by Summary:
Asian economies are commended for improving their external balances and building self-insurance by accumulating large amounts of reserves. However, whether these would be sufficient to provide adequate protection against a reversal of capital flows is contentious. After the Asian crisis external vulnerability came to be assessed in terms of adequacy of reserves to meet short-term external dollar debt. However, short-term debt is not always the most important source of drain on reserves. Currencies can come under stress if there is a significant foreign presence in domestic markets and the capital account is open for residents. A rapid exit could create significant turbulence even though losses from declines in assets and currencies fall on foreign investors and mitigate the drain of
Topics:
Mike Norman considers the following as important: 1997 financial crisis, Asian financial crisis, capital flight, Economic History, financial crises, free capital flow
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Asian economies are commended for improving their external balances and building self-insurance by accumulating large amounts of reserves. However, whether these would be sufficient to provide adequate protection against a reversal of capital flows is contentious. After the Asian crisis external vulnerability came to be assessed in terms of adequacy of reserves to meet short-term external dollar debt. However, short-term debt is not always the most important source of drain on reserves. Currencies can come under stress if there is a significant foreign presence in domestic markets and the capital account is open for residents. A rapid exit could create significant turbulence even though losses from declines in assets and currencies fall on foreign investors and mitigate the drain of
Topics:
Mike Norman considers the following as important: 1997 financial crisis, Asian financial crisis, capital flight, Economic History, financial crises, free capital flow
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Asian economies are commended for improving their external balances and building self-insurance by accumulating large amounts of reserves. However, whether these would be sufficient to provide adequate protection against a reversal of capital flows is contentious. After the Asian crisis external vulnerability came to be assessed in terms of adequacy of reserves to meet short-term external dollar debt. However, short-term debt is not always the most important source of drain on reserves. Currencies can come under stress if there is a significant foreign presence in domestic markets and the capital account is open for residents. A rapid exit could create significant turbulence even though losses from declines in assets and currencies fall on foreign investors and mitigate the drain of reserves.
In all four Asian countries directly hit by the 1997 crisis, international reserves now meet short-term external dollar debt. But they do not always leave much room to accommodate a sizeable and sustained exit of foreigners from domestic markets and capital flight* by residents.* "Capital flight" in an environment of free capital flow means selling the domestic currency in the foreign exchange market for a foreign currency and depositing this in foreign financial institutions. This depresses the exchange value of the domestic currency and lowers the price of the domestic assets being sold. In volume ("rushing for the door"), this puts pressure on domestic economies owing to existing commitments. It does not mean taking the domestic currency out of the country.
Oupblog
The Asian financial crisis: lessons learned and unlearned
The Asian financial crisis: lessons learned and unlearned
Yilmaz Akyüz | former Director of Division on Globalization and Development Strategies at UNCTAD, principal author and head of the team preparing the Trade and Development Report, and coordinator of research support to the Group-of-24 in the IMF on International Monetary and Financial Issues