The Asian debt crisis of the 90\'s: A presentation

1. THE ASIAN DEBT
CRISIS
Nitesh Kumar
Sameer Verma
Ashutosh Bharadwaj

2. THE STORY OF A BOOM AND A BUST AND
THE CASCADE EFFECT
CONTENTS:
 The anatomy of a disaster
 The boom years and the end of the beginning
 The beginning of the end
 The bust: And it all came falling down
 Contagion and aftermath
 Lessons and reflections

3. ASIAN TIGERS :THE ECONOMIC MIRACLE

4. PROLOGUE: TIMES ARE GOOD IN
THAILAND!
 Emerged as a major Industrial centre
for Japan in the 1980s.
 Most investment is based on personal
or institutional savings, less of debt
and more of security.
 The Thai Baht is pegged to the dollar
in order to make investors confident
and encourage trust.

5. BUT WHY INVEST IN SOUTH EAST ASIA?
The end of the
cold war makes
foreign
investments
After the Latin seem to be more
American debt secure
crisis, Investors
looking for
alternate, safer
destinations
Low interest rates
in the developed
world: FII’s
looking towards
‘emerging
markets’

6. AND SO THEY CAME IN DROVES!
Capital inflow
1997: Economic
growth
$256 Billion
Real
estate
boom
Capital Availability of
inflow credit
1990:
$42 Billion

7. THE FUNDAMENTS OF PEGGING A CURRENCY:
THE FLOATING CURRENCY REGIME
In a floating currency regime the value
of a currency is decided by the laws of
demand and supply and is dynamic.
Demand
Supply

8. THE FUNDAMENTS OF PEGGING A CURRENCY:
THE FIXED OR PEGGED CURRENCY REGIME
The government through a central bank maintains
the value of the currency with reference to
another (Commonly the dollar)
25 baht = 1 US $

9. THE FUNDAMENTS OF PEGGING A CURRENCY:
THE FIXED OR PEGGED CURRENCY REGIME
Currency
exchange
• FII’s convert their • FII’s sell Baht and buy
dollars to Baht so that • Outflow: Government buys dollars to pull money
they can invest in Baht to prevent its value out of the country
Thailand from plunging, reserves • Baht are converted to
decrease. dollars to pay for
• Inflow: Government prints imports
more currency to supply
Baht, foreign exchange
Inflow of reserves increase. Outflow of
foreign funds foreign funds

10. THE END OF THE BEGINNING! 1996 A
BUBBLE EMERGES

11. THE BEGINNING OF THE END! 1996 -
1997
Devaluation of the Yen makes
south east Asia less attractive
Speculators start going bust
and financial companies go
under, investor confidence
slides
The housing and stock market
bubbles burst, investors start
pulling out

12. INTERLUDE: CRONY CAPITALISM
THE TOPI GAME AND THE PONZI SCHEME!

13. THE THAI GOVERNMENT: IN BETWEEN A
ROCK AND A HARD PLACE!
Option one: Increase interest rates
to attract and retain investment
• Will negatively affect the economy and hit
businesses that are already suffering
Option two: Let the currency slide
• Dollar debts of Thai companies would
magnify, government reputation tarnished

14. TO FLOAT OR NOT TO FLOAT, THAT IS THE
QUESTION!
Indecision by the Thai government
to devalue currency encourages
speculation against the baht
• Businessmen and hedge funds sell Baht to
buy dollars, buy US Bonds
• Further pressure on the Baht and central
bank, foreign exchange reserves plunge

15. THE ‘LONG’ AND ‘SHORT’ OF SPECULATION
AND THE HEDGE FUND
Long: Stocks or real
estate purchased at
market price and sold
when the rate rises to
make a profit
Short: You borrow stocks
for some time, sell them
and invest the proceeds.
If the stocks lose value
you gain as you purchase
them at a lower price

16. INTERLUDE: HOW GEORGE SOROS
CONQUERED BRITAIN!
 In 1990 as part of the European Monetary
Exchange Rate Mechanism (ERM) Britain forced to
keep its currency pegged at a high rate. Due to a
recession it was inevitable that the pound would
float sooner or later
 The Quantum fund with a credit line of $15 Billion
establishes itself long in dollars and short in
Pounds
 A high profile media attack further hits the pound,
Britain spends $50 billion to peg the Pound and has
to give up and make the currency float
 Soros gains $ 1 Billion!

17. INTERLUDE: THE HONG KONG PUNTER
PARTY! (HEAD I WIN, TAIL YOU LOSE)
In 1998 Hong Kong is hit by the financial crisis, the
government would either raise interest rates or make the
currency float. Hedge funds take advantage of this
Short in stocks
and buy dollars, if
interest rates are
raised stocks fall
and they gain
Long is dollars so
if currency is
devalued they
gain as well

18. THE BUST: AND IT ALL CAME FALLING
DOWN
The value
plunges Interest rates
2nd July 1997 raised sharply
Thailand lets
the baht go
50% to avoid a
(expected meltdown
fall 15%)

19. THE VICIOUS CIRCLE OF A FINANCIAL CRISIS

20. CONTAGION AND THE RIPPLE EFFECT
Crisis even spreads to South Korea
Currency crisis in Malaysia
Indonesian Rupiah plunges by 30 %
Faces the worst financial crisis in
world history

21. REASONS FOR THE RIPPLE EFFECT
Southeast Asian The ‘Asian
Direct trade links investment funds miracle’
between lumped as perception
countries ‘Emerging Market collapses in the
Funds’ mind of investors

22. POSTMORTEM: SO WHY DID IT HAPPEN?
• Devaluation of the Japanese and Chinese
currency makes exports less competitive
External
factors • Cheap Chinese labor
• So called ‘financial companies’ affiliated to
politicians, large scale scams and embezzlement
Cronyism and
corruption
• Badly run economies more susceptible to panic
Panic!
• Flimsy economies crash like a pack of cards

23. THE IMF BAILOUT PACKAGE
 Stepped in for US $ 40 billion package
 Conditional relief – Demanded for Reformed
Economic policies, Removing insolvent institutions

24. INTROSPECTION AND REFLECTIONS
 Crisis rose due to ‘Fast Track Capitalism’

25. REFERENCES
Paul Niall The
Krugman: Ferguson: economist
The The online
Return of Ascent of edition
Depression Money
Economics

26. THANK YOU