Asian Financial Crisis -1997~1998 Asian Financial Crisis- Jung Eun Yoo (# )

Before Asian Financial Crisis(1) The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return.  As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices.

Before Asian Financial Crisis(2) The regional economies of Southeast countries experienced high growth rates, 8–12% GDP, in the late 1980s and early 1990s.  This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the “Asian economic miracle”.

Start of Asian Financial Crisis : Thai's economy developed into a bubble “The collapse of the Thai baht” (in July 1997) Devaluation of Thai baht Thai government quit spending dollars buy its own currency to maintain the baht/dollar value

Spreading to Southeast Asia Thai South Korea IndonesiaMalaysia The Philippines

1) Currencies : Exchange rate 2) Stock markets and other asset prices 3) Private debt Influences of Asian Financial Crisis

Causes within South Korea The banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. Many businesses ultimately failed to ensure returns and profitability.

Cases in South Korea (Examples) 1) In July 1997, South Korea's third-largest car maker, Kia Motors, asked for emergency loans. 2) Moody’s lowered the credit rating of South Korea from A1 to A3, on 28 November 1997, and downgraded again to B2 on 11 December.

Consequences(1) - Seoul stock Exchange fell : 4%  7%  7.2% (percentage decrease in amount of stock exchange) - Korea Exchange Rate (Won Depreciation) : 800 won  1700 won - National debt-to-GDP ratio : 13%  30% -GNP (US$1 billion) : 430  283 (-34.2%)

Consequences(2) The IMF had approved USD $21 billion loan. Korea's economy continued to shrink quarterly at an average rate of -6.65%.

Exchange Rate Decision Factor Exchange Rate Fluctuation Market Expectation Economic Index News Exchange rate of nearby country Etc… Short-run factor Price Level Change in Production Change in Terms of Trade Long-run Factor Macroeconomic Policy Decision on Interest rate, etc. Current Account, Inward and outward Money flow Middle-run Factor

Effect of Exchange Rate Fluctuation - domestic price, import and export - real economy (ex : consumption, investment and production) Ex ↑ Exp↑/ Imp↓CA improvement Imp Goods P↑ Foreign Debt in KRW terms↑ (Foreign Borrowing Redemption Pressure ↑) Dom. Price ↑Export ↑ Production ↑ Economic Growth & Employment ↑

FINANCIAL CRISIS!! Source : Bank of Korea ECOS Asian Financial Crisis in Korea (1997~ 1998)

Recovery Recovery could be attributed to labor adjustments (ie. a dynamic and productive labor market) and alternative funding sources.  By the first quarter of 1999, GDP growth had risen to 5.4%  In December of 1999, President declared the currency crisis was over

Start of The Current Financial Crisis : Subprime mortgage crisis has shredded the global financial system with casualties including financial giants. ex) Bear Stearns, Lehman Brothers, Merrill Lynch and AIG

Lehman Brothers Bankruptcy The local currency closed at a 49-month low of 1,160 won to the U.S. dollar. The Kospi finished at 1, points. It fell below 1,400 won for the first time in 18 months.

Kospi, Won cross paths

The Currency Swap : The currency swap arrangement between the US Federal Reserve and the Bank of Korea providing access to U.S. dollars for up to $30 billion. The benchmark Kospi jumped percent to 1,084.72, its largest-ever daily gain. The Korean currency closed at 1,250 won to the U.S. dollar.

Gloomy November The Kospi index closed at points. The Korean won touched 1,517 won briefly during the intra-day trading before closing down 50.5 won, or 3.5 percent, at 1,497 won against the U.S. dollar, the lowest since March 1998.

FINANCIAL CRISIS!! Source : Bank of Korea ECOS Financial Crisis in Korea (2008~2009)

Comparison vs Sharply raised Exchange Rate Sharply raised Sharply fellKospiSharply fell Sharply raisedInterest RateSharply raised About $20 billionForeign Currency Reserve About $230 billion Around 300% Corporate Debt RateAround 100% Southeast AsiaOrigin of Crisis U.S.

Conclusion (1) Bubble grow in economy Overinvestment (2) Devaluation of Currencies Fall of stock markets and other asset prices (3) Economic downturns Recession

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