The Origin Of Asian Crisis Essay Research — страница 4
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investment boom was excessive and often in wrong sectors (non-traded goods, real estate, speculative assets build-up). + Moral hazard problem created by government Because of a moral hazard problem created by government promises of a bailout, banks borrowed too much from abroad and lent too much for investment projects that were too risky, moreover, the interest rate at which domestic banks could borrow abroad and lend at home was too low (relative to the risks of the projects being financed) so that domestic firms invested too much in projects that were marginal if not outright not profitable. Once these investment projects turned out not to be profitable, the firms (and the banks that lent them large sum) found themselves with a huge amount of foreign debt (mostly in foreign currency) that could not be repaid. The exchange rate crisis that ensued exacerbated the problem as the currency depreciation dramatically increased real burden in domestic currencies of the debt that was denominated in foreign currencies. + Much borrowing and lending fund was to finance speculative asset A significant fraction of the borrowing and lending was not going to finance new investment projects (that would have increased the stock of capital); instead, the loans were financing speculative demand of assets in fixed supply (land, existing real estates, the outstanding stock of equity). Evidence on this is provided by the movements of asset prices (especially stock markets, land values and real estate prices) that were increasing faster than warranted by economic fundamentals. The asset price bubble (in stock markets, land and real estate prices) was fed by the excessive borrowing by banks in international capital markets; therefore, part of the accumulation of foreign liabilities went to the financing of the speculative asset bubble. When this bubble burst in 1997, the firms, banks and investors that had borrowed these funds were left with a large stock of foreign debt that could not be easily repaid. Again, the collapse of the currencies worsened this debt problem by increasing the real burden of the foreign liabilities. + Contagion of financial crisis in the region In order to understand the currency crisis in 1997 and its contagion from one country to the other, it is important to notice that the depreciation of some regional currency appreciated the “effective” real exchange rate and worsened the competitiveness of the other countries in the region that had not depreciated yet. As one after the other, the currencies of countries that were competing in the same world market came under attack and started to depreciate, the equilibrium fundamental value of other currencies that had not depreciated yet started to become lower and the pressure on such currencies to depreciate to regain some of the competitiveness loss became even higher. This game of competitive devaluation is an important factor that explains why the currency contagion and the domino effects were driven by fundamental factors rather than irrational contagion.