Download Currency Crises: Sources & Solutions

Currency Crises
Currency Crises: Sources &
Solutions
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Miss Nawaporn Rujirawanich 434 55404 29
Miss Benjaporn Apisaksirikul 434 55485 29
Miss Sirintra Arkkaleephan 434 56165 29
Miss Janjuda Warunyanon 434 56383 29
Currency Crises: Agenda
• Assessing the sources of crises and relevant theories.
• Reviewing currency crises experienced by selected
countries.
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England “ The ERM Crises and speculative attack”
Mexico “Tequila Effect” with comparison to East Asia’s
Thailand “Tom Yum Kung Effect”
The Brazilian real crisis
Argentina’s currency board crisis
• Solutions proposed.
Currency Crisis
Many countries have at one time or another dealt
with a currency crisis. A crisis only seems to occur
for fixed rate or pegged currencies, since floating
currencies are able to adjust on a relatively
gradual, daily, basis to forces affecting them. A
currency crisis is identified as an official
devaluation or revaluation, or instances in which
the currency is floated. It is also sometimes
known as a balance of payments crisis.
Underlying Sources of Crises
• Divergent in Monetary Policy between currency
partners.
• Overvalued currency with unsound fundamentals.
– Malpractice of pegging currency to stronger trade partners.
– Chronic current account deficit.
– Too high short term foreign capital inflows.
• Excessive level of financial liberalization.
• Lack of credibility due to inconsistent policies.
Relevant Theories
•
Model of Balance of Payment crises (Paul
Krugman)
•
Contagion effect
-
Weak Fundamentals of neighbors leading to contagion
- “Pure” contagion (Speculative attack: Self-fulfilling
effect)
Model of BOP Crises
(Krugman’1979)
• Different role of international reserves
under fixed and flexible regimes
BOP = Current account + Capital account + Reserves
Contagion
• Definition
- Contagion is a case where knowing that there is a
crisis elsewhere increases the probability of a crisis
at home.
- The currency crises of the 1990s have consisted of
three regional “waves”: the ERM crises in Europe
from 1992-3, the Latin American crises of 1994-5,
and the Asian crises of 1997-8.
Contagion
• Fundamentals-based
contagion
- Arises when the
infected country is
linked to others via
trade or finance.
•“true” contagion/ “pure”
contagion
- Arises when common
shocks and all channels
of potential
interconnection are
either not present or have
been controlled for.
“true” contagion/ “pure” contagion
a.Multiple equilibrium and self-fulfilling
shifts in expectations
e.g. currency crisis: Loss of confidence in
central bank’s commitment to a pegged
exchange rate regime can cause
speculators to attack currency.
“true” contagion/ “pure” contagion
b. “Wake-up call”
- A crisis in one country can create a “wake-up call”
for investors by causing them to reevaluate their
view of (‘take another look at”) economic
fundamentals of other countries, even if the
fundamentals of other countries are unchanged.
crisis may spread from initial target to other
countries exhibiting similarly weak economic
fundamentals.
“true” contagion/ “pure” contagion
c. Herding behavior
- If investors have imperfect information about conditions in
foreign countries because of high costs of collecting and
analyzing information,
investors may follow actions of other investors rather
than make own assessments,
- If some investors are perceived to know more about foreign
conditions than others,
uninformed investors may overreact to actions of
informed investors if latter have to sell off assets.
Market manipulation
• Scenarios in which crises are generated either by
self-fulfilling rational expectations or by irrational
herding behavior imply at least the possibility or
profitable market manipulation by large speculators.
e.g. Soros’s attack on the British pound in
1992.
Theories of contagion
1. Nurkse – competitive devaluations
Once one country has
devalued, it makes it costly (in terms
of a loss of competitiveness and
output) for other countries to
maintain their parity.
Theories of contagion
2. Calvo and Mendoza (1998)
- present a model where the fixed costs of
gathering and processing country-specific
information give rise to herding behavior, even
when investors are rational.
3. Kodres and Pritsker (1998)
- focus on the role played by investors who
engage in cross-market hedging of
macroeconomic risks.
Empirical implications
• Eichengreen,et.al.(1996)
- attempted to discriminate among bilateral
trade link channel and a “wake-up call
hypothesis,” where similarities to the crisis
country in fundamentals lead investors to
reassess the risk of the other countries.
Empirical implications
• Wolf (1997)
- explain the pairwise correlations in stock
returns by bilateral trade and other common
macroeconomic fundamentals.
Currency Crises in 1990s
The ERM Crises in 1992
The Latin American Crises
In 1994-5
The Asian Crises
In 1997
The ERM crises of 1992-1993
• The Foreign Exchange Crisis of September
1992
Exchange Rate, Et
(DM/pounds)
E par
RETD1 RETF1
RETF3
RETF2
1 2
1’
iD 1 iD 2
3
iD 3
Expected Return
(in pounds terms)
Foreign Exchange Market for British Pounds in 1992
The ERM crises of 1992-1993
• The huge potential losses on pound deposits and potential
gains on mark deposits caused a massive sell-off of pounds
(and purchases of marks) by speculators. The need for the
British central bank to intervene to raise in British interest
rates, all the way to iD3. After a major intervention effort on
the part of the Bank of England, which included a rise in
its lending rate from 10% to 15%, which still wasn’t
enough, the British were finally forced to give up on
September 16: They pulled out of the ERM indefinitely,
allowing the pound to depreciate by 10% against the mark.
The ERM crises of 1992-1993
• Because foreign exchange crises lead to large
changes in central banks’ holdings of international
reserves and thus affect the official reserve asset
items in the balance of payments, these crises are
also referred to as balance-of-payments crises.
• It is estimated that central banks in the European
Monetary System lost $4 to $6 billion as a result
of exchange rate intervention during the crisis.
• A speculative fund run by George Soros ran up to
$1 billion of profits during the crisis, and Citibank
traders are reported to have made $200 million.
Case Study: Mexico’s “Tequila Effect”
and East Asia’s Crises
• Story of Mexico’s crisis
• Story of East Asia’s crisis
• Comparisons
1994 Mexico’s Crisis: “Tequila Effect”
• Lax monetary policy
• Excessive fiscal deficit-financing
• Divergent inflation rates with trade partners,
fundamentally the US
• Evident overvaluation of the peso requiring
continuous backing with reserves.
1994 Mexico’s Crisis: “Tequila Effect”
• Divergence from purchasing power parity
rapidly led to current account deficits
• Gradually changed exchange rate system
– 1989 crawling peg
– 1991 oscillation band with ceiling and floor levels
– Finally in late 1994, the peso was allowed to float
1997 East Asia’s Turmoil
• East Asia’s rapid growth questioned
– Input-based versus healthy productivity-based
– Diminishing returns confirmed by the relapse between
GDP and Investment growth
• High dependency on short term foreign capital
inflows
– Domestic saving not commensurate with investment
– Positive I-S gap implied the need of foreign funds
1997 East Asia’s Turmoil
• Weak financial supervision
– Rapid credit expansion amid higher degree of
liberalization (details in Thailand’s case)
– Foreign-denominated loans popular among financials
and corporations.
• International Loans to finance unproductive
activities such as consumption and spending
• East Asian experiences of high current account
deficits
Current account balances in 1996
Current account balance as % of GDP (1 9 9 6 )
20
16.26
15
10
5
0.58
0
South Korea
-5
-10
Indonesia
Malaysia
Philippines
-5.99
-5.86
Singapore
Thailand
-3.41
-4.89
-9.18
-15
Source: An Introduction to open Macroeconomics, currency crises and the Asian crises
HK
-0.34
China
Comparison of Exchange Rate
Country
China
HK
Indonesia
Japan
South Korea
Malaysia
Philippines
Singapore
Taiwan
Thailand
Source: Financial Times
Currency
Yuan
HK Dollar
Rupiah
Yen
Won
Ringgit
Peso
Dollar
Taiwan Dollar
Baht
At Feb 7, 1997 At Mar 27, 1998
8 .2 9
8 .2 8
7 .7 5
7 .7 5
2 ,3 7 7 .5 0
8 ,4 5 0 .0 0
1 2 4 .6 6
1 3 0 .3 4
8 6 6 .2 5
1 ,3 7 8 .7 5
2 .4 9
3 .5 8
2 6 .3 5
3 7 .3 5
1 .4 1
1 .5 9
2 7 .5 1
3 2 .6 2
2 6 .0 3
3 7 .8 5
Comparison : Tequila & Tom Yum Kung
• Similarities
– Deterioration in current account
• Similarities but with different degree
– Short term capital inflows
– International bank lending
Comparison : Tequila & Tom Yum Kung
• Differences
– Government action. More Moral Hazard in Asia
given high expectation of government guarantee
– The level of regional integration. NAFTA was
signed immediately preceding Mexican crisis. So
members stood ready for the turmoil.
วิกฤติการณ์ การเงินไทย 2540
วิกฤตการณ์ การเงินไทยเกิดขึ้นได้ อย่ างไร?
1.ความอ่อนแอของระบบเศรษฐกิจไทย
2.ความไม่โปร่ งใสและระบบทุนนิยมพรรคพวก
วิกฤตการณ์ การเงินไทยเกิดขึน้ ได้ อย่ างไร?
3.Moral Hazard
4.การแข่ งขันกันลดค่ าเงิน
5.ความตื่นตระหนกทางการเงิน
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
• การดาเนินนโยบายตามIMFอย่ างเคร่ งครัด ดังนี้
- ยึดถือการรักษาเสถียรภาพทางเศรษฐกิจเป็ นเป้ าหมายหลัก
โดยการตรึ งอัตราดอกเบี้ยในระดับสู ง
ใช้มาตราการที่มีผลในการลดอุปสงค์มวลรวม เพื่อรักษาเสถียรภาพราคา
โดยการรัดเข็มขัดทางการคลังและเพิ่มภาษีเพื่อลดการใช้จ่ายภาคเอกชน
ผล
- อัตราแลกเปลี่ยนมีเสถียรภาพและอัตราเงินเฟ้อต่ากว่าที่คาดการณ์
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
ข้ อสั งเกตุ
- การใช้เครื่ องมือทางการคลังในขณะที่ประเทศอยูใ่ นระบบอัตรา
แลกเปลี่ยนแบบลอยตัว
- ข้อคิดเห็นของJoseph E. Stiglitz ที่วา่ การใช้นโยบายเเบ
บรัดเข็มขัดไม่เป็ นการเเก้ปัญหาที่ถูกต้อง จนในที่สุดกองทุนการเงิน
ระหว่างประเทศต้องออกมารับผิดและปรับนโยบายใหม่
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
• แผนฟื้ นฟูระบบสถาบันการเงิน ”14 สิ งหาคม 2541”
เนื้อหาประกอบด้วย 4 หลักใหญ่ ดังนี้
1) การผนึกสถาบันการเงินของรัฐ
2) การโอนสถาบันการเงินมาเป็ นของรัฐ
3) การขายสถาบันการเงินของรัฐแก่เอกชน
4) การฟื้ นฟูสถาบันการเงิน
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
ผล
1. ส่ งผลกระทบต่องบดุลแห่ งชาติ
2. ส่ งผลกระทบต่องบดุลแห่ งชาติ
3. ถูกโจมตีวา่ เป็ นมาตราการที่ไม่ชดั เจนและโปร่ งใสเนื่องจากมีลกั ษณะเลือก
ปฎิบตั ิและการปิ ดบังข้อมูลอันควรเปิ ดเผย
ข้ อสั งเกตุ
- ผลของ Announcement Effect อันเกิดจากการสร้าง
ความหวังให้แก่ประชาชน มีส่วนสาคัญต่อความเชื่อถือที่ประชาชนมี
ต่อรัฐบาล
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
• นโยบายบริโภคนิยม
- เมื่อประชาชนเพิ่มรายจ่ายในการบริ โภค ภาคการผลิตจะสามารถขายสิ นค้าและบริ การ
ได้ การผลิตก็จะขยายตัว และความเจริ ญเติบโตทางเศรษฐกิจก็จะตามมา
- ธนาคารพาณิ ชย์พร้อมใจกันลดอัตราดอกเบี้ยเงินฝาก และอัตราดอกเบี้ยเงินกูป้ รับตัว
ลงอย่างช้าๆ
ผล
- ประชาชนอยูใ่ นภาวะสับสนต่อนโยบายของรัฐทาให้นโยบายต่างๆไม่ประสบ
ผลสาเร็จเท่าที่ควร
- ในระยะสั้นสามารถกระตุน้ เศรษฐกิจได้บา้ ง
นโยบายทางเศรษฐกิจภายหลังค่ าเงินบาทลอยตัว
ข้ อสั งเกตุ
- ในภาวะที่เศรษฐกิจตกต่าภาวะคนว่างงานมีมาก นโยบายการ
กระตุน้ เศรษฐกิจไม่น่าจะนโยบายที่เหมาะสม
- การเลือกใช้นโยบายตามประเทศอื่นๆควรพิจารณาที่โครงสร้าง
ทางเศรษฐกิจเป็ นสาคัญ
บทเรี ยนที่ได้ รับ
• บทเรี ยนที่ 1 ; การก่อหนี้สาธารณะต่างประเทศ พึงกระทาด้วย
ความระมัดระวัง และพึงใช้เงินกูน้ ้ นั ๆในการเพิ่มพูนศักยภาพในการ
ผลิตของประเทศ
• บทเรี ยนที่ 2 ; ลาดับขั้นการดาเนินนโยบายและจังหวะเวลาในการ
ดาเนินนโยบายมีความสาคัญในการบริ หารนโยบายมหภาค
บทเรียนที่ได้ รับ
• บทเรี ยนบทที่ 3 ; อย่าสร้างความหวังให้กบั ประชาชนโดยทีไ่ ม่มี
ความสามารถในการทาให้เป็ นจริ ง
• บทเรี ยนบทที่ 4 ; การบริ หารนโยบายเศรษฐกิจมหภาคจะต้องมี
ความโปร่ งใสและชัดเจนเพื่อให้เกิดความน่าเชื่อถือของรัฐบาล
The Brazilian Currency Crisis
(1999)
The Brazilian Economy
The Brazilian economy is the largest in
Latin America and one of the 10 largest in
the world. The Brazilian currency is the
real. From October 1994 through January
14, 1999, the official rate was determined
by a managed float. Since January 15, 1999,
the official rate floats independently with
respect to the US dollar.
Causes of the crisis
•
•
•
•
•
Inflation
Poor fiscal policy
Poor currency exchange policies
Corruption
Contagion from Russia to Brazil
How did the crisis begin?
Rising instability in Russia created difficulties for
Brazil’s economy and negative perceptions of the
credibility of the emerging economies. These
negative expectations of the Brazilian economy
led the government to adopt severe fiscal
measures with a conservative approach to
monetary policy. The restrictive economic policy
produced a decrease in the level of activity and
investment indicators mainly in the second half of
the year.
How did the crisis go?
• In January of 1999, Brazil redefined its exchange
system and adopted a free floating rate. The events
of the crisis that led to changing its exchange
system occurred during the week of January 11,
1999, the week of the real crisis.
• The real was hovering around the bottom of its
allowed trading band, billions of dollars in capital
flowed out of the country, and the Brazilian
equities fell in value.
How did the crisis go?
• The 1999 balance of payments had a
differentiated pattern of transactions with
the rest of the world, when compared to
previous years.
• Several measures were adopted in the first
quarter of 1999 to preserve the stabilization
process.
What actions were taken by the
government?
•
•
•
•
•
•
tightened monetary policy
central bank raised nominal interest rates
compulsory reserves on time deposits
offers of securities tied to the exchange rate
exchange market deregulation
adjust public sector accounts
Economic indicators
•
•
•
•
Change in real gross domestic product
The inflation rate (CPI) increased
The real interest rate decreased
The trade deficit as % of GDP decreased
• International reserves (billion US$)
decreased
• The exchange rate R$/$ (end of period)
depreciated
Contagion
• Brazil’s currency crisis spread to Argentina and
was a major cause of the current Argentinean
crisis and has impacted Paraguay and Uruguay in
an adverse way.
• Brazilian products more competitive among these
countries.
• Argentinean exports became more expensive and
were demanded less by Brazilians.
• Only two years after the Brazilian crisis, Argentina
ran into a crisis of its own.
Post-Crisis Economy – 2000 and
beyond
• The increased pace of economic activity was
generated to a great extent by growth in credit to
the private sector.
• The ratio of gross fixed capital formation to GDP
remained stable in 2000.
• The consistency of the Brazilian economic policy
has reinforced confidence in the fundamentals of
the Brazilian economy among both internal market
agents and external investors.
• The current account deficit remained stable
What lessons from this crisis can
others learn so the same problem
does not occur?
• Overvaluation of the nation’s exchange rate is
detrimental to the country.
• An overvalued exchange rate is often associated
with a boom in consumption involving a large
increase in imports.
• Overvaluation of the exchange rate encourages a
decline in private savings as residents substitute
present for future consumption.
Argentina’s Currency crisis
(2001)
Argentina’s Currency History
The Argentine story has been one of the intermittent
economic progress interrupted by periodic crises.
Argentina twice changed its currency in unsuccessful
attempts to halt its spectacularly high inflation.
• In December 1983, Argentina created a new “peso
Argentino” equal to 10,000 old pesos.
• In June 1985, Argentina introduced yet a new currency, the
austral, declaring each austral equal 1,000 pesos Argentino.
• In April 1991, Argentina created another new currency,
called the new peso, worth 10,000 australs.
Causes of the crisis
(As we know)
• Argentina’s monetary system, locally
known as “convertibility,” was a currency
board.
• The peso’s exchange rate of 1 per US dollar
made persistently overvalued.
• As a result, Argentina's exports suffered,
triggering recession and default.
True causes of the crisis
•
•
•
•
Increasing tax rates.
Freezing bank deposits.
Devaluing the peso.
Forcibly converting dollar bank deposits
and contracts into pesos (“pesofication”).
How did the crisis begin?
• In 1991, Argentina introduces the so-called
Convertibility Law, which is a currency
board in Argentina. The exchange rate for
Argentina’s new peso was fixed at 1 US
dollar per peso. A currency board achieved
its goal of price stability,
How did the crisis begin?
• In 1999, Argentina slipped into recession, GDP
falling, unemployment rate rising.
• Throughout the most of 1990s, Argentina ran large
current account deficits.
• Deepening the recession, the heavy interest
payments on foreign debt, and the riots in the
street took their toll. Argentina announced that it
would cease payment on its foreign debt.
How did the crisis go?
• In January 2002, Argentina abandoned the
currency board and let the nominal value of
the peso float relative to the dollar.
• The peso lost 29% of its value on January
10, 2002. And by February 1, the peso had
lost fully half of its value.
Ending the crisis :
Dollarization
• The most pressing problems are its
currency, its financial system, and its tax
system.
• How many dollars does Argentina have?
• How many dollars does Argentina need?
• Determining the exchange rate for
dollarization involves 4 steps.
The 4 steps
• Determine what liabilities need to be redeemed
with dollar reserves.
• Assess the financial position of the central bank
and the government.
• Announce that dollarization will occur and allow
the peso to float cleanly for no more than one
week.
• At the end of the period of floating, declare a fixed
exchange rate with the dollar and announce that
effective immediately.
The Lessons for Crisis Prevention
and Resolution
• First, we should have focused more closely
on the debt dynamics.
• Second, currency boards are not necessarily
as durable as some people liked to imagine
in the wake of the Asian crisis, especially if
they lack support from accompanying fiscal
and structural policies.
The Lessons for Crisis Prevention
and Resolution
• Third, emerging market countries may need to be
even more conservative with public external debt
than we had thought.
• Fourth, we need to make it easier for countries to
exit in a timely fashion from unsustainable debt
dynamics.
• Fifth, we need to make our policy advice more
persuasive when times are good and members do
not require our financial help.
The solutions for currency crises
•
•
•
•
•
•
Extensive capital controls
The agreement of the policies
Adaptation of the policies
Credibility of the policies
Monetary union
Deregulation of goods and factor markets with
strict prudential supervision
• Using discretionary policy
The End