*OT*
Mohan,
This is what I understood from following the S.E. Asian crisis as covered in the Economist.
In large part the current S.E. Asian crisis was caused not by any systemic problems within the economies.
Reality: What many are now labelling as crony capitaism was in fact a product of the special social structure in these countries with emphasis on higher % of personal savings and investing that in relatively safer investments like corporate bonds via bank account deposits. Thus debt financing is more popular than equity financing in S.E. Asia resulting in debt-to-equity ratios unacceptable by Western banking standards. Since high debt loads may lead to cash flow problems in hard times, the corporate social structure evolved into supporting networks of companies and banks so that loans will not be called back at the drop of a hat in times of emergency. Fact is, this arrangement worked rather well in the 80's and early 90's though it is presently being branded as intrinsically negative.
Problem 1. In response, Western banks poured short-term money in without realizing the imbalance that was being created in the structure which by default assumes money supply as long-term. The problem was the misunderstanding of the nature of the money supply (which IMO is to be shared by *both* sides) and not in the struture itself.
Problem 2. In 1995 with the yen dropping in value the S.E. Asian currencies that were pegged to the dollar started losing exports. This put a pressure on their currencies and the hedge funds moved in for the kill. Now it has traditionally been argued that hedge funds have minimal influence in moving markets, but presently with derivatives and liquidity such is not quite the case any more (witness LTCM). In response, the short-term money started to move out, putting further downward stress on the economy and hence the currencies. In no time this spiralled into a full-blown crisis.
Problem 3. Enter the IMF. They had a hammer (raise interest rates) which worked well in Latin America so S.E. Asia looked like a nail to them. Unfortunately they failed to realize that real interest rates were not low by any standards in S.E. Asia which was experiencing little inflation and was in fact facing a depression. Paul Krugman argued in the New Republic a few issues back that the IMF did the textbook opposite of what it should have done, which was to lower interest rates to simulate the economies and the currency would have followed on their own. Instead, focussing on limiting the outflow of short-term money the IMF led the countires into a recession causing the currencies to fall further and short-term money outflows skyrocketed.
Result. Even with enormously high real interest rates and expansion of the risk premium, no foreign investors were willing to put money back in the countries, which spiralled into a second currency problem in 1998. Now it may seem that this is counter to market rationality, but in reality it is not. Raising interest rates shut of economic growth and lowered the sovereign debt rating of these countires to high-yielding junk bond status. And we all know that happened in the high-flying 1980's junk bond market.
To sum it all up, it was not the system that didn't work, it was the misuse of the system. If the S.E. Asian countires are to be blamed for anything it is for their acceptance of piles of short-term cash and nothing else.
It heartens me to see that now the countires have
1. lowered interest rates which is stimulating the economy
2. putting in restricitons to short-term money flows (This may seem counter to free market ideas, but no one is required to invest in these economies anyway and I view this as a corporate bond with a minimal holding time, which is not too uncommon. Such bonds are usually high-yielding to compensate the investor.)
3. trying to set up an AMF which should understand the social dynamics of these countries better and hopefully be a better lender than the IMF (Note that these countries together are net creditor nations holding about $800 Billion in US treasuires. It makes no sense that they will get 4-5% interest on these and pay the foreign banks 10% or more. They should be able to invest the surplus capital in themselves with much better returns.)
So in all, I soon hope to see the economies of the S.E. Asian countires to start to prosper again.
Sorry about the long post.
-Apratim. |
