Ipe International

Chapter 5: East Asian Financial Crisis
Robert Gilpin

1997: Severe financial shock, they experienced the worst economic collapse of any country since 1930s and were declared as be victims of their own irresponsible ways.

Regional Causes

1996: the emerging economies of South Asia began to experience a significant slowdown in their merchandise exports, and it raised serious doubt amonginvestors about the continuing economic success of the region.

1995: USA appreciated the dollar and currencies in the region pegged to the dollar, also appreciated and its international competition decreased.

Over capacity and declining demand in a number of economic sectors and intensifying competition for export markets in memory chips, steel and automobiles raised long-term worries aboutthe export-led growth strategy of the economies in the region.

Domestic Causes

1990s: investor boom: foreign investors poured (vertir) billions of dollars into the Southeast Asian emerging markets and also by local investments who made risky investment in real estate, equities (valores de renta variable), and other assets of poor quality.

Banking and Financial system poorly supervised:overextension of credits.

Declining exports and efforts to defend overvalued currencies through high interest rates caused inflated property values to fall and led to a large number of non performing bank loans.

Precipitation and Spread

1996: Thailand borrowed dollars and other currencies to speculate in local real estate. The Bant (Thailand currency) was pegged to the dollar which meansthat it would not depreciate. By 1996 foreign investors had become concerned over Thailand´s ability to repay its huge accumulated foreign debt and begun to move their money out of the country.

1997: Thailand raised interest rates so the demand for real estate and other assets declined. It caused a significant drop in prices.

As investors rushed to abandon the baht for dollars the CentralBank ran out of dollar reserves: liquidity crisis. 1997 Thailand stopped defending the baht´s peg to the dollar.

The substantial devaluation of the Bath caused panic in their neighbors with same problem. As in Thailand the investor in the region started to convert local currencies into dollars.

IMF offered and emergency loan to Thailand.

Clinton Administration didn’t recognize theseverity of the crises which caused the Thai government to feel deep resentment.

Political leaders and other in the region also originally dismissed the seriousness of the developing crisis.

One of the first to fall very hard because of the speculation was Indonesia, plunging the country in a severe recession. The rupiah fell 80 per cent against the dollar and the country unable to repay its hugedebt became insolvent. The IMF and USA offered Indonesia a 42 billion loan in exchange for promise reforms, eliminate its crony capitalism.

Hong Kong had borrowed heavily to finance its rapid rate of economic growth and was also threatened by investor panic. They defend the Hong Kong dollar against frightened investors and speculators. But it led to raise the interest rates and produceddisastrous results.

South Korea violated the central principal of international finance: that a country should never rely excessively on short-term loans denominated in foreign currencies because those loans put the economy in a vulnerable position if interest rate should rise or the currency depreciate. The devaluation of the won produced a liquidity problem. It had to appeal to the IMF. UnitedStates feared that the Korean collapse produced disastrous consequences for him, for Japan and for the rest of the world engineered the largest ever IMF rescue package.

As the financial crisis spread the major fear was that the domino or contagious effects of the crisis would eventually engulf Japan that was already in recession because they couldn’t deal effectively with the crisis in 1990....