World's Markets, None of Them an Island
(Part II)
Herds Pick Up a Scent
reasury opposed the first Japanese fund in part because it -- along with everybody else, including investors, scholars and journalists -- thought that the storm over Asia would probably pass. Yet something fundamental had changed. Perceptions of risk had altered, and people began to get nervous about holding any Asian currency.
The anxieties became self-fulfilling, particularly as Thailand's economy began to self-destruct. Speculators, stock investors and local businessmen alike wanted the safety of dollars, and during the fall of 1997 currencies fell in the Philippines, Malaysia, Indonesia, Taiwan and South Korea.
Since many Asian countries had problems with heavily indebted corporations, inflated stock and property prices, overvalued currencies, and bad loans, it was easy to find similarities to Thailand once people began to look. Just as Western capital had flooded into emerging markets as a group in the early and mid-1990s, now it began to ebb.
Take Barton Biggs, the strategist at Morgan Stanley, who, a few years earlier, had helped ignite the Asian investment boom. As Thailand began to fall apart in the fall of 1997, he made another trip to Bangkok, and this time his advice was grim.
"I really went with the idea that Asia was sold out and bombed out and that there must be some attractive values," he said in a teleconference with investors on Oct. 27, 1997, recorded by Bloomberg. "And I've got to say that I was disappointed."
Biggs told investors to sell all their holdings in markets like Hong Kong, Singapore and Malaysia, and to cut by one-third their investments in emerging markets like Thailand and Indonesia.
No Banks in Casualty Ward
he dominoes began to fall. In late October 1997, right after Biggs' announcement and partly because of it, the Hong Kong stock market plunged 23 percent over four days. The debacle in Hong Kong suddenly caught Wall Street's attention, and in New York on Oct. 27, the Dow Jones Industrial Average tumbled 554 points, its biggest one-day point loss in history.
"That changed everyone's calculations," recalled Stanley Fischer, the fund's deputy chief. Suddenly, contagion was the buzzword, and there were regular meetings on the crisis in the Situation Room at the White House. Yet while White House officials pondered what to do, investors were busy selling. Anything that seemed to hint of emerging markets was dumped, and stock markets in Brazil, Argentina and Mexico also suffered their worst one-day losses ever.
Mrs. Paoni's money in the Illinois pension fund joined the rush to the exits. Records show that the fund managers sold Indonesian stocks that had cost them $3.3 million, Malaysian stocks that had cost $1.9 million, Philippine stocks that had cost $1.5 million, South Korean stocks that had cost $1.1 million, and Thai stocks that had cost $2.2 million. Across the world, everybody was doing the same.
Gleb Kosorukov for The New York Times
GUM's chairman, Yuri B. Solomatin, is still nattily dressed, but his store is bankrupt. "Overnight," he said, "we were made paupers."
--------------------------------------------------------------------------------
Soon Indonesia was forced to accept a $17-billion bailout, later raised to $23 billion, to which the United States agreed to contribute -- an implicit admission that it had made the wrong call with Thailand. Pressure grew on South Korea, Taiwan, Malaysia, Brazil, Russia and other countries. Everybody seemed alarmed except Clinton, who in November 1997 tried to sound reassuring.
"We have a few little glitches in the road here," he said. "We're working through them."
Clinton was perhaps listening too closely to the State Department, for American diplomats in Bangkok were sending out rosy cables, and their counterparts in South Korea were similarly oblivious to the Korean economy's disintegration, which was then well under way. In Washington, Rubin and Summers had a far clearer sense of what was happening in South Korea, and were openly disparaging of the diplomatic reports from the field.
The State Department missed its cues because, historically, it had focused on the threats from Communists who carry grenades, not on the threats from business executives who wear neckties and trade currencies. The same was true of the Central Intelligence Agency, which proved itself, in the words of one of its top officials, "completely unprepared to deal with questions of an economic nature."
Yet by Thanksgiving Day 1997, it was clear to all top officials in Washington that South Korea was on the brink of an economic catastrophe. After five hours of conference calls among top American officials, Clinton telephoned President Kim Young-sam of South Korea and told him he had no choice but to accept an international bailout.
Kim bowed to the inevitable and accepted a bailout that swelled to $57 billion, the biggest ever. But with that money now flowing into South Korea, Western banks saw a chance to take it and run. The banks called in their loans, hoping to flee while they could.
Rubin quietly called the heads of major banks and urged them to reschedule their loans, and in the end they did.
But the bailout still ended up bolstering Western banks. South Koreans lost their businesses and in some cases were even driven to suicide. But foreign banks -- among them Citibank, J.P. Morgan, Chase Manhattan, BankAmerica and Bankers Trust -- were rewarded with sharply higher interest rates (2 to 3 percentage points higher than the London interbank rate) and a government guarantee that passed the risk of default from their shareholders to Korean taxpayers. The banks say that this was only fair, because they were extending their loans up to three years and thus assuming an extra burden.
Yet in contrast to previous financial crises, which were resolved by banks' effectively paying a good share of the bill, this was a huge bailout with public funds, and the banks did not chip in major new money.
Nicholas B. Kristof/The New York Times
Global financial problems have reached into remote corners of Indonesia, severely affecting the life of this peasant matriarch. With her son-in-law Salamet's rickshaw business under strain, she now pawns her sarongs so the children can eat. "I can put up with it if I don't eat," she said. "But the children aren't used to it. They cry and cry."
--------------------------------------------------------------------------------
Rubin defends the bailouts, saying that he "wouldn't spend a nickel" to bail out banks or investors, but that helping the country often means ensuring that it can pay off its creditors.
But critics note that the some of the biggest beneficiaries are the banks. "The effort is hurting the countries they are lending to, and benefiting the foreigners who lent to them," argued Milton Friedman, the Stanford University economist and Nobel Prize winner. Friedman argues that the monetary fund does more harm than good and is bitterly critical of these bailouts.
"The United States does give foreign aid," he said. "But this is a different kind of foreign aid. It only goes through countries like Thailand to Bankers Trust."
Smart Set, Foolish Choices
ith the collapse of South Korea, investors rushed from any sign of risk. At Morgan Stanley, Biggs had bought emerging markets early in 1997 for his own portfolio, but now he sold frantically. Records at the Securities and Exchange Commission show that in December 1997 he sold $56,000 worth of his own company's Malaysian Fund, $650,000 worth of Emerging Markets Fund, $80,000 worth of India Investment Fund, $137,000 in the Pakistan Investment Fund and almost $1.6 million worth of Asia Pacific Fund.
Tens of thousands of other investors were doing likewise, liquidating their holdings in emerging-markets funds. This created another kind of contagion. Sales of emerging-markets mutual funds forced fund managers to pare down their portfolios to pay back shareholders. This meant that fund managers had to trim holdings even in distant countries, even in stocks that they regarded as still valuable. In this way the electronic herd rushing away from Korea ended up trampling stocks in Argentina and Mexico.
The world seemed to be coming apart, and so was the U.S. government's consensus on what to do.
Indonesia was particularly nettlesome because of the question of how to treat President Suharto, the aging dictator, whom Clinton had previously supported.
While on a trip to Texas on Jan. 8, 1998, Clinton telephoned Suharto from Air Force One to urge compliance with the monetary fund program. But Suharto stuck to some of his ideas about how to run the economy, like a "currency board" to back Indonesian money with dollars.
A White House aide recalls Suharto's growling, "Look, I understand that this doesn't cure anything, but the IMF isn't curing anything either."
American officials were puzzled about what to do, and they had no intuitive feel for what might happen next.
"The nature of the crisis was not understood," recalls a senior official who weathered the thick of the crisis. "We didn't really grasp everything that was going on."
Nation's Drive-By Shooting
ndonesia has been hit hardest, but what remains unclear is whether it had to suffer at all. Some economists argue that Indonesia was simply the victim of the international equivalent of a drive-by shooting.
Its trade balance was in relatively healthy shape. It had a respectable $20 billion in foreign exchange reserves and did not squander them trying to defend its currency. Credit had grown more slowly than in other countries, and there was less indication of a bubble. The government initially reacted with foresight, going to the fund before any severe problems developed.
Yet in the end the Indonesian currency lost 85 percent of its value, riots cost more than 1,000 lives and hunger became widespread. Today there are doubts about whether Indonesia can survive as a nation; some fear that it will fragment like Yugoslavia.
"These horrendous things did not have to happen," argues Jeffrey Sachs, a Harvard economist, who blames the United States and the monetary fund for deepening a financial panic. "The crisis was pushed to an extreme that it never had to take."
Indonesia was particularly vulnerable to panic because most of its private wealth is in the hands of ethnic Chinese who are unusually likely to seek safe havens for themselves and their money. Public confidence was therefore Indonesia's most precious commodity, but it dissipated as officials from Washington tangled repeatedly with the Indonesian government over how to deal with the crisis.
Suharto's handling of it was disastrous. He backtracked on closing banks, adding to confusion, and resisted many reforms that would have threatened his family empire. The fund forced Indonesia to close 16 banks, but then in an internal document acknowledged that it had gravely erred and that the closures had triggered bank runs around the country.
Both Treasury and the fund ridiculed Suharto's budget proposal, which because of exchange-rate movements showed a 32 percent spending increase in local currency terms. But three weeks later, having already irreparably harmed Indonesia's image, the fund quietly approved a budget with a 46 percent spending increase.
fea.unicamp.br |
