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.

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Crisis, reform and recovery

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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Why China survived the financial crisis

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

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

reserves had dwindled to US$45 billion, below the level of its short-term debt. As the real came under renewed pressure from speculators the Brazilian government sought external assistance.16 In November the IMF announced a US$41.5 billion multilateral loan package (with the IMF contributing US$18.1 billion under a three-year Stand-By Arrangement), to sustain the value of the real and help Brazil with its balance of payments problem.17 However, the calming effects of the IMF program were short-lived. The failure by the authorities to reach political agreement on the

in The Asian financial crisis

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

in Lehman Brothers
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The evolving international financial architecture

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

in The Asian financial crisis

-backed securities, but in 2006 Lehman started to retain the assets, both residential markets and commercial real estate, as its own assets. The risk and return remained with Lehman. The effects of this policy were that Lehman had to continually roll over its debt because of the mismatch between short-term debt and long-term illiquid assets. The company had to borrow billions of dollars on a daily basis. Its business risk was increased because of its investments in long-term assets – residential and, especially commercial real estate, private equity and

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Crisis, reform and recovery

their loans from foreign banks. However, borrowing via BIBF considerably enlarged the short-term portion of Thailand’s external debts, as most BIBF credits were on a shortterm basis. Not surprisingly, short-term debt liabilities rapidly outgrew the country’s foreign-exchange reserves. Worse still, corporations invested these funds in risky ventures with inflated project costs and optimistic revenue projections. In many sectors, growth in assets outstripped sales and profit 85 The Asian financial crisis growth. For example, while some of the foreign loans were invested

in The Asian financial crisis
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Crisis, reform and recovery

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

in The Asian financial crisis
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products. The financial crisis arising from Lehman's bankruptcy led to a significant decline in credit to the private sector, as well as to a sharp rise in interest rates. The failure of many US financial institutions led to the collapse of the equity markets in late 2008 and 2009, although the indices showed a recovery in 2010 as well as a slow down in international trade and industrial production. One of the main channels allowing the crisis to spread was the money markets. Following the bankruptcy, the short-term debt that Lehman had issued became

in Lehman Brothers