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Financial Crises
East Asia 1997, Russia 1998,
Brazil ?
Background to 1997 East Asian crisis
• Fundamentalist view
• Contagion view
Three factors:
• Macro policy in OECD
• Domestic mismanagement
• Investor panic
Exchange Rates
Thailand
Malaysia
Indonesia
Philippines
Hong Kong
S. Korea
Taiwan
Singapore
Goldstein 1998
6-12.97
-48.7%
-35
-44.4
-33.9
0.0
-47.7
-14.8
-15
1-5.98
24.7%
2.1
-53
1.3
0.0
21.9
1.2
4.0
Stock Markets
Thailand
Malaysia
Indonesia
Philippines
Hong Kong
S. Korea
Taiwan
Singapore
Goldstein 1998
6-12.97
-29.3%
-44.8
-44.4
-33.5
-29.4
-49.5
-9.3
-23.0
1-5.98
3.7%
-2.4
8.2
18.2
-6.2
-.9
.3
-7.1
IMF Growth Forecasts for 1998
May ’97 April ’98 Change
Indonesia
7.4
-5.0
-12.4
Thailand
7.0
-3.1
-10.1
S. Korea
6.3
-0.8
-7.1
Malaysia
7.9
2.5
-5.4
Philippines
6.4
2.5
-3.9
Singapore
6.1
3.5
-2.6
Hong Kong
5.0
3.0
-2.0
China
8.8
7.0
-1.8
Taiwan
6.3
5.0
-1.3
Goldstein 1998
External Causes
• Credit boom in the 1990s
– Low interest rates in the U.S. and Japan
– Expansion of portfolio funds
– $420 billion net flows to Asian emerging
markets
• Deteriorating current account
– Overvalued real exchange rates
– Slowing exports and increasing competition
External Sector
Real Ex Rate Current Acct
Overvalued
(% GDP)
Thailand
6.7%
-7.9%
Malaysia
9.3
- 4.9
Indonesia
4.2
-3.3
Philippines
11.9
-4.7
Hong Kong
22.0
-1.3
S. Korea
-7.6
-4.9
Taiwan
-5.5
4.0
Singapore
13.5
15.7
Goldstein 1998
Financial Market Vulnerabilities
Capital inflows concentrated:
– Real estate (30-40% of bank lending)
– Equities
– Borrowing in foreign currencies w/ short
maturities
Why?
Financial Market Supervision
• Weak banking sectors—high ratios of
nonperforming loans
• Lack of transparency, sound accounting
procedures
• Inadequate loan-loss reserves
• Corrupt lending
• Banks as quasi-fiscal agents
Precipitating event
• Thailand—CB reserves depleted, rolling
over government debt
• S. Korea—rolling over foreign-currency
denominated bank liabilities
• Indonesia—corporations attempt to
hedge their currency positions
Contagion
• Trade linkages?
– Hard to explain contagion from small
countries to large ones
• Competitive devaluation?
– Same objection
• Goldstein’s “wake-up call” hypothesis
– Do capital markets sleep?
– Rational buffalo
Russia 1998
• Fixed exchange rate, overvalued in real
terms
• Incentive to run a fiscal deficit
– Election of 1996
– Collapse of tax revenues
•
•
•
•
Nominal debt
High interest rates
Central Banking dilemmas
Bail-out of 1998
Why not Brazil in 2002?
•
•
•
•
•
•
Public debt to GDP: 60%
Of which, linked to the dollar: 40%
Spread over U.S. treasuries: 18%
Devaluation: >40% in 2002
$30 billion IMF program in August
Luiz Inacio Lula da Silva (Lula) elected
in October
First Steps
• Reaffirm primary surplus goal of 3.75%
of GDP, an IMF condition
• Propose legislation to strengthen
Central Bank’s independence
• Conservative appointments
• Postponing populist agenda
Discussion
Do IMF rescue packages help
countries that face financial
crises?