Martin Khor looks back at the East Asian Financial Crisis 1997


July 5, 2017

Martin Khor looks back at the East Asian Financial Crisis 1997

http://www.thestar.com.my

It is useful to reflect on whether lessons have been learnt and if the countries are vulnerable to new crises.

IT’S been 20 years since the Asian financial crisis struck in July 1997. Since then, there has been an even bigger global financial crisis, starting in 2008. Will there be another crisis?

The Asian crisis began when speculators brought down the Thai baht. Within months, the currencies of Indonesia, South Korea and Malaysia were also affected. The East Asian Miracle turned into an Asian Financial Nightmare.

https://upload.wikimedia.org/wikipedia/commons/1/14/Suharto_resigns.jpg

Despite the affected countries receiving only praise before the crisis, weaknesses had built up, including current account deficits, low foreign reserves and high external debt.

In particular, the countries had recently liberalised their financial system in line with international advice. This enabled local private companies to freely borrow from abroad, mainly in US dollars. Companies and banks in Korea, Indonesia and Thailand had in each country rapidly accumulated over a hundred billion dollars of external loans. This was the Achilles heel that led their countries to crisis.

These weaknesses made the countries ripe for speculators to bet against their currencies. When the governments used up their reserves in a vain attempt to stem the currency fall, three of the countries ran out of foreign exchange.

They went to the International Monetary Fund (IMF) for bailout loans that carried draconian conditions that worsened their economic situation. Malaysia was fortunate. It did not seek IMF loans. The foreign reserves had become dangerously low but were just about adequate. If the ringgit had fallen a bit further, the danger line would have been breached.

Image result for Mahathir and The East Asian Financial Crisis 1997
Prime Minister Dr. Mahathir Mohamed and Finance Minister Daim Zainuddin introduced selective capital controls and pegged the Ringgit at RM3.80 to USD1.00.

 

After a year of self-imposed austerity measures, Malaysia dramatically switched course and introduced a set of unorthodox policies.These included pegging the ringgit to the dollar, selective capital controls to prevent short-term funds from exiting, lowering interest rates, increasing government spending and rescuing failing companies and banks.

This was the opposite of orthodoxy and the IMF policies (The Washington Consensus). The global establishment predicted the sure collapse of the Malaysian economy. But surprisingly, the economy recovered even faster and with fewer losses than the other countries. Today, the Malaysian measures are often cited as a successful anti-crisis strategy.

The IMF itself has changed a little. It now includes some capital controls as part of legitimate policy measures.

Image result for Korea and The East Asian Financial Crisis 1997

The Asian countries, vowing never to go to the IMF again, built up strong current account surpluses and foreign reserves to protect against bad years and keep off speculators. The economies recovered, but never back to the spectacular 7% to 10% pre-crisis growth rates.

Then in 2008, the global financial crisis erupted with the United States as its epicentre. The tip of the iceberg was the collapse of Lehman Brothers and the massive loans given out to non-credit-worthy house-buyers.

The underlying cause was the deregulation of US finance and the freedom with which financial institutions could devise all kinds of manipulative schemes and “financial products” to draw in unsuspecting customers. They made billions of dollars but the house of cards came tumbling down.

To fight the crisis, the US, under President Barack Obama, embarked first on expanding government spending and then on financial policies of near-zero interest rates and “quantitative easing”, with the Federal Reserve pumping trillions of dollars into the US banks.

It was hoped the cheap credit would get consumers and businesses to spend and lift the economy. But instead, a significant portion of the trillions went via investors into speculative activities, including abroad to emerging economies.

Europe, on the verge of recession, followed the US with near zero interest rates and large quantitative easing, with limited results.

The US-Europe financial crisis affected Asian countries in a limited way through declines in export growth and commodity prices. The large foreign reserves built up after the Asian crisis, plus the current account surplus situation, acted as buffers against external debt problems and kept speculators at bay.

Just as important, hundreds of billions of funds from the US and Europe poured into Asia yearly in search of higher yields. These massive capital inflows helped to boost Asian countries’ growth, but could cause their own problems.

First, they led to asset bubbles or rapid price increases of houses and the stock markets, and the bubbles may burst when they are over-ripe.

Second, many of the portfolio investors are short-term funds looking for quick profit, and they can be expected to leave when conditions change.

Third, the countries receiving capital inflows become vulnerable to financial volatility and economic instability.

If and when investors pull some or a lot of their money out, there may be price declines, inadequate replenishment of bonds, and a fall in the levels of currency and foreign reserves.

A few countries may face a new financial crisis. A new vulnerability in many emerging economies is the rapid build-up of external debt in the form of bonds denominated in the local currency.

The Asian crisis two decades ago taught that over-borrowing in foreign currency can create difficulties in debt repayment should the local currency level fall.

To avoid this, many countries sold bonds denominated in the local currency to foreign investors. However, if the bonds held by foreigners are large in value, the country will still be vulnerable to the effects of a withdrawal.

As an example, almost half of Malaysian government securities, denominated in ringgit, are held by foreigners.

Though the country does not face the risk of having to pay more in ringgit if there is a fall in the local currency, it may have other difficulties if foreigners withdraw their bonds.

What is the state of the world economy, what are the chances of a new financial crisis, and how would the Asian countries like Malaysia fare? These are big and relevant questions to ponder 20 years after the start of the Asian crisis and nine years after the global crisis.

 

Martin Khor (director@southcentre.org) is executive director of the South Centre. The views expressed here are entirely his own.
Read more at http://www.thestar.com.my/opinion/columnists/global-trends/2017/07/03/the-asian-financial-crisis-20-years-later-it-is-useful-to-reflect-on-whether-lessons-have-been-lear/#EEkW3MiZXu87cFZM.99

The Yuan joins the SDR


December 6, 2015

The Yuan joins the SDR

Maiden voyage

http://www.economist.com/news/business-and-finance/21679341-its-new-status-might-make-weaker-yuan-chinese-renminbi-joins-imfs

Reserve-currency status might make for a weaker yuan

PASSING through the Suez Canal became easier earlier this year, thanks to an expansion completed in August. Now it is about to become a little bit more complicated. Transit fees for the canal are denominated in Special Drawing Rights, a basket of currencies used by the International Monetary Fund (IMF) as its unit of account. This week the IMF decided to include the yuan in the basket from next year, joining the dollar, the euro, the pound and the yen.

If lots of things were priced in SDRs, the IMF’s decision would have forced companies around the world to buy yuan-denominated assets as soon as possible, to hedge their exposure. That would have prompted China’s currency to strengthen dramatically. But few goods or services are priced in SDRs. Instead, admission to the currency club is significant mainly for its symbolism: the IMF is lending its imprimatur to the yuan as a reserve currency—a safe, liquid asset in which governments can park their wealth. Indeed, far from setting off a groundswell of demand for the yuan, the IMF’s decision may pave the way for its depreciation.

The reason is that the People’s Bank of China (PBOC) will now find itself under more pressure to manage the yuan as central banks in most rich economies do their currencies—by letting market forces determine their value. In bringing the yuan into the SDR, the IMF had to determine that it is “freely usable”. Before coming to this decision, the IMF asked China to make changes to its currency regime.

Most importantly, China has now tied the yuan’s exchange rate at the start of daily trading to the previous day’s close; in the past the starting quote was in effect set at the whim of the PBOC, often creating a big gap with the value at which it last traded. It was the elimination of this gap that lay behind the yuan’s 2% devaluation in August, a move that rattled global markets. Though the yuan is still far from being a free-floating currency—the central bank has intervened since August to prop it up—the cost of such intervention is now higher. The PBOC must spend real money during the trading day to guide the yuan to its desired level.

Inclusion in the SDR will only deepen the expectations that China will let market forces decide the yuan’s exchange rate. The point of the SDR is to weave disparate currencies together into a single, diversified unit; some have suggested, for example, that commodities be quoted in SDRs to reduce the volatility of pricing them in dollars. But if China maintains its de facto peg to the dollar, the result of adding the yuan to the SDR will be to boost the dollar’s weight in the basket, defeating the point.

What would happen if China really did give the market the last word on the yuan? For some time it has been under downward pressure. The simplest yardstick is the decline in China’s foreign-exchange reserves, from a peak of nearly $4 trillion last year to just over $3.5 trillion now—a reflection, in part, of the PBOC’s selling of dollars to support the yuan. Were it not for tighter capital controls since the summer, outflows might have been even bigger.

And the yuan does look overvalued. Despite China’s slowing economy, its continued link to the surging dollar has put it near an all-time high in trade-weighted terms, up by more than 13% in the past 18 months (see chart). With the Federal Reserve gearing up to start raising interest rates at the same time as China is loosening its monetary policy, the yuan looks likely to come under more downward pressure, at least against the dollar.

It would be foolhardy to predict that China will suddenly give the market free rein. That would go against its deep-seated preference for gradual reform. But while basking in the glow of its SDR status, China must also be aware of the responsibility to minimise intervention that comes with it. A weaker yuan may well be the result.

 

Malaysia Scandal Wreaks Havoc on Economy


August 26, 2015

http://www.asiasentinel.com/politics/malaysia-scandal-havoc-economy/

Malaysia: Scandal Wreaks Havoc on Economy

by John Berthelsen@www.asiasentinel.com

Zeti

Malaysia’s central bank (Bank Negara Malaysia) is clearly losing the battle to defend its national currency, the Ringgit, which fell to RM4.2275 to US$1 on August 24 before recovering slightly on the bank’s buying, with the pace accelerating as the international financial community continues to lose confidence in the country’s  deteriorating economic position and its massive twin financial scandals.

Events over the weekend did little to inspire confidence, with the Police arresting 29 protesters before they could even start a rally and charging them with Section 124 of the Penal Code, a nebulously worded amendment that deals with “activities detrimental to parliamentary democracy” and carries penalties up to 20 years in prison.

The electoral-reform group Bersih has called for mass street protests in Kuala Lumpur, Kuching and Kota Kinabalu on August 29 and 30. Police have vowed to stop the rally and jail its organizers.  The harsh penalties leveled at the protesters over the past weekend may have been aimed at frightening next week’s participants.

Union Bank of Switzerland (UBS) issues currency alert

The Swiss bank UBS last Friday, Aug. 21, issued an alert saying the magnitude and speed of the currency’s decline “exceeded our bearish expectations,” falling 24 percent against the US dollar over the past year and bringing the rate to a 17-year low.  But although UBS set a short-term target of 4.35, privately UBS bankers are saying the currency could go to RM5.0:US$1 just this week. It shot through the psychologically important barrier of 4:1 last week without a hitch.

With international reserves having fallen to US$94.5 billion as of August. 15, Bank Negara has few tools to stop the slide. Bank Negara Governor, Zeti Akhtar Aziz last week ruled out currency controls, leaving her only the weapon of raising interest rates, which would play havoc with the economy, given high household and government debt.  With crude oil and other commodity prices sliding, GDP growth fell to a still-respectable 4.9 percent for the second quarter.

The Kuala Lumpur stock market has headed for collapse as well, falling by 12.7 percent since August 3 and 2.17 percent today alone.  Although all Asian markets have been descending in line with China’s crashing bourses, the KLSE is the worst-performing market in Asia and looks set to get worse.  Foreigners have been bailing out of the market, the currency and foreign direct investment, with FDI plummeting by 41.8% to RM21.3 billion in the first half of 2015, although officials said the sharp fall was due to a high base year in the first half of 2014.

Throw it away

Prime Minister Najib Razak is seemingly willing to wreck almost every government institution in his bid to stay in power in the face of a widespread effort by the opposition and members of his own party to oust him over two massive scandals, one a US$681 million “donation” from unnamed Middle Eastern interests into his personal account, supposedly in gratitude for fighting ISIS. However, US$650 million was spirited back out of the account in 2013 to another Najib personal account in Singapore – then disappeared out of that account to somewhere else, raising more questions than it answered. 

The second is his stewardship of 1Malaysia Development Bhd., a state-backed investment fund which, according to critics, has US$6.6 billion worth of unfunded liabilities that a revolving door of chief executive officers and accounting firms have been unable to explain. The Sarawak Report, edited from the UK by Clare Rewcastle Brown, alleged that hundreds of millions of dollars have been diverted to accounts in Singapore and elsewhere held by the young Penang-born tycoon Jho Taek Low, who was instrumental in persuading Najib to establish the fund.

Unity Coalition Seeking No Confidence vote?

However, despite desperate attempts to contain the scandals by sacking or neutralizing a long list of officials involved in investigating them, there are indications that they are escaping into the wider global financial sphere. On August 26, Switzerland’s financial regulator FINMA announced that it is investigating the extent of any involvement which its banks may have had in any of the alleged ‘dubious’ transactions linked to 1MDB. At least half a dozen banks including Falcon Private Bank, BSI of Lugano, JP Morgan and Coutts & Co have been named elsewhere as involved.   Singapore authorities have also said they are investigating accounts connected to 1MDB.

Over the weekend, it appeared that the opposition  Pakatan Rakyat coalition’s three component parties might be willing to at least discuss the possibility of teaming up with former Prime Minister Mahathir Mohamad, Najib’s severest domestic critic, to seek a vote of no confidence in the Parliament.  Mahathir is insisting that the ruling Barisan Nasional lead any unity government. Lim Kit Siang, the Democratic Action Party parliamentary leader, said that the idea might be worth discussing. 

For Mahathir to team up with Lim would be a surprise. But earlier this month he agreed to meet with longtime foe Tengku Razaleigh Hamzah, who tried to oust him in the 1980s and failed, nearly destroying UMNO in the process. A vote of confidence would first have to get by the parliamentary speaker, who is a close ally of the Prime Minister’s.

Mahathir and Najib in the same UMNO pod

Perhaps anticipating such a challenge, over the weekend Najib set out to play the race card, telling a United Malays National Organization assembly that Malays and Muslims would be ‘bastardized’ if UMNO is ousted from ruling the government as a part of the Barisan Nasional coalition. The leaders of the challenge against him are almost all ethnic Malays, including Mahathir, Razaleigh, fired deputy prime minister Muhyiddin Yassin and others.

Fear tactics by Najib

“Some people say that the Malays will be defeated, beaten or fall flat on the ground but I choose the word ‘bastardize,’ Najib was quoted in local media as saying – a veiled reference to the possibility that ethnic Chinese would dominate the political process as well as the economy.

He and other officials have also charged that unnamed foreigners are also out to wreck Malaysia’s parliamentary democracy.  The United States’ two leading newspapers, the Wall Street Journal and the New York Times, have both carried extensive, deeply detailed stories describing both the 1MDB shenanigans and the Najib family’s personal wealth including expensive properties in New York and California. Najib has threatened to sue the Wall Street Journal for its reports, but has stalled on actually issuing a demand for retraction. His counsel’s latest ploy was to say he would seek advice from “other countries” on the feasibility of suing. That has been met with derision.

The Sarawak Report has been a particular source of irritation, with a constant drumbeat of entries describing family and governmental misdoings. The government has charged Rewcastle Brown with sedition and sought to have her extradited from the UK, which is regarded as nonsensical grandstanding for a domestic audience.

 

More on Greece’s Financial Debacle


July 21, 2015

Why Greece should QUIT the Eurozone

Shrey’s Finance Blog

A 15 year old’s thoughts about finance, economics and growing up as a trader!

http://shreysfinanceblog.com/

Goldman's current CEO, Lloyd Blankfein.Taking Advantage of Greece

The debate over Greece leaving the Eurozone has been raging for a matter of years now. Some believe that Greece staying in the Eurozone is axiomatic, in that a Greek exit from the Euro would ravage the economy, perhaps causing hyperinflation. Others argue to look at the other side of the coin, and propagate the idea that a Greece exit would attenuate the suffering of the Greek people, as they might only have to suffer for the next 10 years, rather than the next 50. Personally, it is my firm belief; my avowal, if you will, that Greece should leave the eurozone, and start a new era, having ended the old era of economic pain.

Almost at the very command of Angela Merkel, the Greek Prime Minister Alexis Tsipras was forced to impose harsher austerity members than the previous weekend’s “No” vote had suggested. This paves the way for increased value added tax, increased privatisation of organisations previously owned by the state, and an increase in the retirement age, making the years that people have to work longer. The harsh austerity measures outlined in the plan forced on Tsipras make the deterioration of the economy an inevitability, which forces the Greeks to sell public assets. We can all agree on the fact that this is a malfeasance in itself, and that the Greek people should not be subjected to having the public assets sold in the interests of paying down Greece’s loans.

It can be clearly seen that Greece is in the midst of an economic depression. The latest measures imposed on Greece by Merkel will only make this worse, with the economy getting worse by the day. If Greece, however, exits the Euro and returns to the Drachma, they will have a substantially weaker currency on their hands, which will be a massive influence in helping Greece get themselves out of their deflation and debt. If Greece does get out of this negative spiral of deflation, they will be alleviated from the economic stagnation and high unemployment that currently pervades the country. This can only be a good thing, as more people can sustain a living due to an increase in jobs.

Moreover, it is arguable that the Greek economy will find it very hard to recover within the Eurozone. Greece needs a complete devaluation of its currency through a flexible exchange rate in order to make economic growth a likely scenario again. It is clear as a bell that the short term consequences would be quite damning for the Greek people, however this is a far better alternative than the other scenario, in which the people are suffering from hardship and poverty for the next half a century, potentially. This whole saga with Greece has affected other economies as well, which has led to fears of an Italian, or even a Spanish exit. If one of these two countries exits the eurozone, the ramifications of this would be irreversible for the euro and it would likely never bounce back.

Finally, it is a definite fact that this whole drama has caused deep political instability and rifts within the Eurozone, which means that the tension between the people in the Eurozone has never been higher. It was revealed earlier that a majority of German citizens want Greece to exit the Eurozone, and if this is the case, then there will be gargantuan pressure on Angela Merkel to force this to happen (some would argue that she is already exhibiting this). In order to put this tension within the Eurozone to rest, Greece needs to exit so we can have some semblance of peace in the Eurozone. All these factors combined show that it is in the best interests of all the countries involved that Greece does exit the Eurozone, and although this may have significant short-term impacts, it is definitely the best thing to do to secure long term economic prosperity for all involved.

_____________________

Is Greece insolvent, and what would that mean for the euro?

http://www.biznews.com/global-investing/2015/02/03/greece-insolvent-mean-euro

Greece financial crisisAs the new Greek government tries to fumble its way through the business of running a struggling country, more and more questions are being asked about the future of Greece and of the Eurozone. As this column asks, we need to know if Greece is, actually insolvent, and if so, how that can be reconciled with its position within the Eurozone. – FD

By James Saft

Feb 3 (Reuters) – Much hangs on the interpretation of a word, and in the case of Greece and the euro zone that word is: insolvent.

New Greek Finance Minister Yanis Varoufakis has been unusually frank, likening his country’s case to that of a jobless person being advised to take out advances on her credit card to pay the mortgage.

“Would you advise them that they should continue to take these tranches of loans from the credit card in order to deal with what is essentially an insolvency problem?” Varoufakis said days after taking office under the new Syriza-party-led coalition.

“This is the trouble over the last five years with Greece. Our European partners and the previous Greek government have been extending and pretending.”

Keeping up the pretense that one can honor one’s debts if only given room to maneuver and time is an old if not glorious tradition among the deeply indebted. Coming straight out and coping to insolvency, on the other hand, is not.

That’s because certain things tend to follow from an admission of insolvency. Creditors decline new advances, existing loans, where possible, are called and the debts of the insolvent, Greece, are no longer acceptable as collateral.

Guntram Wolff, Director of the Bruegel think tank, argues that Varoufakis has set a rapid clock ticking, making its debts theoretically beyond the pale for the European Central Bank and creating a pressing need for a new deal.

“When a Finance Minister declares the insolvency of his country, then the quality of all the debt he has issued should fall below the relevant thresholds for Emergency Liquidity Assistance as well as standard monetary policy operations. While I do not believe the ECB will be so consequential as to do this immediately, I also cannot believe that it will just continue lending for a long time,” Wolff wrote in a Bruegel piece.

“By talking about insolvency, he has raised the funding needs for Greece’s banking system and made government fund-raising on capital markets impossible,” Wolff said.

Insolvency is a state,  Default is an event

Important to remember that extend and pretend as a strategy, while obviously unfair to many participants, can sometimes work as a means of keeping an entity ticking over. Many leading U.S. banks were very likely insolvent during the crisis.

Like all relationships, good and bad, extend and pretend requires the participation of two partners, the creditor and debtor. All true, but these things are never simple, and far less when, as in Greece, the insolvency includes a euro member state.

While Greece’s liabilities may shortly exceed its ability to repay, its creditors and partners maintain that with current low interest rates and a very long repayment schedule its ongoing debt maintenance burden is not out of line with that of France, for example.

Varoufakis sees the situation as a debt deflation spiral, in which the conditions imposed on Greece stifle demand, pushing prices and output lower and making the debt ultimately impossible to repay without ruin. There is some justice in this position.

Varoufakis’ slapping down of the insolvency card is best seen as a gambit to bring the other side more rapidly to the table and to extract better concessions.

As for the ECB, it seems to be standing on ceremony, maintaining its hands will be tied as for extending Greek banks more credit when the Greek program extension expires at the end of February.

“We (ECB) have our own legislation and we will act according to that,” ECB council member Erkki Liikanen said.

That angle, that the ECB will have to follow its rules and that Greek debt and its banks will be high and dry, is heavily overplayed, argues Karl Whelan, an economics professor at University College Dublin.

Whelan believes that even in March Greek access to ECB enabled credit will be based on discretionary decisions rather than mechanical outcomes. Greece and its negotiating partners can conceivably limp along together because both the ‘rules’ and the meaning of insolvency are such woolly concepts, offering insulation if not clarity.

Thus we have two sides, both seeking to pressure the other by creating what could be a false urgency to negotiate, and both hoping the other crumples and gives way. Meanwhile, capital, sensibly, flees Greece and the chance rises that an overplayed hand by either side leads to a bank run.

Greek Politicians Vs EU hardliners


July 13, 2015

Greek Politicians Vs EU hardliners

http://www.ft.com

Leading politicians from Greece’s ruling Syriza coalition have rounded on German-led resistance to a third bailout, with one accusing EU hardliners of trying to bring down the government of Prime Minister Alexis Tsipras.

Greek PM  Alexis Tsipras.

In the run-up to a decisive eurozone leaders’ summit on Sunday, a German proposal that Athens could take a five-year timeout from the eurozone has sparked fears that Berlin has little interest in keeping Greece in the single currency.

The recalcitrance from countries such as Germany, Finland, Slovakia and the Baltic states piles huge pressure on Mr Tsipras, who is widely expected to reshuffle his cabinet to try to prevent a political breakdown in Athens next week.

“What is at play here is an attempt to humiliate Greece and Greeks, or to overthrow the Alexis Tsipras government,” Dimitrios Papadimoulis, a Syriza politician who is Vice-President of the European Parliament, told Mega TV. More broadly, Greek politicians are arguing that the opposition to Syriza is based on a political agenda that runs far deeper than calculations about whether the reform proposals stack up.

In a briefing about Saturday’s negotiations, government officials told Greek media: “While there was agreement in principle at the eurogroup yesterday, a group of countries brought up the issue of ‘credibility’, but without specifying what exactly should be done. It is clear that some countries, for reasons not related to the reforms and the programme, do not want a deal.”

In a thinly veiled swipe at Germany, Nikos Kotzias, Foreign Minister, said “powerful countries in the EU and its recent members” were pandering to vested interests at home. Although Greece’s parliament overwhelmingly supported the reform package on Saturday, Mr Tsipras faces the threat of fissures within his own coalition.

Prominent Syriza politicians such as Energy Minister Panagiotis Lafazanis, Parliament Speaker Zoe Konstantopoulou and Deputy Labour Minister Dimitris Stratoulis abstained from the vote. Yanis Varoufakis, the former Finance Minister, did not attend the session and travelled to the island of Aegina, citing family problems.

In a sign of potential rifts on the home front, Stavros Theodorakis, leader of the centrist To Potami party, has stressed the need for a “true national unity government”. In an interview with the Efimerida Ton Syntakton newspaper, he said: “What is needed is a determined team of 20 capable and progressive people that will say ‘let’s do it’.”