(align:"=><=")[(text-colour:red)[Asian Financial Crisis: IMF Response]]
(align:"=><=")[Decisions and Consequences
By: MS]
[[ Start ->Introduction]]
[[ Bibliography ->Bibliography]]July 1997
Over the course of the last year, export growth in Thailand, one of the economies heavily reliant on foreign financing, has dropped precipitously.
Foreign creditors are beginning to worry that their capital via loans in Thailand won't be returned, and begin to withdraw their capital.
The increased exchanging of Thai Baht (Thai currency) for US dollars caused immense downward selling pressure of the Thai Baht. Opportunistic currency speculators saw the inevitable, and joined the selling, betting on the downfall of the Thai Baht's value (cycling-link:"*","supply and demand - more selling equates to more supply, depressing the price").
On July 2nd,1997, the Thai government, which had been depleting its foreign currency (forex) reserves to meet the immense selling of the Baht, runs out of forex reserves (cycling-link:"*","governments use forex reserves to support their currencies by supplying foreign currencies and demanding their domestic currency"). The Baht is forced to float (cycling-link:"*","the government is no longer able to intervene in exchange rates") with market demands and is instantly devalued.
[[Continue ->Decision Starts]]
(set: $Bahtrate to '$32')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Rao, 'East Asian,'.")August 1997
As the continued capital outflows from Thailand cripple its economic and financial system, fears of a financial meltdown spreads across Asia. With Thailand appealing for aid, as director of the IMF, you are in charge of the international response to the crisis. Historically, the IMF has moved slowly and cautiously under such circumstances with the understanding that decisions must be made carefully. However, the crisis is on the verge of spreading across Asia, the same (cycling-link:"capital providers","foreign investors and lenders") that are now withdrawing from Thailand are threatening to do the same to other developing nations in the region. You must choose to either maintain the IMF's precedence of being disciplined in crises or respond quickly to the unfolding situation.
(set: $marketconfidence to (either:false,true)) (set: $relapse to false)
[[Act Now ->Thailand Quarantine]]
[[Stay Disciplined ->Contagion]]
(set: $Bahtrate to '$34.5')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Rao, 'East Asian,.
Stanley Fischer, 'On the Need for an International Lender of Last Resort,' The Journal of Economic Perspectives 13, no. 4 (1999), JSTOR.
Katz, 'The Asian,'.
According to Katz, the IMF had a slow and cumbersome response thanks to their bureaucratic process of stand-by agreements and loan facilities. Had the IMF leadership realized the fast moving nature of the crisis they might have chosen to circumvent the slow process they were used to.
")September 1997
In abandoning the IMF's traditional principles of slow and careful moves, you have successfully quarantined the crisis to Thailand by arresting the Baht's free fall. However, despite the outflow of capital being stemmed, the crisis is far from over in Thailand with the financial system still reeling from a combination of currency shocks and loss of confidence. Since the IMF is a creditor of the Thai government, the IMF is also given the role of supervising government spending while IMF loan facilities are in effect. As director of the IMF, you must carefully weigh your choices: let the government increase its budget and bail out the financial system (expansionary policy), potentially putting the IMF's loans at the risk of not being returned, or force the government to tighten its budget, leave the financial system its own devices, and focus on reattracting foreign capital and getting the IMF loans back (contractionary policy).
(set: $luck to (either:false,true))
(if: $luck is false) [[Expansionary Policy -> Unlucky]] (if: $luck is true)[[Expansionary Policy ->Early Resolution]]
[[Contractionary Policy ->Contractionary (Early)]]
(set: $Bahtrate to '$34.5')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Stanley Katz, 'The Asian Crisis, the IMF and the Critics,' Eastern Economic Journal 25, no. 4 (1999), JSTOR.
Alice D. Ba, 'Asian Financial Crisis,' Encyclopedia Britannica, last modified August 28, 2024, accessed September 12, 2024, https://www.britannica.com/money/Asian-financial-crisis.
'Thai Baht to U.S. Dollar Spot Exchange Rate [DEXTHUS],' FRED Federal Reserve Bank of St. Louis, last modified November 10, 2024, https://fred.stlouisfed.org/series/DEXTHUS/.
Although this did not occur in actuality, a fast IMF response (replenishing central bank reserves) to restabilize exchange rates would have likely shored up confidence in the markets given the increased capacity for the government to defend its currency as well as the willingness of the IMF to quickly respond. The timeline is based off of historical IMF decision points, but moved forward.
")(if:$relapse is false)[Novemeber 1997](else:)[April 1998]
(if:$relapse is false)[Your decision to hold true to the IMF's traditionally careful and prudent approach comes at great cost.] (else:)[Although your initial reaction to the Thailand crisis had quarantined the crisis, your inability to deal with the fallout has meant that the crisis is now breaking free of Thailand and spreading across Asia.]As confidence in the financial systems of Asia continues to collapse, South Korea's Won and Indonesia's Rupiah both take a nosedive against the US dollar. South Korean banks begin to face enourmous stress as loans with domestic enterprises defaulting on loans to merchant banks. This is causing the Korean credit markets to dry up, triggering even more defaults on loans. Indonesia, whose economy had previously drawed on large sums of foreign capital, is now facing an insolvent financial system as banks fail under the pressure of bank runs.
The IMF must now resolve a far larger crisis as a recession looms over the asian economies. A significantly larger aid package is now being prepared. However, as is expected of the IMF in its role as a advising creditor, you must determine the IMFs stance on fiscal policy in the recipient nations: Thailand, Korea, and Indonesia. Allowing expansionary fiscal policies would mean that these governments will run deficits, increasing their sovereign debt, potentially risking their creditworthiness, something you have to consider as a lender to these nations. On the other hand, running fiscally contractionary policies means that the financial systems will be left to their own devices and the economies will have to bear the full force of a devastating recession.
[[Contractionary Policy ->Contractionary (Late)]]
[[Expansionary Policy ->Expansionary (Late)]]
(set: $Bahtrate to '$40.5') (set: $Wonrate to '1020.0') (set:$Rupiahrate to '4650.0')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","Rao, 'East Asian,'.
Katz, 'The Asian,'
'Thai Baht.'
'South Korean Won to U.S. Dollar Spot Exchange Rate [DEXKOUS],' FRED Federal Reserve Bank of St. Louis, last modified November 10, 2024, https://fred.stlouisfed.org/series/DEXKOUS/.
'Currency Conversions: US Dollar Exchange Rate: Spot, End of Period: National Currency: USD for Indonesia [CCUSSP02IDQ650N],' FRED Federal Reserve Bank of St. Louis, last modified November 10, 2024, https://fred.stlouisfed.org/series/CCUSSP02IDQ650N.
This follows the historical course of events
")November 1998
Although historical IMF doctrine has argued that currency and credit markets are best restabilized by tightening credit and raising interest rates to reattract capital, your decision to differ has been paying dividends. Even though the exchange rate has not returned to its pre-crisis range, you appear to have restored the market's confidence in the Thai financial system by focusing on easing the pain of the stresses facing the financial system. In doing so, you have proved that the credit markets are not neccesarily negatively impacted by allowing the government to increase its spending. Your fast response and willingness to bend the rules have led to a fast resolution of the crisis. The IMF's actions under your leadership will be used as a case study of capable financial crisis management for many years to come.
[[The End ->Title]]
(set: $Bahtrate to '$34.5')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Ba, 'Asian Financial,' Encyclopedia Britannica.
Katz, 'The Asian,'.
'Thai Baht.'
Expansionary monetary and fiscal policies would mean a lower cost of borrowing (cost of capital), enabling strained financial institutions to draw on lines of credit with ease (mainstream economics). Increased government spending used to insure the financial system and prevent the crisis from enlarging would have likely been deemed as a rational use of government capital by the credit markets (speculating from real reactions from credit markets).
")(if:$relapse is false)[January 1998](else:)[June 1998]
You enact contractionary policies, following the traditional playbook of the IMF. As such, the various governments under your advisory have begun to raise interest rates in an attempt to stop the outflow of capital. However, credit markets appear to be unconvinced as asian currencies continue their dive against the dollar (cycling-link:"*","currency crashes can come as a result of capital flight"). This comes as a shock since the entire point of the contractionary policies is to encourage the return of capital (cycling-link:"*","higher interest rates create more lucrative returns for investors"). The financial systems in these nations have come under incredible strain, as depositers start pulling their money from banks, the unpleasant posibility of bank runs (cycling-link:"*","bank runs result in banks not having enough cash on hand to meet withdrawals") become present. Given the continued financial meltdown, you are forced to reconsider the IMF's policy recommendations. You can either continue the course of contractionary policies, maintaining your faith in the tried and true approach, or take the unexplored approach of allowing expansionary policies.
[[Continue with Contractionary Policies ->Annihilation]]
[[Relent and allow Expansionary Policies ->Reconsider (late)]]
(set: $Bahtrate to '$48.2')(set: $Wonrate to '1476.0') (set:$Rupiahrate to '8325.0')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","
Rao, 'East Asian,'.
Katz, 'The Asian,'.
Ba, 'Asian Financial,' Encyclopedia Britannica.
Radelet et al., 'The East,'.
'Currency Conversions.'
'South Korean.'
'Thai Baht.'
This was the historical choice made by Camdessus.
")(if:$relapse is false)[January 1998](else:)[June 1998]
Although your initial decision to delay the IMF's response wasted crucial time and allowed the crisis to become contagious, your decision to advise for expansionary policy has, against expectations, seemingly paid off. The credit markets appear to approve, as evidenced by selloffs of the currency halting, temporarily restabilizing the crashing asian currencies. However, given the unprecedented IMF response, there are still doubts as to whether or not the results are reflecting just a temporary pullback. The IMF's board of governors appear to share the skepticism, and ask you to return to contractionary policies, sticking to the tested out strategy implemented by the IMF over the years. Will you continue with the unprecedented path of expansionary policies or agree to return to contractionary policy?
[[Continue with Expansionary Policies ->Continued Expansionary (late)]]
[[Contractionary Policies ->Annihilation]]
(set: $Bahtrate to '$40.5') (set: $Wonrate to '1020.0') (set:$Rupiahrate to '4650.0')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","Katz, 'The Asian,'.
Radelet et al., 'The East,'.
Ba, 'Asian Financial,' Encyclopedia Britannica.
'Currency Conversions.'
'South Korean.'
'Thai Baht.'
Cheap credit under expansionary policies would have been a lifeline to struggling institutions (standard economics). Given that such a policy recommendation would have been unprecedented, it would not be expected to have many still questioning the effects of expansionary policies (Encyclopedia Britannica).
")(if:$relapse is false)[March 1998](else:)[August 1998]
The meltdown of asian financial systems becomes inevitable, as high interest rates have made obtaining credit for financial institutions untenable. Fears about the solvency of these institutions begins to spread not only amongst foreign creditors, but through regular retail depositers. Bank runs begin as regular people begin fearing for their deposits. The effects of your policies will be felt for decades to come as asian financial systems will be forced to rebuild from scratch. Your ineptitude in dealing with the crisis will be studied in the oncoming years. Your leadership of the IMF will serve as a case study for the inability of institutions to deal with dynamic situations that require new solutions.
[[The End ->Title]]
(set: $Bahtrate to 'unknown xx.xx')(set: $Wonrate to 'unknown xx.xx') (set:$Rupiahrate to 'unknown xx.xx')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","Rao, 'East Asian,'.
A widespread financial crisis would have led to catostrophe. Contractionary policies enforced by the IMF would prevent governments from stepping in by constraining government budgets (which began to happen in reality - Rao). Any worries by depositers and creditors alike would have been confirmed by a bank run, resulting in more bank runs in a self-fulfilling prophecy, which would ultimately lead to a complete destruction of the financial system.
")(if:$relapse is false)[March 1998](else:)[August 1998]
Although the IMF's board of governors are unsure of your decision, you see the writing on the wall and realize that the IMF's contractionary policies will no longer work. Your decision to enact expansionary fiscal and monetary policies come in time to prevent a catostrophic meltdown of the asian financial system. With depositers and creditors being reassured in the soundness of the financial system, the immediate worry of bank runs and mass insolvency is over. However, it may be some time until the currencies of these nations return to their pre-crisis prices. Investors and creditors will likely be shaken for some time to come, and will unlike be as enthusiastic in providing capital to the asian nations as they were before.
[[The End ->Title]]
(set: $Bahtrate to '$38.0')(set: $Wonrate to '1387.0') (set:$Rupiahrate to '10700.0')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","Rao, 'East Asian,'.
'Currency Conversions.'
'South Korean.'
'Thai Baht.'
This follows the real course of events.")
(if:$relapse is false)[March 1998](else:)[August 1998]
Your decision to break from tradition and advise for expansionary fiscal and monetary policies is daring but successful. Despite the political pressure from your colleagues, you are convinced that the traditional IMF policy recommendations will end in disaster. Currencies slowly but steadily return to their pre-crisis ranges as the market appears to be willing to do business with the asian economies again. Although your initial decision to wait to respond allowed the crisis to spread, your decision to enact expansionary policies in the face of political pushback allowed a fast and relatively painless resolution to the crisis.
[[The End ->Title]]
(set: $Bahtrate to '$40.5') (set: $Wonrate to '1020.0') (set:$Rupiahrate to '4650.0')
Thai Baht to USD Exchange Rate: $Bahtrate
Korean Won to USD Exchange Rate: $Wonrate
Indonesian Rupiah to USD Exchange Rate: $Rupiahrate
(cycling-link:"$","Rao, 'East Asian,'.
Katz, 'The Asian,'.
Radelet et al., 'The East,'.
'Currency Conversions.'
'South Korean.'
'Thai Baht.'
Had the IMF from the onset implemented expansionary policies in affected nations, interest rates would have exerted less of a pressure on strained instutions, while governments given more leeway with their budgets would have had the opportunity to bail out creditors should the need arrive (mainstream economics).
")November 1998
Thailand follow the IMF's plan of fiscally contractionary policies and begins raising interest rates in to resecure the exchange rate, tightening credit markets in the process. The aim of these contractionary policies is to allow the government to restore faith in the credit and currency markets. However, markets appear to be unconvinced, with the Baht beginning to slip again. Foreign creditors are still pursuing the withdrawal of their capital and government reserves, which had been bouyed by IMF funds, continue their decline as funds are used to support the markets. With the efficacy of the IMF's contractionary prescription being called into question by the market's reaction, you are forced to reconsider the IMF's policy recommendation. You can continue with the IMF's standard approach of contractionary policy, focusing on repaying creditors and mitigating the damages, or change course and implement expansionary policy, subsidizing the Thai government's attempt to rescue the financial system.
(set:$relapse to true)
(if: $marketconfidence is true)[[Continue with Contractionary Policy ->Smaller worse problem]](if: $marketconfidence is false)[[Continue with Contractionary Policy ->Contagion]]
[[Implement Expansionary Policy ->Reconsider]]
(set: $Bahtrate to '$36.0')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Katz, 'The Asian,'.
Ba, 'Asian Financial,' Encyclopedia Britannica.
Steven Radelet et al., 'The East Asian Financial Crisis: Diagnosis, Remedies, Prospects,' Brookings Papers on Economic Activity 1998, no. 1 (1998), https://doi.org/10.2307/2534670.
'Thai Baht.'
Although this doesn't follow the real course of events, the IMF did push contractionary policies in reality, which was ultimately a terrible decision that worsened the crisis (Katz).
")It is early 1997, you are Michel Camdessus, director of the International Monetary Fund (IMF).
The directive of the IMF is to monitor major economic and financial events, advise member nations (which number over 180), issue emergency loans in its role as a lender of last resort, and provide alternative solutions to nations in crisis.
In recent years, the developing economies in Asia have flourished, becoming shining examples of the benefits brought by globalisation, lifting their populations out of poverty and rapidly industrializing and modernizing their economies.
However, over the same period of time, these economies have heavily borrowed from foreign creditors, made possible by currency exchange rates fixed to the US dollar, making the financial systems of these nations vulnerable to a flight of foreign capital (cycling-link:"*","capital fleeing nations can result in exchange rates crashing, causing more capital to seek an exit").
[[Continue ->Crisis Begins]]
(set: $Bahtrate to '$26')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Bhanoji Rao, 'East Asian Economies: The Crisis of 1997-98,' Economic and Political Weekly 33, no. 23 (1998): [Page #], JSTOR.
'What is the IMF,' IMF, last modified October 2024, accessed November 10, 2024, https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance#:~:text=What%20does%20the%20IMF%20do?%20The%20IMF%20fosters%20international%20financial.
")
Bibliography
Ba, Alice D. "Asian Financial Crisis." Encyclopedia Britannica. Last modified August 28, 2024. Accessed September 12, 2024. https://www.britannica.com/money/Asian-financial-crisis.
"Currency Conversions: US Dollar Exchange Rate: Spot, End of Period: National Currency: USD for Indonesia [CCUSSP02IDQ650N]." FRED Federal Reserve Bank of St. Louis. Last modified November 10, 2024. https://fred.stlouisfed.org/series/CCUSSP02IDQ650N.
Fischer, Stanley. "On the Need for an International Lender of Last Resort." The Journal of Economic Perspectives 13, no. 4 (1999): 85-104. JSTOR.
Katz, Stanley. "The Asian Crisis, the IMF and the Critics." Eastern Economic Journal 25, no. 4 (1999): 421-39. JSTOR.
Radelet, Steven, Jeffrey D. Sachs, Richard N. Cooper, and Barry P. Bosworth. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects." Brookings Papers on Economic Activity 1998, no. 1 (1998): 1-90. https://doi.org/10.2307/2534670.
Rao, Bhanoji. "East Asian Economies: The Crisis of 1997-98." Economic and Political Weekly 33, no. 23 (1998): 1397-416. JSTOR.
"South Korean Won to U.S. Dollar Spot Exchange Rate [DEXKOUS]." FRED Federal Reserve Bank of St. Louis. Last modified November 10, 2024. https://fred.stlouisfed.org/series/DEXKOUS/.
"Thai Baht to U.S. Dollar Spot Exchange Rate [DEXTHUS]." FRED Federal Reserve Bank of St. Louis. Last modified November 10, 2024. https://fred.stlouisfed.org/series/DEXTHUS/.
"What is the IMF." IMF. Last modified October 2024. Accessed November 10, 2024. https://www.imf.org/en/About/Factsheets/IMF-at-a-Glance#:~:text=What%20does%20the%20IMF%20do?%20The%20IMF%20fosters%20international%20financial.
January 1998
Although the problem has been limited to Thailand for now, the financial system has turned into an unsalvageable mess as trust in the system breaks down. The Baht once again takes a nosedive against the dollar as foreign capital continues its flee from the country. Thankfully, the initial quarantine of the crisis to Thailand has allowed other nations in the region to prepare for the crisis. The Korean and Indonesian governments have already stepped up, guaranteeing the solvency of their banks and pledging to make foreign creditors whole on any defaulting loans.
[[The End ->Title]]
(set: $Bahtrate to '$39.2')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Radelet et al., 'The East,'.
'Thai Baht.'
High interest rates would mean struggling institutions would have to choose between defaulting on their obligations or taking out loans that in the long term would likely result in the same thing. As such, there would likely be widespread failure in the financial system, only furthering the flight of capital (standard economics). If neighboring Asian governments had seen the writing on the wall and began taking precautions, it would still be conceivable that the crisis would have been contained to Thailand (speculation).
")January 1998
Your unprecedented decision to allow the Thai government to drop interest rates, loosen the credit markets, and increase its budget to deal with the crisis appears to have paid off handsomely. The Thai government has been using their newly granted latitude, thanks to the approval of budget increases, to guarantee bad loans. The markets appear to have confidence in the new approach developed by the IMF and Thai government, the Baht's decline against the dollar has stopped and is now settling into a much more stable range, albeit still well above the pre-crisis range. As the crisis concludes, you leave an admirable legacy as director of the IMF, your decisions have shown the ability of the organization to quickly adapt to fast changing circumstances.
[[The End ->Title]]
(set: $Bahtrate to '$35.0')
Thai Baht to USD Exchange Rate: $Bahtrate
(cycling-link:"$","Katz, 'The Asian,'.
Radelet et al., 'The East,'.
'Thai Baht.'
Reconsidering the contractionary policies would likely have pulled back the financial system from the brink of destruction (based off real IMF response). The government stepping in to insure bad loans would have restored confidence among creditors and investors.
")September 1997
Your bold actions have attracted much attention from the IMF's member governments and the general public. Not of the good kind.
Your refusal to adhere to the IMF's traditional principles has made it clear to the Board of Governors that you are unable to fulfill your duty as managing director of the IMF. The succeeding director will be directed to institute contractionary fiscal policy in Thailand, a decision you know can only end in disaster. However, there will be nothing you can do, except for watch on in horror.
[[The End ->Title]]
(set: $Bahtrate to '$36.0')
Thai Baht to USD Exchange Rate: $Bahtrate
(9)
(cycling-link:"$","Katz, 'The Asian,'.
Ba, 'Asian Financial,' Encyclopedia Britannica.
'Thai Baht.'
Given that the IMF playbook was centered around contractionary policy (Encyclopedia Britannica), Camdessus would have likely faced immense political backlash had he chosen to take such a daring course of action.
")
↶↷Asian Financial Crisis: IMF Response
Decisions and Consequences
By: MS
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