The East Asia Crisis.ppt

The East Asia Crisis Prior to the Crisis “The Asian Miracle” $94.1 billion dollars flowed into East Asia between 1991 and 1997 Growth was fueled by export promotion, industrial policy, lowered trade barriers, and the rapid accumulation of physical and human capital By 1992, income per capita averaged $11,100 The Collapse of the Thai Baht July 1996: Bangkok Bank of Commerce fails and the Bank of Thailand expands the money supply to support the financial systems, putting pressure on the baht. May 14, 1997: The stock market declines 7 percent amid political instability June 19, 1997: Finance Minister Virava resigns sending the stock market tumbling 11 percent July 2, 1997: The fixed exchange rate is abandoned and the Thai is floated freely, devaluing 25 percent What Caused The Crisis? Factors contributing to the crisis: Speculative attacks Deficits in balance of payments Inefficient financial systems Lack of capital controls Exchange Rate regimes External debt Speculative Attacks Korea: Widespread corporate bankruptcy from large firms that borrowed heavily caused foreign banks to become weary that their loans would not be repayed. Indonesia: Large scale borrowing from off-shore banks with loose regulation made the extent of the firms’ debt understated. Malaysia: The real estate bubble burst lead to foreign investors selling to sell their stocks causing the stock market to crash and Malaysian banks were left with bad loans. Other countries: Contagion effect – the crisis spread because of investors worrying that others countries in the region would face similar problems Balance of Payment Deficits In Indonesia and Thailand, the current account deficit was above 5% of GDP. ASEAN countries and Korea had a combined deficit of $33 billion from 1995-1996 that jumped to $87 billion in 1998-1999. Mostly driven by overvalued currency and over lending to moral hazard borrowers. Inefficient Financial Systems Financial institutions were not especially concerned with over lending d