asian financial crisis
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The evolving international financial architecture

. They claim that rather than utilizing the so-called “breathing space” to implement more fundamental policy reforms, in particular, the correction of macroeconomic imbalances and the strengthening of its fragile and highly leveraged financial sector, the Malaysian government has done very little. They note, for example, that Prime Minister Mahathir, besides sacking reform-oriented policy-makers (such as Anwar Ibrahim), has followed policies, including further loosening non-performing loan classification regulation and setting minimum lending targets for banks, that will

in The Asian financial crisis

, asking: ‘in rough numbers, what do you think the intrinsic value of the $54bn is’, and was assured that it was on a mark-to-market basis, with ‘a lot of transparency, as a result of all the sales’. Bhatia also asked about the non-performing loans balances broken down by residential, commercial and real estate investment related, but the CFO replied that he did not have those figures to hand. Bill Tanona, from Goldman Sachs, pointed out that where assets were marked was ‘obviously a big concern in the market-place’ especially with Level 3 assets being about $38bn for

in Lehman Brothers