Why Aren't They Shouting? by Kevin Rodgers

Author:Kevin Rodgers
Language: eng
Format: epub
ISBN: 9781473535633
Publisher: Random House

A Bit of a Drawdown

Asia’s ‘Tiger’ economies were touted as the success story of the 1990s. Currency pegs, introduced over the previous decade, had been designed to provide reduced risk: reduced risk for foreign lenders who could rest easy that their high returns in local currency would not be devalued away, and reduced risk for local borrowers who could access the lower interest rates available in US dollars without the prospect of a stronger dollar making their repayments unaffordable in their own currency. As a result of the reassurance coming from these pegs, economies surged and debt ballooned across the region: in East and South East Asia combined, foreign debt more than doubled in the six years between 1991 ($336 billion) to 1997 ($742 billion) with Korea, Thailand and Indonesia leading the charge.14 The IMF described the result as ‘a build-up of overheating pressures, evident in large external deficits and inflated property and stock market values’.15 Put another way, it was a monstrous asset bubble. Derivatives, the offspring of growing computer power, played an important role in this explosion of debt, which, unlike the 1980s, was no longer dominated by bank lending but rather by foreign direct investment (FDI), in large part to private firms.16 Money was lent, often using complex variants of the total return swap, in ways that were not transparent to the rest of the market. VaR models added to the problem. Because of Asian currencies’ pegs to the US dollar, which allowed only small price variations around a central rate, their volatilities, calculated by looking back over historical data series, were very low. For example, in the three years prior to June 1997 when the crisis started, the average volatility of the Thai baht to US dollar exchange rate had been around 3.7 per cent. This compares to around 10.8 per cent for the rate between the Japanese yen and the US dollar over the same period.17 Bank after bank’s version of the Engine automatically translated this fact into a simple mathematical message: ‘Asia is low risk.’ This encouraged even more lending and an even bigger bubble. And then the bubble burst.

Between 1995 and 1997, the US dollar had strengthened, mainly as a result of the rising interest rates that had caused such havoc with Procter and Gamble. The US dollar, which had bought around 85 Japanese yen in June 1995, bought 115 by June 1997 – a 35 per cent increase. With their currencies pegged to the dollar, this surge disadvantaged the export-led emerging Asian countries, all of which became increasingly uncompetitive. As the countries’ currency reserves dwindled as a result, and the extent of the asset bubble became obvious, nervous investors began to withdraw their funds. Speculators added to the outflow, putting intolerable strain on the dollar pegs. Eventually, Thailand’s was the first to snap. In an Asian replay of the ERM debacle, the Thai government was forced to devalue the baht by 20 per cent on 2 July 1997. Chaos ensued in every other country in the region.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.