Financial Crises in Asia

Brainteaser

• A prison warden tells 16 prisoners there is a switch in the room, currently off

• The prisoners are allowed to meet today but never again

• Every day, 1 prisoner is chosen at random to visit the switch room and he can choose to flick the switch as many times as he wants

• If someone realizes at some point that every prisoner has visited the switch room, they all go free, if not, they all die.

Brainteaser

• Use a person as a counter!

Market Update

• European Inflation at 0.5%, Thurs meeting coming up

• N/S Korea exchange fires across sea borders

• China corruption clampdown on Zhou Yongkang

• Greece is safe till May

The Asian Financial Crisis

• Thailand – government forced to float the Bhat and de-peg from USD– Lots of efforts to prop up the Baht (largely RE

driven)

1997

Asian Financial Crisis

• Current Account = X – M + Net Income from abroad + Net current transfers

• ALSO Current account = net foreign transfers

• CA deficit is known as absorption– Why?

• What do you need to keep a fixed exchange rate?

Primer of Current Account

The Asian Financial Crisis

• Difference between hot money and investments

• What did Thailand, South Korea and Indonesia have in common?– Current account deficit + fixed exchange rate – What about Hong Kong then?

• Reserves and public share buyback

• What do you think happened to interest rates?

• Catalyst: George Soros

1997

Asian Financial Crisis

• Speculative short selling of currency rapid currency decline (Indonesia)– Worries about debts in Indonesia (does this

make sense?)

The crash itself

Aftermath

• Oil demand drops against a backdrop of huge increases in Capex in large oil firms in Russia

• LTCM collapse• In Japan: Sanyo Securities, Hokkaido

Takushoku Bank• In HK: Peregrine Investments• Japan enters recession

Russia

Other notable Crises

• 2003 SARS• 2008 GFC