Same crisis, different bucket

The Asian crisis of 1997 can in some regard be seen as an analogous integration of the current Euro crisis and the financial crisis of late 2008. From 1970 up until the late 90’s, new diversification opportunities and the promise of a high rate of return saw a high influx of foreign direct investments within the Asian economies (Thailand, Malaysia, Indonesia, Singapore, and Korea). As a result of these large capital flows within the Asian economies, there was a large concomitant and exponential increase in asset prices. These increases in asset and property prices fuelled a “credit boom” within the Asian countries. As a result construction increased ferociously, and property started to pop up everywhere.

The Euro zone experienced a similar increase in property prices, especially in Spain and Portugal with retirement villas and holiday retreats sprouting up malignantly. The main similarities between these two crises were that both economies underwent financial sector deregulation as well as capital account liberalisation prior to the outbreak of the crisis. Within the Asian economies the structural deformation in the financial and banking sector, forced banks to borrowing excessively from foreign countries in order to feed the domestic credit boom. Moreover, international banks appeared to have neglected sound risk assessment standards when large amounts of funds where lent out to Southeast Asian financial intermediaries.

Furthermore both the Asian economies as well as the Euro zone economies had large current account deficits, a high influx of imports, and a large and unsustainable government sector/expenditure.  Interestingly within both economies there seemed to have been one country that had exceptionally good exports (China and Germany), while the rest had high levels of imports and substantial wage increases.

Another similarity seems to be the role that the private sector played within the crisis. Within the Euro crisis the private sector was the main culprits in the borrowing spree whereas in the Asian economies the private sector was guilty of making poor investment decisions, which led to a weak financial sector, strong capital inflows and a credit boom.

Then growth started to slow down, and with a subsequent increase in interest rates various companies and Banks started to default on their payments. Within the Asian Banks there were high leveraged ratios and excessive foreign borrowing.

Moreover, capital flight was not only a problem within the Asian crisis but within the Euro crisis as well. Capital flight from Spain is now worse than what Indonesia experienced, according to analysts.

It becomes clear that not only are there various similarities between these two crises but also that the Euro zone could have learned a few things; firstly to keep debt monitored at all times and to use inflation targeting to expand the economy, not credit; secondly that the relationship between the private sector and government should be kept strong in order to make an informed decision, unfortunately it becomes clear that any solution made by one sector that doesn’t agree with the other is no clear solution; and lastly that interest rates should not only be used to expand credit but also to keep investors happy, when capital flight occurs a devaluation of the currency is soon to follow, thus making the imports – that the European countries are currently doing with no regards to what will happen to domestic competitiveness – a lot more expensive.

It becomes clear that there is no definite solution to the Euro crisis and all eyes will be on Germany to decide what will be the best path to follow.

C. Weideman


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