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Unformatted text preview: H aving successfully weathered several bouts of speculative pressures, the Bank of Thailand on July 2, 1997 let the baht float. Its immediate depreci- ation triggered, in relatively quick succession, the de- preciations of several of the regional currencies—the Philippine peso, the Malaysian ringgit, and the In- donesian rupiah. Early characterizations of this first round of currency devaluations were as exchange rate “corrections” that were expected to lead to manage- able external adjustment. At that point, no one pre- dicted the large depreciations that would fundamen- tally call into question the underlying assumptions on which past cross-border borrowing, lending, and in- vestment decisions had been based, and provoke a massive retrenchment of capital flows. Outside the re- gion, the rest of the emerging markets remained rela- tively insulated from the events in Southeast Asia until late October 1997. Then, what began as a localized disturbance in Hong Kong SAR’s foreign exchange and equity markets was transmitted rapidly and force- fully across the emerging markets, bringing strong pressures to bear, most notably on Brazil and Ar- gentina in Latin America, on Russia, and in Asia on Korea. It resulted in an across-the-board external li- quidity squeeze for emerging market borrowers and a deepening of pressures on the already affected coun- tries in Asia. These events raise a host of questions regarding the dynamics of the crisis and its spillover across the emerging markets. What caused the abrupt and mas- sive swing in flows from Southeast Asia? Which flows—foreign direct investment, portfolio, or bank lending—turned around? Were there factors that ex- acerbated price pressures to create the eventual enor- mous depreciations? What were the channels for the rapid transmission of pressures across the emerging markets in October 1997 following the turbulence in Hong Kong SAR? Was it simply broad-based in- vestor panic or did the form and structure of invest- ment linkages play a role? How did the actions of the credit rating agencies affect market dynamics? And, finally, what was the role of different investor groups—the international macro hedge funds that some believe took speculative short positions against the Southeast Asian currencies; the international commercial and investment banks that were large in- vestors of funds in the region; international mutual funds that had sizable equity investments; multina- tional corporations with substantial direct invest- ments; domestic banks and corporates that had built up large foreign currency liabilities; and domestic re- tail investors? Complete answers to these questions encompass several dimensions—the macroeconomic context, policy responses, and the capital market dynamics and spillover of the crisis. The macroeconomic context and outlook have been addressed in successive rounds of the World Economic Outlook 1 while policy issues have been considered elsewhere. This chapter exam-have been considered elsewhere....
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This note was uploaded on 08/08/2008 for the course ECON 365 taught by Professor Muniagurria during the Spring '07 term at University of Wisconsin.
- Spring '07