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What Happened?
Events Leading to the Southeast Asian Currency Crisis
October 28, 1997

Southeast Asian exchanges tumbled again overnight as anxious speculators continued to convert various regional currencies into dollar-denominated assets. A mixture of currency crises, short-term interest rate crises, bankruptcy crises, and crises in confidence had most of Southeast Asia pinned against the wall. Europe followed Asia lower with the British Financial Times, the French CAC 40, the German DAX, and the Swiss OMX all closing down 5.5% or more. Early trading had U.S. stocks open lower with many companies on the New York Stock Exchange held in early trading due to order imbalances. Investors are speculating that the economic problems in Asia could translate into slower growth for U.S. and European companies

Hong Kong's Hang Seng index closed down 13.7% as stocks continued to react to short-term interest rates. Hong Kong government bonds closed at 8.7%, roughly 3 percentage points above where they have traded for most of the past year. As the rates stay high to help protect the Hong Kong dollar's peg to the U.S. dollar, investors are dumping anything related to property or mortgages as higher interest rates basically kill earnings growth. Malaysia, Singapore, Thailand, and the Philippines all closed at least 6.0% lower as investors rushed into U.S. dollars, fearing collapsing native currencies and slowing economic growth as all of these nations ratchet up short-term rates to defend their currencies and diminish their current accounts surplus. South Korea was also hosed as investors swapped won for dollars. Debt-laden Korean conglomerates (chaebol) in particular were selling anything denominated in won in order to make sure they can pay their foreign-denominated debt.

The theme dragging world markets lower is the fear that the local crises in Southeast Asian countries could cause growth in the region to slow tremendously. Malaysia has already reduced expectations for growth in its gross domestic product to 7% from 8%, the lowest rate in more than four years. Investors are actually trying to get Malaysia to go even farther, as higher short-term rates will help to stabilize the currency by making it more expensive for short-sellers to borrow ringgit. Thailand, the Philippines, and Singapore are all saddled with similar problems. Already in the grips of a pretty serious debt crisis, the destabilization has added to woes in South Korea, already in the midst of a two-year recession. Hong Kong is purely an issue of acidic short-term rates hitting basic real estate and financial shares and shearing prior expectations of earnings growth. All this said, should interest rates and currencies stabilize over the next few weeks, the region's growth will probably only slow a few percent -- perhaps enough to be noticed but hardly enough to plunge Europe and North America into depression.

This collection contains a detailed sequence of events for four key Southeast Asian markets -- Hong Kong, Malaysia, Korea, and Thailand. As you will see, the relationships between short-term interest rates, currency exchange rates, and stock markets -- the cause and effect at work in Asia -- is simple but powerful. A reader will note that much of what the world is panicking about over the past few days has been building for months and can hardly be characterized as a surprise. A closer reader will also note that the country-specific factors outweigh the global implications, despite the anxiety of U.S. and European investors. Although this is an important series of events with far-reaching implications, the risk appears to be slower growth for North American and European companies that sell to Asian consumers -- not a global depression.

next page -- Korea Timeline


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