The Asian Financial Crisis
A quick story about a strengthening dollar and debt in Thailand circa '95
💰 Crisis
2 Min Read
I’ve been reading the book “The Asian Financial Crisis” by Russell Napier and I couldn’t help but draw a few parallels to what’s taking place today, here are a few of my notes on one chapter.
I posted this on twitter so if you have seen it already, I apologize.
Notes:
In 1995, the flow of capital into Asia was so large that most believed the appreciation of the Dollar would have little impact on the local economies, it was thought intervention would take place to slow the appreciation of the local currency, and thus the money creation dynamic present would stay intact.
The dollar had begun a climb in late ‘95 which slowed capital flows into the Asian region and forced Central Banks to defend their exchange rates. The rise of the US dollar and the deterioration of Asian external accounts had an outsized impact on domestic liquidity. This series of choices eventually led to a cataclysmic change in the monetary policy that we are still dealing with today.
In choosing the exchange rate management target, Central Banks in Asia were forced to surrender and manipulate their balance sheets according to the whims of fate rates
August ’95 Thailand
The capital account was booming and in Q2 Thailand reported its biggest ever balance of payment surplus and current account deficit at the same time. The surge of cap flows in ’95 were due to international Investors, and Thai corporates borrowing USD to buy baht which was then used to invest in Thailand. The problem was high interest rates, any attempt to mop up liquidity by CB’s would only exacerbate the arbitrage by pushing rates higher. Normally a deteriorating current account would help to raise Thai interest rates on its own and aid in extinguishing the froth. However, because of the balance of payments surplus at the time, this wasn’t happening. The bank of Thailand was left with limited responses aside from financial repression.
The change in the composition of the capital inflows played a massive role in the implosion of the Asian miracle. Thailand and others chose to replaced long term stable funding for short term -primarily debt focus- funding. Money that was previously flowing into the country was used to purchase machinery, to employ people and start businesses. This capital was fundamental in promoting economic growth, it tended to stay and slowly build a foundation for exports. “The new money -primarily from investors- was interest rate sensitive and focused on liquid assets like short terms debt assets and equities.”
They exchanged sticky long term inflows for short term inflows that could be quickly reversed and extracted.
At the same time, Thai corporates were involved in a foreign currency binge, some were borrowing at long tenors, but most were borrowing short term and exchanging for Baht which they then used for domestic investment. Should they ever have problems, they would have to liquidate Baht investments to fund USD repayments. Additionally, if the Dollar was to go on a meteoric run over the next few years (which it did,) it would be increasingly hard to service their debt.
The point here is that long term capital inflows exchanged for short term debt based inflows lead to fragility. In the first chart I posted in this article you see the Thai Baht eventually implode in ‘97 along with the other Asian currencies. The hunt for yield by mercenary capital drives history to repeat apparently, nations cant resist the call of the siren, but when the music stops and the dollar wakes up, who’s left holding the bag.