Monday, July 02, 2007

Revisiting the Asian financial crisis

It is January 15 1998. The photo on the right of Indonesia's president Suharto signing away his power to an IMF bail out package of $ 33 billion is a powerful image; one that was witnessed by a stern-faced Michel Camdessus, the IMF managing director and a anxious nation watching on national television.

This July marks the 10th anniversary of East Asia's financial crisis. In July 1997, the Thai baht plummeted. Soon after, financial panic spread to Indonesia and South Korea, then to Malaysia. In a little more than a year, the Asian financial crisis became a global financial crisis, with the crash of Russia's ruble and Brazil's real.

Mr Suharto of Indonesia had no choice but to agree to severe austerity measures. In the space of less than a year, annual per-capita income has fallen from $1,200 to $300 and stock market values from $118 billion to $17 billion. Only 22 of Indonesia's 286 publicly listed companies are considered solvent.

According to official estimates, nearly two million Indonesians lost their jobs, including about 500,000 workers in the textile industry. The state-run labor union has estimated that the unemployment rate could reach 11 percent of the country's estimated work force of more than 90 million. Many more will be underemployed.

Public anger and frustration that followed, soon saw a violent end to Suharto's iron-fisted regin of 31 years.

Then, the IMF and the US Treasury blamed the crisis on a lack of transparency in financial markets.

But when developing countries pointed their fingers at secret bank accounts and hedge funds, IMF and US enthusiasm for greater transparency diminished. Since then, hedge funds have grown in importance, and secret bank accounts have flourished.

Some similarities exist between the situation then and today. Before the 1997 crisis, there had been rapid increases in capital flows from developed to developing countries -- a six-fold increase in six years. Afterward, capital flows to developing countries stagnated.

Before the crisis, some thought risk premia for developing countries were irrationally low. These observers proved right: The crisis was marked by soaring risk premia. Today, the global surfeit of liquidity has once again resulted in comparably low risk premia and a resurgence of capital flows, despite a broad consensus that the world faces enormous risks (including the risks posed by a return of risk premia to more normal levels.)

It seems in the very nature of capitalism there will be ups and downs in the markets; therefore some crises is bound to lurk around the corner. The ability to always anticipate change, religiously follow market trends and be ever ready to react would be the order of success in this financial game.

No comments: