1. Financial Crises in 1990’s
Presented By : Jyoti Manda
Vivek Agarwal
Sandeep Mohan
Samaksh Malik
2. Introduction
v
Financial crises arises when some financial institutions or assets
suddenly lose a large part of their value.
There are a number of different types of crises:
q
Banking crises (runs or related difficulties)
q
Speculative bubbles and crashes (stock markets, real estate)
q
Currency crises; isolated crises and contagion
A large number of institutions or assets behave in a non-sustainable
way.
3. East Asian Financial Crisis
A series of currency declines in Asian
nations that started in the summer of
1997 in Thailand. The crisis, also known as
the Asian Contagion, spread to other
Asian markets, affecting other markets
throughout the world as well.
.
4. Crises Overview
May, 1997 : Foreign speculators attack the baht. Thailand spends 90% of
foreign reserves to defend the baht against speculative attack.
July 2, 1997: Thailand changes its exchange rate system from fixed
exchange
rate to Managed-floated.
At the same time, the Thai government also requests "technical assistance"
from the IMF.
Aug. 5, 1997: Thailand receives a $17 billion loan from the IMF and agrees to
adopt tough Economic measures in return.
Dec. 8, 1997: 56 insolvent finance companies and one commercial bank are
closed. The remaining financial institutions suffer from financial panic.
May, 1997 : Foreign speculators attack the baht. Thailand spends 90% of
foreign reserves to defend the baht against speculative attack.
July 2, 1997: Thailand changes its exchange rate system from fixed
exchange
rate to Managed-floated.
At the same time, the Thai government also requests "technical assistance"
from the IMF.
Aug. 5, 1997: Thailand receives a $17 billion loan from the IMF and agrees to
adopt tough Economic measures in return.
Dec. 8, 1997: 56 insolvent finance companies and one commercial bank are
closed. The remaining financial institutions suffer from financial panic.
Crises Overview
5. Dec.31,1997: The index of Thailand’s stock market (The SET), ultimately
declines from 787 in January 1997 to a low of 337 in December of that
year. Thai economy turns into recession.
1997-1998: Thai crisis spreads quickly from Thailand to other countries in
the region including Malaysia, Indonesia, Philippines , South Korea and
Japan.
Continuing….
6. Causes of Crises
External factors 1
Increasing trend of capital flow into emerging markets in Asia and
Latin America in the 1990s
Financial liberalization by Thailand:
q No interest rate ceilings, Bangkok International Banking Facility (BIBF),
non-resident baht account.
q More direct borrowing from abroad by large businesses (not through
banks)
q Speculative investment in stock market and real estate
External factors 1
Increasing trend of capital flow into emerging markets in Asia and
Latin America in the 1990s
Financial liberalization by Thailand:
q No interest rate ceilings, Bangkok International Banking Facility (BIBF),
non-resident baht account.
q More direct borrowing from abroad by large businesses (not through
banks)
q Speculative investment in stock market and real estate
7. External factor 2External factor 2
Continuous deficits in the current account, exceeding 5% of GDP before
the crisis, affecting the confidence in repayment ability.
Continuous deficits in the current account, exceeding 5% of GDP before
the crisis, affecting the confidence in repayment ability.
External factor 3External factor 3
Stagnant exports in 1996 because:
q The baht was overvalued: “real appreciation” of baht (higher price of
nontrade goods to traded goods).
q Slowdown in export markets for electronics
q Competition from China
q The era of “cheap labour” is over
Stagnant exports in 1996 because:
q The baht was overvalued: “real appreciation” of baht (higher price of
nontrade goods to traded goods).
q Slowdown in export markets for electronics
q Competition from China
q The era of “cheap labour” is over
q Increase in international reserves, but more rapid increase in short-
term Debts.
8. ArticleArticle
The Financial Crises in Japan:
Causes and Policy Reactions by the Bank of Japan
The Financial Crises in Japan:
Causes and Policy Reactions by the Bank of Japan
AbstractAbstract
q This paper describes the transmission of the 2012 financial crisis to Japan
and compares the monetary policy reactions by the Bank of Japan
(BoJ) with those during the 1990s, and with reactions by other major
central banks.
q
q It first reviews the recent literature on the origins and transmission
mechanism of financial crises.
q
q Considered how the financial crises was transmitted to Japan and
described the response by BoJ (Bank of Japan).
q
q Analysed the lessons that have been learnt by the BoJ and other central
banks from the financial crises of the 1990s.
q This paper describes the transmission of the 2012 financial crisis to Japan
and compares the monetary policy reactions by the Bank of Japan
(BoJ) with those during the 1990s, and with reactions by other major
central banks.
q
q It first reviews the recent literature on the origins and transmission
mechanism of financial crises.
q
q Considered how the financial crises was transmitted to Japan and
described the response by BoJ (Bank of Japan).
q
q Analysed the lessons that have been learnt by the BoJ and other central
banks from the financial crises of the 1990s.
9. Continuing….Continuing….
Objective: Determine how severely Japan was affected by the 2012 financial
crisis and whether the Japanese authorities reacted differently to the recent
crisis, than during the 1990s or to the actions of authorities in other
countries.
Objective: Determine how severely Japan was affected by the 2012 financial
crisis and whether the Japanese authorities reacted differently to the recent
crisis, than during the 1990s or to the actions of authorities in other
countries.
Result: Research revealed that Japanese banks were barely involved in the
production and distribution of subprime-related products and explained
how the financial crisis was transmitted to Japan through capital outflows.
Result: Research revealed that Japanese banks were barely involved in the
production and distribution of subprime-related products and explained
how the financial crisis was transmitted to Japan through capital outflows.
Argument: Japanese authorities reacted differently to the recent financial
crisis than other central banks, not because Japan was hit less severely by
the current crisis, but because Japan had indeed learned from its
experiences during the first crisis.
Argument: Japanese authorities reacted differently to the recent financial
crisis than other central banks, not because Japan was hit less severely by
the current crisis, but because Japan had indeed learned from its
experiences during the first crisis.
10. Case study 1
A strong output decline led to much higher unemployment and more
poverty in South East Asia. Below chart and the graph illustrate the
economic and social costs of the Asian crisis.
A strong output decline led to much higher unemployment and more
poverty in South East Asia. Below chart and the graph illustrate the
economic and social costs of the Asian crisis.
Economic and financial implications of the Asian financial crisesEconomic and financial implications of the Asian financial crises
11. Output and inflation in Asian crises countries, 1994-1998
(Percentage charge over previous year)
Output and inflation in Asian crises countries, 1994-1998
(Percentage charge over previous year)
• Real economic growth in
the Republic of Korea,
Malaysia, the
Philippines and
Thailand declined from
a regional average of
7–8 per cent before
the crisis to negative 7
per cent by the second
and third quarter of
1998 before improving
slowly in the fourth
quarter of 1998.
• Real economic growth in
the Republic of Korea,
Malaysia, the
Philippines and
Thailand declined from
a regional average of
7–8 per cent before
the crisis to negative 7
per cent by the second
and third quarter of
1998 before improving
slowly in the fourth
quarter of 1998.
12. • In Indonesia, output contracted
even more sharply at an
annualized rate of almost 20
per cent in the second half of
1998.
• The output decline caused
unemployment to rise to a
projected 15 per cent in
Indonesia and 7.5 and 6 per
cent in the Republic of Korea
and Thailand, respectively.
• In Indonesia, output contracted
even more sharply at an
annualized rate of almost 20
per cent in the second half of
1998.
• The output decline caused
unemployment to rise to a
projected 15 per cent in
Indonesia and 7.5 and 6 per
cent in the Republic of Korea
and Thailand, respectively.
Continuing….
13. The output decline caused unemployment to rise to a projected 15 per
cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and
Thailand, respectively.
q Growth is likely to remain very limited in 1999, and unemployment is not
likely to fall significantly before 2000.
q
q Despite the considerable devaluations, inflation was successfully
contained in the region, and remained at single digit levels in
Malaysia, Thailand, the Republic of Korea and the Philippines.
q
q In Indonesia, the spectre of hyperinflation was probably eradicated by
the end of 1998 as well, despite inflation reaching annualized rates of
80 per cent in the second half of that year.
q
q Before the crisis, the share of the population living below the poverty
line was 11 to 16 per cent in the three countries for which data are
available.
q
The output decline caused unemployment to rise to a projected 15 per
cent in Indonesia and 7.5 and 6 per cent in the Republic of Korea and
Thailand, respectively.
q Growth is likely to remain very limited in 1999, and unemployment is not
likely to fall significantly before 2000.
q
q Despite the considerable devaluations, inflation was successfully
contained in the region, and remained at single digit levels in
Malaysia, Thailand, the Republic of Korea and the Philippines.
q
q In Indonesia, the spectre of hyperinflation was probably eradicated by
the end of 1998 as well, despite inflation reaching annualized rates of
80 per cent in the second half of that year.
q
q Before the crisis, the share of the population living below the poverty
line was 11 to 16 per cent in the three countries for which data are
available.
q
14. q
Worst case estimates (which suggested that poverty would double)
seem to prove exaggerated but higher unemployment has
certainly caused much hardship especially in urban areas, as each
wage earner often has a large family to feed (World Bank,1999).
q
q
Rural areas sometimes benefited from the devaluation’s impact on
exportable food crop prices and rural-urban terms of trade.
Continuing….
15. Case study 2Case study 2
The direction and composition of trade adjusted to changes in the
exchange rate and in the economic climate.
The direction and composition of trade adjusted to changes in the
exchange rate and in the economic climate.
q Illustrates that exports to the US and Western Europe as a share of total
exports from the Republic of Korea, Malaysia and Thailand have
increased considerably between 1996 and the first half of 1998.
q
q At the same time, the share of exports to Japan has fallen, probably both
as a result of the falling yen and the recession in Japan.
q
q Exports to the other Asian crisis countries have also fallen, but again this
is probably more the result of currency depreciation than of volume
declines.
q Illustrates that exports to the US and Western Europe as a share of total
exports from the Republic of Korea, Malaysia and Thailand have
increased considerably between 1996 and the first half of 1998.
q
q At the same time, the share of exports to Japan has fallen, probably both
as a result of the falling yen and the recession in Japan.
q
q Exports to the other Asian crisis countries have also fallen, but again this
is probably more the result of currency depreciation than of volume
declines.
17. q Above Table illustrates the overall fall in imports and the change in
import structure in the Republic of Korea between 1996 and 1998.
While overall imports fell by almost 40 per cent, the import value of
consumer durables and investment goods such as iron and steel,
transport equipment and other capital goods fell most strongly by 50–
72 per cent (Can refer also JETRO, 1998).
q
q A reversal of this trend may start in 1999, as economic recovery sets in
and companies have to start investing and retooling again.
q Above Table illustrates the overall fall in imports and the change in
import structure in the Republic of Korea between 1996 and 1998.
While overall imports fell by almost 40 per cent, the import value of
consumer durables and investment goods such as iron and steel,
transport equipment and other capital goods fell most strongly by 50–
72 per cent (Can refer also JETRO, 1998).
q
q A reversal of this trend may start in 1999, as economic recovery sets in
and companies have to start investing and retooling again.
Continuing….
18. Article from The Hindu
Who actually responsible for the 1991 balance of payments crises? RagEEv
Gandhi or V.P. Singh?
Who actually responsible for the 1991 balance of payments crises? RagEEv
Gandhi or V.P. Singh?
Published: April 4, 2013Published: April 4, 2013 T.C.A. Srinivas-RaghavanT.C.A. Srinivas-Raghavan
A very senior officer of the RBI, Dr. T.K. Chakrabarty and Srinivas Raghavan
interviewed around 40 officers from the bank and the finance Ministry.
A very senior officer of the RBI, Dr. T.K. Chakrabarty and Srinivas Raghavan
interviewed around 40 officers from the bank and the finance Ministry.
Those tapes revealed a fascinating story about the 1991 crisis:Those tapes revealed a fascinating story about the 1991 crisis:
q
This is that Rajiv ignored the advise of two Finance Secretaries and V.P.
Singh's Finance Secretary at a crucial time to tender the proper advice.
By the time he made up his mind – to go to the International Monetary
Fund(IMF)- It was too late.
q
q In turns out that in March 1988, the Managing Director of the IMF,
Michael Camdessus, while in India told Rajiv that if India asked for the
a loan, the IMF would take a sympathetic view. The Finance Ministry
and the Prime Minister's Office advised Rajiv to go for it.
q
This is that Rajiv ignored the advise of two Finance Secretaries and V.P.
Singh's Finance Secretary at a crucial time to tender the proper advice.
By the time he made up his mind – to go to the International Monetary
Fund(IMF)- It was too late.
q
q In turns out that in March 1988, the Managing Director of the IMF,
Michael Camdessus, while in India told Rajiv that if India asked for the
a loan, the IMF would take a sympathetic view. The Finance Ministry
and the Prime Minister's Office advised Rajiv to go for it.
19. q But Rajiv, reeling from the Bofors scandal in which he had been accused
of accepting a Rs. 64 crore bribe, was contemplated an October
election. He decided not to ask IMF.
q But Rajiv, reeling from the Bofors scandal in which he had been accused
of accepting a Rs. 64 crore bribe, was contemplated an October
election. He decided not to ask IMF.
q By the middle of 1998, Rajiv had been persuaded by his political
managers to stay the full term which would finish at that end of 1989.
The Finance Ministry did ask him a couple of times more.
q
q Rajiv agreed that it would be prudent to approach the IMF. But he also
said to wait till after the election.
q
q In the general election of November 1989, the Congress was defeated
and V.P, Singh formed the nation Front government. It was supported
by the Bharatiya Janata Party (BJP) and communists “from the
outside”.
q
q By march 1990, it had become cleared that India was heading towards a
serious problem and that only the IMF could help.
q By the middle of 1998, Rajiv had been persuaded by his political
managers to stay the full term which would finish at that end of 1989.
The Finance Ministry did ask him a couple of times more.
q
q Rajiv agreed that it would be prudent to approach the IMF. But he also
said to wait till after the election.
q
q In the general election of November 1989, the Congress was defeated
and V.P, Singh formed the nation Front government. It was supported
by the Bharatiya Janata Party (BJP) and communists “from the
outside”.
q
q By march 1990, it had become cleared that India was heading towards a
serious problem and that only the IMF could help.
Continuing….
20. q Credit to Indian dried up completely. Then, to make matters worse, the V.P.
Singh government fell and Rajiv agreed to support Chanra Shekar as Prime
Minister “from the outside”.
q Credit to Indian dried up completely. Then, to make matters worse, the V.P.
Singh government fell and Rajiv agreed to support Chanra Shekar as Prime
Minister “from the outside”.
q By January, India was broke. It was then Yeswant Sinha, as Finance
Ministers, went to Japan asking for financial help.
q
q The Finance Minister of Japan met him for a few seconds and rushed off,
leaving sinha to talk to his deputy. No money materialsed. In 2000, it
was Sinha's turn to make the Japanese wait.
q By January, India was broke. It was then Yeswant Sinha, as Finance
Ministers, went to Japan asking for financial help.
q
q The Finance Minister of Japan met him for a few seconds and rushed off,
leaving sinha to talk to his deputy. No money materialsed. In 2000, it
was Sinha's turn to make the Japanese wait.
q So he did nothing for three crusial months. By August it was too late
because the BJP had started the rath yatra and Saddam Hussein has
invaded Kuwait, sending oil prices rocketing.
q After that it was steadily downhill. By December, even the State Bank of
India could not get its paper rolled over
q So he did nothing for three crusial months. By August it was too late
because the BJP had started the rath yatra and Saddam Hussein has
invaded Kuwait, sending oil prices rocketing.
q After that it was steadily downhill. By December, even the State Bank of
India could not get its paper rolled over
Continuing….
