World Economic Crisis

2000: Dot Com Crash (2000 to 2002)

2007-12-26T07:35:00.001-08:00

The Nasdaq Composite lost 78% of its value as it fell from 5046.86 to 1114.11. Decades before the word "dotcom" slipped past our lips as the answer to all of our problems, the internet was created by the U.S. military, who vastly underestimated how much people would want to be online. Commercially the internet started to catch on in 1995 with an estimated 18 million users. The rise in usage meant an untapped market--an international market. Soon, speculators were barely able to control their excitement over the "new economy." Companies underwent a similar phenomenon to the one that gripped Seventeenth century England and America in the early eighties: investors wanted big ideas more than a solid business plan. Buzzwords like networking, new paradigm, information technologies, internet, consumer-driven navigation, tailored web experience, and many more examples of empty double-speak filled the media and investors with a rabid hunger for more. The IPOs of internet companies emerged with ferocity and frequency, sweeping the nation up in euphoria. Investors were blindly grabbing every new issue without even looking at a business plan to find out, for example, how long the company would take before making a profit, if ever. Obviously, there was a problem. The first shots through this bubble came from the companies themselves: many reported huge losses and some folded outright within months of their offering. Siliconaires were moving out of $4 million estates and back to the room above their parents' garage. In the year 1999, there were 457 IPOs, most of which were internet and technology related. Of those 457 IPOs, 117 doubled in price on the first day of trading. In 2001 the number of IPOs dwindled to 76, and none of them doubled on the first day of trading. Many argue that the dotcom boom and bust was a case of too much too fast. Companies that couldn't decide on their corporate creed were given millions of dollars and told to grow to Microsoft size by tomorrow.

1999: Argentine Economic Crisis (1999-2002)

2007-12-26T07:31:00.000-08:00

The Argentine economic crisis was part of the situation that affected Argentina's economy during the late 1990s and early 2000s. Macroeconomically speaking, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before. As of 2005, the crisis is arguably over, though many challenges remain for the country.

Origins

Argentina was subject to military dictatorship (alternating with weak, short-lived democratic governments) for many years, that resulted in an important number of economic problems. During the National Reorganization Process (1976-1983) huge debt was acquired for money that was later lost in different unfinished projects, the Falkland/Malvinas Islands War, and the state's takeover of private debts; in this period, a neoliberal economic platform was introduced. By the end of the military government the country´s industries were severely affected and unemployment was at its highest point.
In 1983, democracy in the country was restored with the election of president Raúl Alfonsín. The new government's plans included stabilizing Argentina's economy including the creation of a new currency (the Austral, first of its kind not to carry the word peso as part of its name), for which new loans were required. The state eventually became unable to pay the interest of this debt, the economy collapsed and inflation began increasing. In 1989, Argentina's inflation reached 200% per month, topping 3,000% annually. President Alfonsín resigned six months before ending his term, and Carlos Menem took office.
Menem, who had campaigned on a populist platform, immediately went back on his promises and began a plan, aligned on the neoliberal Washington consensus, of trade liberalisation, labor deregulation and privatisation of state companies which were the source of much spending (such as those providing the telephone, energy and water services).

The 1990s

The fight against inflation did not go well. In early 1991, under the rule of Minister of Economy Domingo Cavallo, executive measures fixed the value of Argentine currency at 10,000 australes per U.S. dollar. Furthermore, any citizen could go to a bank and ask for any amount of cash in domestic currency to be converted to the corresponding amount of dollars; in order to secure this "convertibility", the central bank was bound to keep its dollar reserves at the same level as the cash in circulation. The initial aim of such measures was to ensure the acceptance of domestic currency, since during 1989 and 1990 hyperinflation peaks, people had started to reject it as payment, demanding U.S. dollars instead. This regime was later fixated by a law (Ley de Convertibilidad) which restored the peso as the Argentine currency, with a monetary value fixed by law to the value of the United States dollar.
As a result of the convertibility law, inflation dropped sharply, price stability was assured, and the value of the currency was preserved. This raised the quality of life for many citizens, who could now afford to travel abroad, buy imported domestic appliances and electronic products or ask for credits in dollars at very low interest rates.
But Argentina had international debts to pay, and it needed to keep borrowing money. The fixed exchange rate made imports cheap, producing a constant flight of dollars away from the country and a progressive loss of Argentina's industrial infrastructure, which led to an increase in unemployment.
In the meantime, government spending continued to be high and corruption was rampant. Argentina's public debt grew enormously during the 1990s, and the country showed no true signs of being able to pay it. The IMF, however, kept lending money to Argentina and postponing its payment schedules. Massive tax evasion and money laundering explained a large part of the evaporation of funds toward offshore banks. A congressional committee started investigations in 2001 about accusations that Argentina's central bank governor, Pedro Pou, as well as part of the board of directors, had failed to investigate cases of alleged money laundering through Argentina's financial system [1]. Clearstream was also accused of being instrumental in this global financial process.
Other countries, such as Mexico and Brazil (both of which also happen to be important trade partners for Argentina) faced economic crises of their own, leading other countries to mistrust Latin American countries moneywise, and affecting the overall economy of the region. The influx of foreign currency provided by the privatisation of state companies had dried out, and after 1999 Argentine exports were harmed by the devaluation of the Brazilian real and a considerable international revaluation of the dollar, effectively revaluing the peso against its major trading partners, Brazil (30% of total trade flows) and the euro area (23% of total trade flows).
By 1999, newly elected President Fernando de la Rúa faced a country where unemployment had risen to a critical point, and the undesirable effects of the fixed exchange rate were showing forcefully. In 1999 Argentina's GDP dropped 4% and the country entered a recession (which was to last three years, ending in a collapse). Stability became stagnation (even deflation at times), and the economic measures taken did nothing to avert it; in fact, the government continued the contractive economic policies of its predecessor. The possible solution (abandonment of the exchange peg, with a voluntary devaluation of the peso) was considered a political suicide and a recipe for economic disaster. By the end of the century, a spectrum of complementary currencies had emerged.
While the provinces had always issued complementary currency in the form of bonds and drafts to brave shortages of cash, the maintenance of the convertibility regime led to this being done in an unprecedented scale, leading to their being called "quasi-currencies", the strongest of them being Buenos Aires province's Patacón. The national state also issued its own quasi-currency-the LECOP.

The crisis

Argentina quickly lost the confidence of investors and the flight of money away from the country increased. In 2001, people fearing the worst began withdrawing large sums of money from their bank accounts, turning pesos into dollars and sending them abroad, causing a run on the banks. The government then enacted a set of measures (informally known as the corralito) that effectively froze all bank accounts for twelve months, allowing for only minor sums of cash to be withdrawn.
Because of this allowance limit and the serious problems it caused in certain cases, many Argentines became enraged and took to the streets of important cities, especially Buenos Aires. They engaged in a form of popular protest that became known as cacerolazo (banging pots and pans). These protests occurred especially during the period of 2001 to 2002. At first the cacerolazos were simply noisy demonstrations, but soon they included property destruction, often directed at banks, foreign privatized companies, and especially big American companies. Many businesses installed metal barriers because windows and glass facades were being broken, and even fires being ignited at their doors. Billboards of such companies as Coca Cola and others were brought down by the masses of demonstrators.
Confrontations between the police and citizens became a common sight, and fires were also set on Buenos Aires avenues. Fernando de la Rúa declared a state of emergency (illegally since it needed confirmation by the Congress) but this only worsened the situation, precipitating the violent protests of 20 and 21 December 2001 in Plaza de Mayo, where demonstrators clashed with the police, ended with several dead, and precipitated the fall of the government. De la Rúa eventually fled the Casa Rosada in a helicopter on 21 December.
Since De la Rúa's vice president, Carlos Álvarez, had resigned in October 2000, a political crisis ensued. Following presidential succession procedures established in the Constitution, the president of the Senate Ramón Puerta took office but quickly resigned, followed by the president of the Chamber of Deputies, Eduardo Camaño. The Legislative Assembly (a body formed by merging both chambers of the Congress) convened with the goal of creating a more legitimate interim government. By law, the candidates were its own members plus the Governors of the Provinces -they finally appointed Adolfo Rodríguez Saá, then governor of San Luis. During the last week of 2001, the interim government led by Adolfo Rodríguez Saá, facing the impossibility of meeting debt payments, defaulted on the larger part of the public debt, totalling no less than 93,000 million dollars.
Politically, the most heated debate involved the time for the following elections -the spectrum ranged from March 2002 to October 2003 (the original date for the ending of De la Rúa's office).
Rodríguez Saá's economy team came up with a project designed to preserve the convertibility regime, dubbed the "Third Currency" Plan. It consisted of creating a new, non-convertible currency called Argentino coexisting with convertible pesos and U.S. dollars. It would only circulate as cash (checks, promisory notes or other instruments could be nominated in pesos or dollars but not in Argentinos) and would be partially guaranteed with federally-managed land -such features were expected to counterbalance inflationary tendencies.
Argentinos having legal currency status would be used to redeem all complementary currency already in circulation -the acceptance of which as a means of payment was quite uneven. It was hoped that preservation of convertibility would restore public confidence, while the non-convertible nature of this currency would allow for a measure of fiscal flexibility (unthinkable with pesos) that could ameliorate the crippling recession of economy. Critics called this plan merely a "controlled devaluation"; its advocates countered that since controlling a devaluation is perhaps its thorniest issue, this criticism was a praise in disguise. The "Third Currency" plan had enthusiastic supporters among mainstream economists (the most notorious being perhaps Martín Redrado, current president of the central bank) citing sound technical arguments. However, it could never be implemented because the Rodríguez Saá government lacked the political support required.
Rodríguez Saá, utterly incapable to deal with the crisis and unsupported by his own party, resigned before the end of the year. The Legislative Assembly convened again, appointing Peronist Eduardo Duhalde-then a Senator for the Buenos Aires province-to take his place.

The end of convertibility

Monthtly inflation in Argentina, 2002 (the peak is 10.4%, in April).
After much deliberation, Duhalde abandoned in January 2002 the fixed 1-to-1 peso-dollar parity that had been in place for ten years. In a matter of days, the peso lost a large part of its value in the unregulated market. A provisional "official" exchange rate was set at 1.4 pesos per dollar.
In addition to the corralito, the Ministry of Economy dictated the pesificación ("peso-ification"), by which all bank accounts denominated in dollars would be converted to pesos at official rate. This measure angered most savings holders and appeals were made by many citizens to declare it unconstitutional.
After a few months, the exchange rate was left to float more or less freely. The peso suffered a huge devaluation, which in turn prompted inflation (since Argentina depended heavily on imports, and had no means to replace them locally at the time).
The economic situation became steadily worse with regards to inflation and unemployment during 2002. By that time the original 1-to-1 rate had skyrocketed to nearly 4 pesos per dollar, while the accumulated inflation since the devaluation was about 80%. (It should be noted that these figures were considerably lower than those foretold by most orthodox economists at the time.) The quality of life of the average Argentinian was lowered proportionally; many businesses closed or went bankrupt, many imported products became virtually inaccessible, and salaries were left as they were before the crisis.
Since the volume of pesos didn't fit the demand for cash (not even after the devaluation) huge quantities of a wide spectrum of complementary currency kept circulating alongside them. Fears of hyperinflation as a consequence of devaluation quickly eroded the attractiveness of their associated revenue, originally stated in convertible pesos. Their acceptability now ultimately depended on the State's willingness to take them as payment of taxes and other charges, consequently becoming very irregular. Very often they were taken at less than their nominal value -while the Patacón was frequently accepted at the same value as peso, Entre Ríos's Federal was among the worst-faring, at an average 30% as the provincial government that had issued them was reluctant to take them back. There were also frequent rumors that the Government would simply banish complementary currency overnight (instead of redeeming them, even at disadvantageous rates), leaving their holders with useless printed paper.
Immediate effects
Many private companies were affected by the crisis: Aerolíneas Argentinas, for example, was one of the most affected Argentine companies, having to stop all international flights for various days in 2002. The airline came close to bankruptcy, but survived.
Most barter networks, viable as devices to ameliorate the shortage of cash during the recession, collapsed as large numbers of people turned to them, desperate to save as many pesos as they could for exchange for hard currency as a palliative for uncertainty.
Several new homeless and jobless Argentines found work as cartoneros, or cardboard collectors. The 2003 estimation of 30,000 to 40,000 people scavenged the streets for cardboard to seek out a living by selling it to recycling plants. This method accounts for only one of many ways of coping in a country suffering from unemployment rate soaring at nearly 25%[1].
Agriculture was also affected: Argentine products were rejected in some international markets, in fear that they might come damaged because of the poor conditions in which they grew, and the USDA put restrictions on Argentine food and drugs arriving at the United States.
Producers of television channels were forced to produce more reality shows than any other type of shows, because these were generally cheap to produce as compared to other programmes. Virtually all education-related TV programmes were cancelled.
The recovery
Eduardo Duhalde finally managed to stabilise the situation to a certain extent, and called for elections. On 25 May 2003 President Néstor Kirchner took charge. Kirchner kept Duhalde's Minister of Economy, Roberto Lavagna, in his post. Lavagna, a respected economist with moderate-centre-wing views, showed a considerable aptitude at managing the crisis, with the help of heterodox measures.

Evolution of the Argentine GNP, 1999–2004

The economic outlook was completely different from that of the 1990s; the high exchange rate made Argentine exports cheap and competitive abroad, while discouraging imports. In addition, the high price of soy in the international market produced an injection of massive amounts of foreign currency (with China becoming a major buyer of Argentina's soy products).
The government encouraged import substitution and accessible credit for businesses, staged an aggressive plan to improve tax collection, and set aside large amounts of money for social welfare, while controlling expenditure in other fields.
As a result of the administration's productive model and controlling measures (selling reserve dollars in the public market), the peso slowly revalued, reaching a 3-to-1 rate to the dollar. Agricultural exports grew and tourism returned.

Foreign currency reserves of Argentina's central bank, in millions of USD
The huge trade surplus ultimately caused such an inflow of dollars that the government was forced to begin intervening in order to keep the peso from revaluing further, which would have ruined the tax collection scheme (largely based on imports taxes and royalties) and discourage further reindustrialisation. The central bank started buying dollars in the local market and stocking them as reserves. By December 2005, foreign currency reserves had reached $28,000 million (they were greatly reduced by the anticipated payment of the full debt to the IMF in January 2006). The downside of this reserve accumulation strategy is that the dollars have to be bought with freshly-emitted pesos, which may induce inflation. The central bank neutralises a part of this monetary emission by selling Treasury letters. In this way the exchange rate has been stabilised near a reference value of 3 pesos to the dollar.
The currency exchange issue is complicated by two mutually opposing factors: a sharp increase in imports since 2004 (which raises the demand of dollars), and the return of foreign investment (which brings fresh currency from abroad) after the successful restructuring of about three quarters of the external debt. The government has set up controls and restrictions aimed at keeping short-term speculative investment from destabilising the financial market.
Argentina's recovery suffered a minor drawback in 2004 when rising industrial demand caused a short-lived energy crisis. Scenarios of energy shortage are not discarded in the near future.
Argentina has managed to return to growth with surprising strength; GNP jumped 8.8% in 2003, 9.0% in 2004, and 9.1% in 2005 (with expectations of 8% for 2006). Consumer prices have accompanied this surge; though not comparable to the levels of former crises, the inflation rate was 12.5% in 2005, with expectations around 10% for 2006, though average wages have increased 18% in the same year. This has prompted the government to restrict benefits for exporters and put pressure on companies in order to stabilize prices. While unemployment has considerably reduced, Argentina has so far failed to reach an equitable distribution of income (the wealthiest 10% of the population owns 31 times more wealth than the poorest 10%). [2] [3]
Effects on wealth distribution
According to Argentine agronomist Alberto Lapolla, who has written extensively on the transformation of Argentina from the "granary of the world" to a "soy republic", 450,000 Argentines died below the poverty line between 1990 and 2003. Citing the Institute of State and Participation Studies (IDEP), a thinktank, Lapolla adds that every day, 55 children, 35 adults and 15 elderly die in the country from illnesses related to hunger.
Although GDP has grown consistently and quickly since 2003, it was only in late 2004 that it reached the levels of 1998 (the last year before the recession). Other macroeconomic indicators have followed suit. A study by Equis, an independent counseling organisation, found out that two measures of economic inequality, the Gini coefficient and the wealth gap between the 10% poorest and the 10% richest among the population, grew continuously since 2001, and decreased for the first time in March 2005.

Argentine debt restructuring

When the default was declared in 2002, foreign investment fled the country, and capital flow towards Argentina ceased almost completely. The Argentine government met severe challenges trying to refinance the debt. The state had no spare money at the time, and the central bank's foreign currency reserves were almost depleted.
The Argentine government kept a firm stance, and finally got a deal by which 76% of the defaulted bonds were exchanged by others, of a much lower nominal value (25–35% of the original) and at longer terms.
Criticism of the IMF
The International Monetary Fund suffered no discounts in its part of the Argentine debt. Some payments were refinanced or postponed on agreement. However, the authorities of the IMF at times expressed harsh criticism of the discounts and actively lobbied for the private creditors.
In a speech before the United Nations General Assembly on 2004-09-21, President Kirchner said that "An urgent, tough, and structural redesign of the International Monetary Fund is needed, to prevent crises and help in [providing] solutions". Implicitly referencing the fact that the intent of the original Bretton Woods system was to encourage economic development, Kirchner warned that the IMF today must "change that direction which took it from being a lender for development to a creditor demanding privileges".
During the weekend of October 1–2, 2004, at the annual meeting of the International Monetary Fund/World Bank, leaders of the IMF, the European Union, the Group of Seven industrialised nations, and the Institute of International Finance (IIF), warned President Kirchner that Argentina had to come to an immediate debt-restructuring agreement with the speculative "vulture funds", increase its primary budget surplus in order to pay more debt, and impose "structural reforms" to prove to the world financial community that it deserves their loans and investments.
In 2005, as a large and consistently growing fiscal surplus made it possible, Argentina shifted to a policy of "disindebtment" towards the IMF: paying the IMF in schedule, with no negotiation whenever possible, with the intention of gaining independence from it. On 2005-12-15, in a sudden move following Brazil, President Kirchner announced that Argentina would pay the whole debt to the IMF which had been previously financed in installments until 2008, for a total of 9,810 million USD, employing the central bank's foreign currency reserves.
In a report published in June 2006, a group of independent experts hired by the IMF to revise the work of its Independent Evaluation Office (IEO) stated that the assessment of the Argentine case suffered from informative manipulation and lack of collaboration on the part of the IMF; the IEO is claimed to have unduly softened its conclusions to avoid criticizing the IMF's board of directors.

Allegations of use of un-published Clearstream accounts

Further information: Clearstream scandal
As a clearing house, Clearstream has a "dominant position" in Europe, according to the European Commission. Funds composing the private and public Argentine debt have transited through Clearstream, which is inevitable because of its quasi-monopoly situation. However, according to "Revelation$" (2001), written by reporter Denis Robert and Ernest Backes, some Argentine funds have transited through an illegal system of non-published accounts used by Clearstream; the Citibank in particular, which held a large part of the private Argentine fund, had numerous unpublished bank accounts in Clearstream. This illegal system of non-published accounts makes of Clearstream, according to several judges as Eva Joly and Renaud van Ruymbeke, European members of parliament (MPs) such as Harlem Désir, Glyn Ford and Francis Wurtz, and Attac NGO, a major actor of the underground economy, through which global tax evasion and money laundering may be investigated. Henceforth, Clearstream is a major key in the understanding of the evaporation of the Argentine funds which led to the economic crisis.

1997: East Asian Financial Crisis

2007-12-26T07:24:00.000-08:00

The East Asian Financial Crisis was a period of economic unrest that started in July 1997 in Thailand and South Korea with the financial collapse of Kia, and affected currencies, stock markets, and other asset prices in several Asian countries, many considered Four Asian Tigers. It is also commonly referred to as the East Asian currency crisis or locally as the IMF crisis although the latter is somewhat controversial. There is general consensus on the existence of a crisis and its consequences, but what are less clear are the causes of the crisis, its scope and resolution. Indonesia, South Korea and Thailand were the countries’ most affected by the crisis. Hong Kong, Malaysia, Laos and the Philippines were also hit by the slump. Mainland China, Taiwan, Singapore and Vietnam were relatively unaffected. Japan was not affected much by this crisis but was going through its own long-term economic difficulties. However, all nations mentioned above saw their currencies dip significantly relative to the US dollar, though the harder hit nations saw extended currency losses. Out of all the countries affected, South Korea was hit hardest.

History and causes

Until 1997, Asia attracted almost half of total capital inflow to developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of hot money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, the Philippines, Singapore, and South Korea experienced high growth rates, 8-12% GDP, in the late 1980s and early 1990s. This achievement was broadly acclaimed by economic institutions including the IMF and World Bank, and was known as part of the Asian economic miracle.
Whatever the disputed causes, the Asian crisis started in mid-1997 and affected currencies, stock markets, and other asset prices of several Southeast Asian economies. Triggered by events in Latin America, particularly after the Mexican peso crisis of 1994, Western investors lost confidence in securities in East Asia and began to pull money out, creating a domino effect. In 1994, Princeton University (then MIT) economist Paul Krugman published an article attacking the idea of an Asian economic miracle. He argued that East Asia's economic growth had historically been the result of capital investment, leading to growth in productivity. However, total factor productivity had increased only marginally or not at all. Krugman argued that only growth in total factor productivity, and not capital investment, could lead to long-term prosperity. Krugman would be seen by many as prescient after the financial crisis became full-blown, though he himself stated that he had not predicted the crisis or foreseen its depth.
At the time Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of pegged exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors. In the mid-1990s, two factors began to change their economic environment. As the U.S. economy recovered from a recession in the early 1990s, the U.S. Federal Reserve Bank under Alan Greenspan began to raise U.S. interest rates to head off inflation. This made the U.S. a more attractive investment destination relative to Southeast Asia, which had attracted hot money flows through high short-term interest rates, and raised the value of the U.S. dollar, to which many Southeast Asian nations' currencies were pegged, thus making their exports less competitive. At the same time, Southeast Asia's export growth slowed dramatically in the spring of 1996, deteriorating their current account position.

Some economists have advanced the impact of Mainland China on the real economy as a contributing factor to their ASEAN nations' export growth slowdown, though these economists maintain the main cause of the crises was excessive real estate speculation [2] . China had begun to compete effectively with other Asian exporters particularly in the 1990s after the implementation of a number of export-oriented reforms. Most importantly, the Thai and Indonesian currencies were closely tied to the dollar, which was appreciating in the 1990s. Western importers sought cheaper manufacturers and found them, indeed, in China whose currency was depreciated relative to the dollar. Other economists dispute this claim noting that both ASEAN and China experienced simultaneous rapid export growth in the early 1990s.
Many economists, like those within the Cato Institute, believed that the Asian crisis was created not by market psychology or technology (which actually represents a more efficient form of capitalism through the ability to acquire information cheaply and more quickly) but by macroeconomic policies that distorted information which in turn created the volatility that attracted speculators. What some have called "herd mentality" was merely the result of speculators behaving rationally, noting the currency policies (the government defending the fixed exchange rate) which speculators assumed could not be sustained. Such economists believe that this crisis was the result of unsustainable macroeconomic/protectionist policies which create the very "market" imperfections they were originally designed to correct.
Other economists, including Joseph Stiglitz and Jeffrey Sachs, have downplayed the role of the real economy in the crisis compared to the financial markets due to the speed of the crisis. The rapidity with which the crisis happened has prompted Sachs and others to compare it to a classic bank run prompted by a sudden risk shock. Sachs points to strict monetary and contractory fiscal policies implemented by the governments at the advice of the IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a "herd mentality" among investors that magnified a relatively small risk in the real economy. The crisis has thus attracted interest from behavioral economists interested in market psychology. Another possible cause of the sudden risk shock may also be attributable to the Handover of Hong Kong sovereignty on 1st July, 1997. During the 1990s, hot money flew into the Southeast Asia region but investors were often ignorant of the actual fundamentals or risk profiles of the respective economies. The uncertainty regarding the future of Hong Kong led investors to shrink even further away from Asia, exacerbating economic conditions in the area (subsequently leading to the devaluation of the Thai baht on 2nd July, 1997).
The foreign ministers of the 10 ASEAN countries believed that the well co-ordinated manipulation of currencies was a deliberate attempt to destabilise the ASEAN economies. Former Malaysian Prime Minister Mahathir Mohamad accused currency speculator George Soros of ruining Malaysia's economy with massive currency speculation. At the 30th ASEAN Ministerial Meeting held in Subang Jaya, Malaysia, they issued a joint declaration on 25 July 1997 expressing serious concern and called for further intensification of ASEAN's cooperation to safeguard and promote ASEAN's interest in this regard. [3] Coincidentally, on that same day, the Central Bankers of most of the affected countries were at the EMEAP (Executive Meeting of East Asia Pacific) meeting in Shanghai, and they failed to make the New Arrangement to Borrow operational. A year earlier, the finance ministers of these same countries had attended the 3rd APEC finance ministers meeting in Kyoto, Japan on 17 March 1996, and according to that joint declaration, they had been unable to double the amounts available under the General Agreement to Borrow and the Emergency Finance Mechanism. As such, the crisis could be seen as the failure to adequately build capacity in time, to prevent currency manipulation.
IMF and controversy

The role of the IMF was very controversial during the crisis, causing many locals to call the crisis the "IMF crisis." To begin with, many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast track capitalism", meaning liberalization of the financial sector (i.e. elimination of restrictions on capital flows); maintenance of high domestic interest rates in order to suck in portfolio investment and bank capital; and pegging of the national currency to the dollar to reassure foreign investors against currency risk.
However, the greatest criticism of the IMF's role in the crisis was targeted towards its response. As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditors. The dynamics in this scenario were similar to that of the Latin American debt crisis.
In response, the IMF offered to step in the case of each nation and offer it a multi-billion dollar "rescue package" to enable these nations to avoid default. However, the IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a structural adjustment package (SAP). The SAP's called on crisis nations to cut government spending to reduce deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency, penalize insolvent companies, and protect currency values. However, the effects of the SAP's were mixed and their impact controversial. Critics, however, noted the contractionary nature of these policies, arguing that in a recession, the traditional Keynesian response is to increase government spending, prop up major companies, and lower interest rates. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic pain. They pointed out that the U.S. government pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the U.S. itself entered a recession in 2001.

Thailand

From 1985 to 1995, Thailand's economy grew at an average of 9% per year. On 14 May and 15 May 1997, the Thai baht was hit by massive speculative attacks. On 30 June, Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht, but Thailand's administration eventually floated the local currency, on 2 July. Opposition parties had claimed that future Thai Prime Minister Thaksin Shinawatra profited from the devaluation, although subsequent Opposition party-led governments did not investigate the issue.
In 1996, an American hedge fund had already sold US$400 million of the Thai currency[citation needed]. From 1985 until 2 July 1997, the baht was pegged at 25 to the dollar. The baht dropped very swiftly and lost half of its value. The baht reached its lowest point of 56 to the dollar in January 1998. The Thai stock market dropped 75% in 1997. Finance One, the largest Thai finance company collapsed. On 11 August, the IMF unveiled a rescue package for Thailand with more than 16 billion dollars. The IMF approved on 20 August, another bailout package of 3.9 billion dollars. The baht has only recently in November 2006 reached pre-crisis highs of 36.5 to the dollar.

Philippines

The Philippines central bank raised interest rates by 1.75 percentage points in May 1997 and again by 2 points on 19 June. Thailand triggered the crisis on 2 July. On 3 July, the Philippines central bank was forced to intervene heavily to defend the peso, raising the overnight rate from 15% to 24%. The peso fell significantly, from 26 pesos per dollar at the start of the crisis, to 38 pesos in 2000, to 40 pesos by the end of the crisis.
The Philippine economy recovered from a contraction of 0.6 % in GDP during the worst part of the crisis to GDP growth of some 3% by 2001, despite scandals caused by the administration of Joseph Estrada in 2001, most notably the "jueteng" scandal, causing the PSE Composite Index, the main index of the PSE, to fall to some 1000 points from a high of some 3000 points in 1997. The peso fell even further, trading at levels of about 35 pesos to the US Dollar. Later that year, Estrada was impeached though refused to leave office, leading to popular protests caused EDSA II, which forced his resignation and lifted Gloria Macapagal-Arroyo to the Philippine presidency. Arroyo did manage to end the crisis in the Philippines, which led to the recovery of the Philippine peso to about 50 pesos by the time Arroyo became president.

Hong Kong

The collapse of the Thai baht on July 2, 1997, came 24 hours after the United Kingdom handed over sovereignty of Hong Kong to the People's Republic of China. In October 1997, the Hong Kong dollar, which was pegged at 7.8 to the US dollar, came under speculative pressure since Hong Kong's inflation rate was significantly higher than that of the US for years. Monetary authorities spent more than US$1 billion to defend the local currency. Since Hong Kong has more than US$80 billion of foreign reserves, which is equivalent to 700% of M1 money supply and 45% of M3 money supply of Hong Kong, Hong Kong managed to keep the currency pegged to the US dollar despite the speculative attacks. Stock markets become more and more volatile; between 20 October and 23 October the Hang Seng Index dipped by 23%. Hong Kong Monetary Authority promised to protect the currency. On 15 August 1998, Hong Kong raised rates overnight from 8% to 23% and at one point, to 500%. While the Monetary Authority recognized that the speculative forces were taking advantage of the unique currency board system, in which the overnight rates would automatically increase proportionally when the currency is sold in the market heavily, which would in turn increase the downward pressure of the stock market and thus allowing the speculators to earn a large profit by short selling shares, the Monetary Authority started buying component shares of the Hang Seng Index in mid-August. The Monetary Authority and Donald Tsang, then Financial Secretary, declared war with speculators openly. The Government ended up buying approximately HK$120 billion (about US$15 billion) of shares of various companies, and becoming the largest shareholder of some of the companies (e.g. the government owned 10% of HSBC) at the end of August when hostilities ended with the closing of the August contract of Hang Seng Index Futures. The Government started to divest itself from the position in 2001 and made a profit of about HK$30 billion (about US$4 billion) in the process.
Speculative actions against the Hong Kong Dollar and the stock market did not continue into September largely due to extraordinary reaction to speculators by the Malaysian authorities and the onset of the collapse of Russian bond and currency market, which caused massive loss to the speculators. The currency peg between the Hong Kong Dollar and the US Dollar at 7.8:1 continued to exist undeterred.

South Korea

South Korea is the world's 11th largest economy[1]. Macroeconomic fundamentals were good but the banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. Excess debt would eventually lead to major failures and take-overs. For example, in July, South Korea's third largest car maker, Kia Motors asked for emergency loans. In the wake of the Asian market downturn, Moody's lowered the credit rating of South Korea from A1 to A3, on November 28, 1997, and downgraded again to B2 on December 11. That contributed to a further decline in Korean shares since stock markets were already bearish in November. The Seoul stock exchange fell by 4% on 7 November 1997. On November 8, it plunged by 7% the biggest one-day drop recorded there to date. And on November 24, stocks fell another 7.2% on fears that the IMF would demand tough reforms. In 1998, Hyundai Motor took over Kia Motors. Samsung Motors' $5 billion dollar venture was dissolved due to the crisis, and eventually Daewoo Motors was sold off to General Motors.
The Korean won, meanwhile plunged to less than 1700 per dollar from less than 1000, however, despite initial sharp economic slowdown and many companies going bankrupt, Korea has managed to triple its per capita GDP since the 1997 crisis to 2006 in dollar terms, continuing its growth from 1960 as the world's fastest growing economy in the period (1960-2006), per capita GDP having grown from $80 capita to over $18,000. However, like the chaebol, South Korea's government didn't come out unscathed, as its national debt to GDP ratio more than tripled after the crisis.

Malaysia

Pre-crisis, Malaysia had a large current account deficit of 5% of GDP. At the time, Malaysia was a top investment destination, and this was reflected in KLSE activity which was regularly the most active exchange in the world. (with turnover exceeding even markets with far higher capitalisation like the NYSE) . Expectations at the time were that the growth rate would continue, propelling Malaysia into developed status by 2020, a government policy articulated in Wawasan 2020. As at start of 1997, the KLSE Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the overnight rate was below 7%. In July, within days of the Thai baht devaluation, the Malaysian ringgit was "attacked" by speculators. The overnight rate jumped from under 8% to over 40%. This led to rating downgrades and a general sell off on the stock and currency markets. By end 1997, ratings had fallen many notches from investment grade to junk, the KLSE had lost more than 50% from above 1,200 to under 600, and the ringgit had lost 50% of its value, falling from above 2.50 to under 3.80 to the dollar. In 1998, the output of the real economy declined plunging the country into its first recession for many years. The construction sector contracted 23.5%, manufacturing shrunk 9% and the agriculture sector 5.9%. Overall, the country's gross domestic product plunged 6.2% in 1998. During that year, the ringgit plunged below 4.7 and the KLSE fell below 270 points. In September that year, various defensive measures were announced to overcome the crisis. The principal measure taken were to move the ringgit from a free float to a fixed exchange rate regime. Bank Negara fixed the ringgit at 3.8 to the dollar. Capital controls were imposed. Various agencies were formed. The Corporate Debt Restructuring Committee dealt with corporate loans. Danaharta discounted and bought bad loans from banks to facilitate orderly asset realization. Danamodal recapitalised banks. Growth then settled at a slower but more sustainable pace. The massive current account deficit became a fairly substantial surplus. Banks were better capitalised and NPLs were realised in an orderly way. Small banks were bought out by strong ones. A large number of PLCs were unable to regularise their financial affairs and were delisted. Compared to the 1997 current account, by 2005, Malaysia is estimated to have USD14.06 billion surplus. Asset values however, have not returned to their pre crisis highs. In 2005 the last of the crisis measures was removed as the ringgit was taken off the fixed exchange system. But unlike pre-crisis days, it does not appear to be a free float, but a managed float, like the Singapore dollar.

Indonesia

In June 1997, Indonesia seemed far from crisis. Unlike Thailand, Indonesia had low inflation, a trade surplus of more than $900 million, huge foreign exchange reserves of more than $20 billion, and a good banking sector. But a large number of Indonesian corporations had been borrowing in U.S. dollars. During preceding years, as the rupiah had strengthened respective to the dollar, this practice had worked well for those corporations -- their effective levels of debt and financing costs had decreased as the local currency's value rose. In July, when Thailand floated the baht, Indonesia's monetary authorities widened the rupiah trading band from 8% to 12%. The rupiah came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, strong demand for dollars. The rupiah and Jakarta Stock Exchange touched a new historic low in September. Moody's eventually downgraded Indonesia's long-term debt to junk bond. Although the rupiah crisis began in July and August, it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars, i.e. selling rupiah, undermining the value of the latter further.
The inflation of the rupiah and the resulting steep hikes in the prices of food staples led to riots throughout the country in which more than 500 people died alone in Jakarta. In February 1998, President Suharto sacked the governor of Bank Indonesia, but this proved insufficient. Suharto was forced to resign in mid-1998 and B. J. Habibie became President.
Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2000 rupiah to 1 USD. The rate had plunged to over 18000 rupiah to 1 USD at times during the crisis.
Indonesia lost 13.5% of its GDP that year.

Singapore

The economy of Singapore dipped into a short recession almost purely as a result of financial contagion. The relatively short duration and milder effects can be credited to active management by the government. For example, the Monetary Authority of Singapore allowed for a gradual 20% depreciation of the Singapore dollar to cushion and guide the economy to a soft landing. The timing of government programmes such as the Interim Upgrading Program and other construction related projects were brought forward. Instead of allowing the labour markets to work, the National Wage Council pre-emptively agreed to Central Provident Fund cuts to lower labour costs, with limited impact on disposable income and local demand. Unlike in Hong Kong, no attempt was made to directly intervene in the capital markets and the Straits Times Index was allowed to drop 60%. In less than a year, the Singapore economy recovered and continued on its growth trajectory.

People's Republic of China

The Chinese currency, renminbi (RMB), had been pegged to the US dollar at a ratio of 8.3 RMB to the dollar, in 1994. Throughout 1998 there was heavy speculation in the Western press that China would soon be forced to devalue its currency to protect the competitiveness of Chinese exports vis-a-vis those of ASEAN nations, whose exports became cheaper relative to China's. However, the RMB's non-convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, improving the country's standing within Asia. The currency peg was partly scrapped in July 2005 rising 2.3 % against the dollar, reflecting pressure from the United States.
Unlike investments of many of the Southeast Asian nations, almost all of its foreign investment took the form of factories on the ground rather than securities, which insulated the country from rapid capital flight. While the PRC was relatively unaffected by the crisis compared to Southeast Asia and Korea, GDP growth slowed sharply in 1998 and 1999, calling attention to structural problems with the PRC economy. In particular, the Asian financial crisis convinced the Chinese government of the need to resolve the issue of non-performing loans within the banking system.
Although most of the deposits in PRC banks are domestic and there was not a run on the banks, there was a fear within the Chinese government that weak banks would cause a future crisis and lead to a scenario similar to the fall of Suharto in which the Communist Party of China would be overthrown. This led to measures to fix the banks and the industrial enterprises, which were largely complete by 2005.

The United States and Japan

The "Asian flu" also put pressure on the United States and Japan. Their economies did not collapse, but they were severely hit. On 27 October 1997, the Dow Jones industrial plunged 554-points, or 7.2%, amid ongoing worries about the Asian economies. The New York Stock Exchange briefly suspended trading. The crisis led to a drop in consumer and spending confidence (see October 27, 1997 mini-crash). However, DOW proved resilience and recovered quickly on an upward trend.
Japan was affected because its economy is prominent in the region. Asian countries usually run a trade deficit with Japan because the latter's economy was more than twice the size of the rest of Asia together. The Japanese yen fell to 147 as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. About 40% of Japan's exports go to Asia. GDP real growth rate slowed dramatically in 1997, from 5% to 1.6% and even sank into recession in 1998, due to intense competition from cheapened rivals. The Asian financial crisis also led to more bankruptcies in Japan. In addition, with South Korea's devalued currency, and China's steady gains, many companies complained outright they could not compete.

Consequences in Asia

The crisis had significant macro-level effects, including sharp reductions in values of currencies, stock markets, and other asset prices of several Asian countries. Many businesses collapsed, and as a consequence, millions of people fell below the poverty line in 1997-1998. Indonesia, South Korea and Thailand were the countries most affected by the crisis.
The economic crisis also led to political upheaval, most notably culminating in the resignations of Suharto in Indonesia and Chavalit Yongchaiyudh in Thailand. There was a general rise in anti-Western sentiment, with George Soros and the International Monetary Fund in particular singled out as targets of criticisms. Heavy US investment in Thailand ended, replaced by mostly European investment, though Japanese investment continued[citation needed]. Islamic and separatist movements intensified in Indonesia as the central authority weakened.
More long-term consequences include reversal of the relative gains made in the boom years just preceding the crisis. For example, the CIA World Factbook reports that the per capita income (measured by purchasing power parity) in Thailand declined from $8,800 to $8,300 between 1997 and 2005; in Indonesia it declined from $4,600 to $3,700; in Malaysia it declined from $11,100 to $10,400. Over the same period, world per capita income rose from $6,500 to $9,300 [3], [4]. Indeed, the CIA's analysis suggests the economy of Indonesia was still smaller in 2005 than it had been in 1997 despite a population increase of 30 million, suggesting an impact on that country similar to the Great Depression.
Within East Asia, the bulk of investment and a significant amount of economic weight shifted from Japan and ASEAN to China.
The crisis has been intensively analyzed by economists for its breadth, speed, and dynamism; it affected dozens of countries, had a direct impact on the livelihood of millions, happened within the course of a mere few months, and at each stage of the crisis leading economists, in particular the international institutions, seemed a step behind. Perhaps more interesting to economists is the speed with which it ended, leaving most of the developed economies unharmed. These curiosities have prompted an explosion of literature about financial economics and a litany of explanations why the crisis occurred. A number of critiques have been leveled against the conduct of the International Monetary Fund in the crisis, including one by former World Bank economist Joseph Stiglitz.
Politically there were some benefits. In several countries, particularly South Korea and Indonesia, there was renewed push for corporate governance. Rampaging inflation weakened the authority of the Suharto regime and lead to its toppling in 1998, accelerating East Timor's independence.

Consequences elsewhere

After the Asian crisis, international investors were reluctant to lend to developing countries, leading to economic slowdowns in developing countries in many parts of the world. The powerful negative shock also sharply reduced the price of oil, which reached a low of $8/barrel towards the end of 1998, causing a financial pinch in OPEC nations and other oil exporters.
Such sharply reduced oil revenue in turn contributed to the Russian financial crisis in 1998. Which in turn caused Long-Term Capital Management in the United States to collapse, after losing $4.6 billion in 4 months. A wider collapse in the financial markets was avoided when Alan Greenspan and the Federal Reserve Bank of New York organized a $3.625 bn bail-out.
Major emerging economies Brazil and Argentina also fell into crisis in the late 1990s (see Argentine debt crisis).
The crisis in general was part of a global backlash against the Washington Consensus and institutions such as the IMF and World Bank[citation needed], which simultaneously became unpopular in developed countries following the rise of the anti-globalization movement in 1999. Four major rounds of world trade talks since the crisis, in Seattle, Doha, Cancun, and Hong Kong, have failed to produce a significant agreement as developing countries have become more assertive, and nations are increasingly turning toward regional or bilateral FTAs (Free Trade Agreement) as an alternative to global institutions[citation needed].
Many nations learned from this, and quickly built up foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency swaps were introduced in the event of another crisis.
However, interestingly enough, such nations as Brazil, Russia, and India as well as most of East Asia began copying the Japanese model of weakening their currencies, restructuring their economies so as to create a current account surplus to build large foreign currency reserves.
This has led to ever increasing funding for US treasury bonds, allowing or aiding housing (2001-2005) and stock asset bubbles (1996-2000) to develop in the United States.

1994: Mexico Economic Crisis

2007-12-26T07:18:00.000-08:00

The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis, was triggered by the sudden devaluation of the Mexican peso in the early days of the presidency of Ernesto Zedillo. A week or so of intense currency crisis was stabilized when US President Bill Clinton, and other international organizations granted Mexico a $50 billion loan. The crisis is also known in Spanish as el error de diciembre — The December Mistake a term coined by president Carlos Salinas de Gortari. In the Southern Cone and Brazil, the impact that the Mexican economic crisis had on the region was labeled the Tequila Effect (Spanish: Efecto Tequila, Portuguese: Efeito Tequila).

Causes of the economic crisis of 1994

The 1994 economic crisis in Mexico, widely known as the Mexican peso crisis, was triggered by the sudden devaluation of the Mexican peso in the early days of the presidency of Ernesto Zedillo. A week or so of intense currency crisis was stabilized when US President Bill Clinton, and other international organizations granted Mexico a $50 billion loan.
The crisis is also known in Spanish as el error de diciembre — The December Mistake a term coined by president Carlos Salinas de Gortari. In the Southern Cone and Brazil, the impact that the Mexican economic crisis had on the region was labeled the Tequila Effect (Spanish: Efecto Tequila, Portuguese: Efeito Tequila).

While the crisis took place under President Zedillo, the causes are usually attributed to Carlos Salinas de Gortari's outgoing administration. Salinas de Gortari partly coined the term "December Mistake" when he stated in an interview that Zedillo's sudden reversal of the former administrative policies of tight currency controls was "a mistake." It must be mentioned that Salinas de Gortari's popularity and credibility at the time was still high; even though his government's currency policy put an unbelievable strain on the nation's finances, the resulting economic bubble gave Mexico a prosperity not seen in a generation. This period of rapid growth coupled with low inflation prompted some political thinkers and the media to state that "Mexico was on the verge of becoming a First World nation.", and in fact, it was the first of the "newly industrialized nations" to be admitted into the OECD in May 1994.

As in prior election cycles, a pre-election disposition to stimulate the economy temporarily and unsustainably led to a self-fulfilling prophesy of post-election economic instability. Well before this, there were concerns of the sheer level and quality of credit extended by banks during the preceding low-interest rate period, as well as the standards for extending credit. Credit booms often precede credit busts. Later on, the country's risk premium was also affected by an armed rebellion in Chiapas which made investors even more wary of investing their money in an unstable region. The Mexican government's finances and cash availability were further hampered by two decades of increasing spending, debt loads, and low oil prices. It's ability to absorb shocks was hampered by its commitments to finance past spending.
It was a known fact that the peso was overvalued (by at least 20%, according to some sources), but the extent of the Mexican economy's vulnerability was either not well-known or downplayed by Salinas de Gortari's tame políticos and media. Nonetheless this vulnerability was further aggravated by several unexpected events and macroeconomic mistakes of his administration.

Economists Hufbauer and Schott (2005) have commented on several events in 1994, and the macroeconomic policy mistakes that precipitated the crisis:
1994 was the last year of the sexenio or 6-year administration of Carlos Salinas de Gortari who, following the PRI tradition on every election year, launched an amazingly high spending splurge, which translated into a historically high deficit. In order to finance the historical deficit (a 7% of GDP current account deficit) Salinas issued the Tesobonos, an attractive type of debt instrument that was denominated in pesos but indexed to dollars. Mexico experienced (common to those days) lax banking or corrupt practices; moreover, some members of the Salinas family (though only his brother, Raúl, was imprisoned) collected enormous illicit payoffs
The most-likely-to-win candidate, Luis Donaldo Colosio, was assassinated in March of that year; a couple of months later José Francisco Ruiz Massieu, in charge of the investigation, was assassinated as well. The EZLN, an insurgent rebellion, officially declared war on the government on 1 January; even though the armed conflict ended two weeks later, the grievances and petitions remained a cause of concern, especially amongst some investors.
All of these, and the increasing current account deficit fostered by consumer binding and government spending, caused alarm amongst savvy investors that had bought the tesobonos, mainly Mexican and a few foreigners, who sold them rapidly, depleting the already low central bank reserves. The economically orthodox thing to do, in order to maintain the fixed exchange rate functioning (at 3.3 pesos per dollar, within a variation band), would have been to sharply increase interest rates by allowing the monetary base to shrink, as dollars were being withdrawn from the reserves (Hufbauer & Schott, 2005). Given the fact that it was an election year, whose outcome might have changed as a result of a pre-election-day economic downturn, Banco de México decided to buy Mexican Treasury Securities in order to maintain the monetary base, and thus keep the interest rates from rising. This, in turn, caused an even more dramatic decline in the dollar reserves. These decisions aggravated the already delicate situation, to a point in which the crisis became inevitable and devaluation was only one of many necessary adjustments. Nonetheless, nothing was done during the last 5 months of Salinas' administration even after the elections were held in July of that year. Some critics presume this was done in order to maintain Salinas' popularity, as he was seeking international support to become director general of the WTO. Zedillo took office on 1 December, 1994.

A few days after a private meeting with major Mexican entrepreneurs in which his administration asked them for their opinion of a planned devaluation, Zedillo suddenly announced his government would let the fixed rate band increase to 15 percent (up to 4 pesos per US dollar), by stopping the previous administration's unorthodox measures to keep it at the previous fixed level (by selling dollars, assuming debt, and so on). It was no longer possible to maintain the previous fixed rate as reserves were on the brink of depletion (having hit a record low of merely 9 billion). This measure, however, was not enough. The government, being unable even to hold this line, decided to let it float. While experts agree that a devaluation was necessary, some critics of Zedillo's incumbent 22-day-old administration, argue that although economically coherent, the way it was handled was politically incorrect. By having announced its plans for devaluation, they argue that many foreigners withdrew their investments, thus aggravating the effects. Whether the effects were aggravated further or not, the result was that the peso crashed under a floating regime from four pesos to the dollar (with the previous increase of 15%) to 7.2 to the dollar in the space of a week.

The United States intervened rapidly, first by buying pesos in the open market, and then by granting assistance in the form of $50 billion in loan guarantees that same year. [See the following section for a more detailed explanation.] The dollar then stabilized at the rate of 6 pesos per dollar and, for the next two years, before being affected by the Asian Crisis in 1998, remained around 7 to 7.7 pesos per dollar.

Having to comply with the recently signed NAFTA obligations, Mexico did not resort to the traditional Latin American policies in times of crisis of trade protection and capital controls (which might have prolonged the crisis), but introduced strict controls on monetary and fiscal policy, open trade, and devalued currency. The boom in exports that followed eased the recession which turned out to be a 10-month, short-lived recession. By 1996, the economy was already growing (and peaked at 7% growth in 1999). In 1997, Mexico repaid, ahead of schedule, all US Treasury loans.

Financial assistance package

Mexican reserves continued to decrease into January 1995, raising the possibilities of peso inconvertibility, and international debt default. In view of the effects on Mexico's trading partners and the loss of confidence in Latin American economies in general, the IMF, the U.S. Government, and the Bank for International Settlements promised loans and guarantees to Mexico totalling almost $50 billion.

Contributions were as follows:

The United States arranged currency swaps and loan guarantees with a $20 billion total value.
The IMF promised an 18 month Stand-by Credit Agreement of around US $17.7 billion.
The Bank for International Settlements offered a $10 billion line of credit.
The Bank of Canada offered short term swaps with a US dollar value of around one billion.
The United States' assistance was provided via the treasury's Exchange Stabilization Fund. This was a slightly controversial decision, as President Clinton had already tried and failed to pass the Mexican Stabilization Act through Congress. However, use of the ESF allowed the provision of funds without the approval of the legislative branch.

Effects of the economic crisis of 1994

Mexican businesses with debts to be paid in dollars, or that relied on supplies bought from the USA, suffered an immediate hit, with mass industrial lay-offs and several well-publicized suicides. Businesses whose executives attended the meeting at Zedillo's office were spared the nightmare — forewarned, they quickly bought dollars and renegotiated their contracts into pesos. To make matters worse, the devaluation announcement was made mid-week, on a Wednesday, and for the remainder of the week foreign investors fled the Mexican market without any government action to prevent or discourage it until the following Monday when it was too late.

The December Mistake caused so much outrage that Salinas exiled himself in Ireland (he was campaigning worldwide for WTO head at the time). Although the country's GDP contracted approx. 7% in 1995-- the worst decline in the country's history in a single year-- the incident also served to make it clear that his influence (if any) on the Zedillo administration was over.

1991: Impact of 9/11 on Stock Market

2007-12-26T07:17:00.001-08:00

TBU

1989: Japan Crisis

2007-12-26T07:13:00.000-08:00

Location: Japan

Percentage Lost From Peak to Bottom: 63.5% as of 2003. The Japanese have an uncanny ability to enhance what they adopt from the Americans (market economy). Sadly, the Japanese have picked up on crashes as well and made there’s a lot bigger than any one historical American crash. The crash of the Nikkei has morphed into a massive, surly bear that attacks any signs of recovery. It all started with the boom/bull market of the 1980s. The Japanese economy gained extreme strength after its long recovery from the war and the atomic bombs. By coupling with the other emerging Southeast Asian economies to form an unstoppable economic force, Japan seemed to create a flawless realization of Keiretsu. The phrase Japan Inc. was coined to describe how Japanese economy, business, and government were intertwined. Businesses from all over the world were sending representatives to try and find out how Japan was gaining its success. In true business fashion, the Japanese built an industry around visitors with company expense accounts and profited off the corporate spies. Soon, the Asian economy became an alternative for investors who were recently bruised by 1987.Between 1955 and 1990, land prices in Japan appreciated by 70 times and stocks increased 100 times over. Trading became the national sport, and the Japanese jumped into the market with more blind confidence than that of the Americans of the 1920s. During the eighties, large Tokyo firms were worth more individually than all their American counterparts combined, and Japanese golf courses were worth more than the value of all the stocks on the Australian exchange. Investors may have realized Japan was becoming a bubble, but it was believed that the high level of collusion between the government and business could sustain the growth forever. But an inverted growth cycle perpetuated itself when landowning firms started using the book value of their land to buy stocks that they in turn used to finance the purchase of American assets (Rockefeller Centre is 80% owned by Mitsubishi Estate Company). Like the prosperity of the Roman Empire, the prosperity of Japan proved to be its undoing as corruption began to spread throughout the political and business realms. The government sought to excise the tumour and put a halt to the inflammatory growth of stocks and real estate by raising interest rates. Regrettably, this didn't have the slow soothing effect on the market that the government hoped. Instead, it plunged the Nikkei index down more than 30 000 points. The bursting of the Asian bubble nearly took out the American economy as well, but the measures enacted after 1987 sopped the avalanche of program trading. We learned at least one lesson from all of these crashes: humans may overact frequently with small effects, but computers do it only once in a big way.

1987: Largest One Day Crash

2007-12-26T07:09:00.000-08:00

The amount the market declined from peak to bottom: 508.32 points, 22.6%, or $500 billion lost in one day. The largest one-day percentage drop in history. This was the crash that everyone expected but could not justify because of the work of the U.S. Securities and Exchange Commission, which is the governing body President Franklin D. Roosevelt ordered after the depression. The SEC - which was established for the prevention of further crashes and fraudulent practices that had infected the stock market - was doing a fine job after the war and finally coaxed tentative investors back into the market in the sixties. The SEC, however, could take investors to the proper information but couldn't make them think. In the early '60s and '70s, investors looked not at the value of the company but at the appeal of its public image and the vernacular used to describe it. The following kinds of over-embellished company sketches would attract the public eye: "Synergy Space-Bovubetribucs forges a new frontier in the introduction of organic entities into the ecosystem of the lunar-scape in order to promote greater synergy. This triumphant new paradigm will be enacted through a leveraged advantaged momentum initiator." Even though these illustrations were vague, investors were infatuated with these companies, which somehow represented some higher idea. The SEC required companies to state explicitly that they had no assets or even a fighting chance at getting any, but investors continued to believe that the potential for these companies was limitless. This bullish attitude, despite frequent bumps and insolvencies, continued into the eighties when conglomerates and hostile takeovers were the golden children of a finance-hungry media. Under the math of the "economy, “firms would grow exponentially rather than incrementally simply by picking up other companies. The SEC was unable to halt the shady IPOs and conglomerations, so the market continued to rise unabated throughout the '80s. Even institutional investors and large mutual funds, increasing their dependency on program trading, began to adhere to the mantra, "if a stock isn't gaining big time, find one that is." Then, in early 1987, there was a rash of SEC investigations into insider trading. For the most part, people were aware of the tendency of Wall Street to look out for itself, but the barrage of SEC investigations, rattled investors. By October, investors decided to move out of the crooked game and into the more stable environment offered by bonds or, in some cases, junk bonds. As people began the mass exodus out of the market, the computer programs began to kick in. The programs put a stop loss on stocks and sent a sell order to DOT (designated order turnaround), the NYSE computer system. The instantaneous transmission of so many sell orders overwhelmed the printers for DOT and caused the whole market system to lag, leaving investors on every level (institutional to individual) effectively blind. Herd-like panic set in and people started dumping stock in the dark without knowing what their losses were or whether their orders would execute fast enough to keep up with plummeting prices. The Dow plummeted 508.32 points (22.6%) and 500 billion dollars vaporized. Fortunately, the newbie chairman of the Fed, Alan Greenspan, was around to help fight off a depression by preventing the insolvency of commercial and investment banks. The market recovered, and some modest refinements were made, including a circuit breaker that cuts out trading programs if the market slides to a set level.

1929 to 1939: Great Depression

2007-12-26T06:23:00.000-08:00

The U.S. stock market expanded rapidly in the late 1920s and reached a peak in August 1929, when prices began to decline while speculation increased. On October 18 the stock market began to fall precipitously. On the first day of real panic, October 24, known as "Black Thursday," a record 12,894,650 shares were traded. Banks and investment companies bought large blocks of stock to stem the panic, but on October 29, "Black Tuesday," 16 million shares were traded and prices collapsed. The crash began a 10-year economic slump that affected all the Western industrialized countries. The amount the market declined from peak to bottom: A string of terrible days led to a more than 40% drop in the market from the beginning of September 1929 to the end of October 1929. In fact, the market continued to decline until July 1932 when it bottomed out, down nearly 90% from its 1929 highs. It took 23 years for the market to recover to its peak in 1955 before the 1929 crash.

Despite the Florida crash, Americans were as bullish as ever. The stock market was guaranteed to make everyone rich as the First World War had been won, and industrialization was resulting in previously-unimaginable luxuries. It was a good time to be American. Since the stock market was believed to be a no-risk, no-brain world where everything went up, many people poured all their savings into it without learning about the system or the underlying companies. With the flood of uneducated investors, the market was ripe for some manipulation and swindling. Investment bankers, brokers, traders, and sometimes owners banded together to manipulate stock prices and get out with gains. They did this by subtly acquiring large chunks of stock between them and trading them between each other for slightly more each time. When the public noticed the progression of price on the ticker tape, everyone would buy the stock. So, the market manipulators would then sell off their overpriced shares for a healthy profit. On and on the cycle went as uneducated investors turned a profit by selling the manipulated, over-priced shares to someone who wanted to have a rising stock.