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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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Crisis, reform and recovery

was now a matter of time before more sustained speculative attacks would begin. The attack came in several waves: first on May 10, 1996, when the country’s ninth-largest commercial bank, the Bangkok Bank of Commerce (BBC) collapsed (despite the massive injections of liquidity by the BOT), under the weight of non-performing property loans that totaled nearly half its US$7.2 billion of assets (Economist 1996, 77). Though the BBC was run by a well-connected former central bank official, Krikkiat Jalichandra, it came to public light “that the central bank knew in 1993

in The Asian financial crisis
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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

institutions. These were defined as follows: Loans for construction, land and land development (CLD) represented 100 per cent or more of a bank's total risk-based capital and total CRE non-owner-occupied represented 300 per cent or more of the bank's total risk-based capital. The growth in total CRE lending had increased by 50 per cent or more during the previous 36 months. The guidance stated that such banks should have in place enhanced credit risk controls, including stress testing of the CRE portfolios. These banks would require further supervisory

in Lehman Brothers
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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
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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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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
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$28bn was used to purchase the CDOs on which AIG had sold protection and $20bn was allotted to buy subprime mortgage-backed securities in which AIG had invested as part of its securities lending programme. The remaining $80bn was a loan to enable the company to continue operating, whilst it sold off its non-core assets and capital investment through the TARP programme. 31 ISDA's argument is that it was not the CDSs per se which gave rise to the losses, but to the ‘failure to assess the risks of MBSs, CDOs and other mortgage exposures’. That

in Lehman Brothers