1. Financial Crises East Asia 1997, Russia 1998, Brazil ?

2. Background to 1997 East Asian crisis Fundamentalist view Contagion view Three factors: Macro policy in OECD Domestic mismanagement Investor panic

3. Exchange Rates 6-12.971-5.98 Thailand-48.7%24.7% Malaysia-352.1 Indonesia-44.4-53 Philippines-33.91.3 Hong Kong0.0 S. Korea-47.721.9 Taiwan-14.81.2 Singapore-154.0 Goldstein 1998

4. Stock Markets 6-12.971-5.98 Thailand-29.3%3.7% Malaysia-44.8-2.4 Indonesia-44.48.2 Philippines-33.518.2 Hong Kong-29.4-6.2 S. Korea-49.5-.9 Taiwan-9.3.3 Singapore-23.0-7.1 Goldstein 1998

5. IMF Growth Forecasts for 1998 May ’97April ’98Change Indonesia7.4-5.0-12.4 Thailand7.0-3.1-10.1 S. Korea6.3-0.8-7.1 Malaysia7.92.5-5.4 Philippines6.42.5-3.9 Singapore6.13.5-2.6 Hong Kong5.03.0-2.0 China8.87.0-1.8 Taiwan6.35.0-1.3 Goldstein 1998

6. External Causes Credit boom in the 1990s –Low interest rates in the U.S. and Japan –Expansion of portfolio funds –$420 billion net flows to Asian emerging markets Deteriorating current account –Overvalued real exchange rates –Slowing exports and increasing competition

7. External Sector Real Ex Rate Overvalued Current Acct (% GDP) Thailand6.7%-7.9% Malaysia9.3- 4.9 Indonesia4.2-3.3 Philippines11.9-4.7 Hong Kong22.0-1.3 S. Korea-7.6-4.9 Taiwan-5.54.0 Singapore13.515.7 Goldstein 1998

8. Financial Market Vulnerabilities Capital inflows concentrated: –Real estate (30-40% of bank lending) –Equities –Borrowing in foreign currencies w/ short maturities Why?

9. Financial Market Supervision Weak banking sectors—high ratios of nonperforming loans Lack of transparency, sound accounting procedures Inadequate loan-loss reserves Corrupt lending Banks as quasi-fiscal agents

10. Precipitating event Thailand—CB reserves depleted, rolling over government debt S. Korea—rolling over foreign-currency denominated bank liabilities Indonesia—corporations attempt to hedge their currency positions

11. Contagion Trade linkages? –Hard to explain contagion from small countries to large ones Competitive devaluation? –Same objection Goldstein’s “wake-up call” hypothesis –Do capital markets sleep? –Rational buffalo

12. Russia 1998 Fixed exchange rate, overvalued in real terms Incentive to run a fiscal deficit –Election of 1996 –Collapse of tax revenues Nominal debt High interest rates Central Banking dilemmas Bail-out of 1998

13. Why not Brazil in 2002? Public debt to GDP: 60% Of which, linked to the dollar: 40% Spread over U.S. treasuries: 18% Devaluation: >40% in 2002 $30 billion IMF program in August Luiz Inacio Lula da Silva (Lula) elected in October

14. First Steps Reaffirm primary surplus goal of 3.75% of GDP, an IMF condition Propose legislation to strengthen Central Bank’s independence Conservative appointments Postponing populist agenda

15. Discussion Do IMF rescue packages help countries that face financial crises?