Asian Currency Sink In 1997

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Loss of Export Competitiveness

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Click icon Click icon toto add picture Moral Hazard add picture

and Crony Capitalism

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The Bubble Bursts

Probable reasons for crisis

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Loss of export competitiveness

Most East Asian countries depend on exports. These countries tied their currencies with dollar It promoted low inflation and currency stability Dollar fell against Japanese Yen Companies and banks taken short term loan of $275 bn

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$ Appreciation

By mid 1997, dollar risen by 50% against Yen and 20% against German Mark Chinese Yuan Depreciated by 25% against dollar Exports became less price competitive Asian central banks devalued their currencies

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Moral Hazards and Crony Capitalism

Tendency to take undue risks because the costs are not borne by the party taking the risk Most Asian banks and finance companies operated with implicit or explicit government guarantees Problem was compounded by the crony capitalism that is pervasive throughout the region Resulted in overinvestmentfinanced by vast quantities of debtand inflated prices of assets in short supply, such as land

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The Bubble Burst

Bubble persists as long as the government guarantee is maintained Large amounts of nonperforming loans and widespread loan defaults. Decline in asset values triggers further loan defaults capital flight accelerates and the local currency falls, increased the cost of servicing foreign debts

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Questions

What weremoral hazard andthethe the origins How did manyappreciation ofof the East Asian companies What is role did Why did so What Asian dollaritand depreciation of U.S. currency crisis? the and banks borrow dollars, yen, and how did help cause
Deutsche marks instead ofplay in their local the yuan affect the timing and expectationscrisis? What Asian currencyAsian currency currencies to finance their operations? magnitude of the themselves to? risks were they exposing the Asian currency

crisis?

crisis?

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