A Look at Thailand During the Asian Financial Crises

October 14, 2011

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FT examined the actions of the ratings agencies during the Asian Flu. Naturally, they were late and forced to play catch up with multi-notch downgrades.  Surrounding countries were subsequently downgraded, leading to contagion in the region.

Below is a a timeline along with a stock chart of Thailand, whose fall from grace marked the start of the Asian financial crises.

Background : From 1985 to 1996, Thailand’s economy grew at an average of over 9% per year, driven by real estate. The baht was pegged to the US dollar. Stock prices ultimately fell 75%, the Baht devalued, and it’s largest financial firm went bankrupt along the way.

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February 1997 : Trading in the shares of Finance One was suspended while the government tried to arrange for the troubled company to be acquired by a small Thai bank, in a deal sponsored by the Thai central bank. By this time it was clear that bad loans in the Thai property market were swelling daily, and had risen to over $30 billion. Finance One was bankrupt and it was feared that others would follow.

April, 8 1997 : Moody’s drops Thailand’s ratings 5 notches on evaporation of reserves

May 14, 1997  : Thailand, with the intervention of Singapore, spends billions of dollars of its foreign reserves to defend the Thai baht against speculative attacks.

June 30, 1997 : Prime Minister Chavalit Yongchaiyudh said that he would not devalue the baht. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the basket of currencies in which the U.S.

July 2, 1997 : Thailand devalues the baht. News of the devaluation drops the value of the baht by as much as 20%–a record low. The Thai government requests "technical assistance" from the International Monetary Fund (IMF).

August 5, 1997 : Thailand agrees to adopt tough economic measures proposed by the IMF in return for a $17 billion loan from the international lender and Asian nations. The Thai government closes 42 ailing finance companies and imposes tax hikes as part of the IMF’s insistence on austerity.

September 3, 1997 : S&P drops ratings 4 notches on evaporation of reserves

Dec. 8, 1997 : The Thai government announces that it will close 56 insolvent finance companies as part of the IMF’s economic restructuring plan. 30,000 white-collar workers lose their jobs. Michel Camdessus, the IMF’s managing director, praises Thailand for "solid progress."

A few Observations :

  • Ratings agencies were late to the game and didn’t start making downgrades until stock prices were down 50%.
  • The ratings agencies downgrades did precede additional weakness, both short term and long term.
  • There were some violent short covering rallies before bailouts and the devaluation, but upon the announcement, prices resumed their slide shortly thereafter.

Further Reading : FT, PBS, Wikipedia

Lessons from The 1997-1998 Asian Financial Crises

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