Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98


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They borrowed in USD and lent to domestic projects in local currency currency mismatch. In addition, they borrowed in short term loans but lent to long-term domestic projects maturity mismatch. When the currency depreciation began, the balance sheets of these financial institutions were immediately hit and bad debt increased. When foreigners demanded repayment, they had no foreign cash. This is a liquidity problem, but as the crisis deepened, it created insolvency as well.

In addition, the collapsing domestic demand, which was caused by panic, credit crunch malfunctioning of the banking sector and wrong policy prescriptions in some countries , damaged the real sector and led to the accumulation of bad debt. This further deteriorated the quality of the balance sheets of financial institutions.

According to this view, the Asian crisis was primarily caused by the wrong speed and sequencing of external financial liberalization. Countries liberalized capital accounts too quickly and without preparation, which caused overborrowing and bubbles. Furthermore, the government did not properly monitor what was happening. The lesson therefore is: you must open up your financial sector gradually and in the right order.

The pace of financial liberalization must match the pace of strengthening the domestic financial sector and the monitoring capability.

The government must make utmost effort to improve domestic banks and securities, but this will take time. A big bang liberalization is dangerous and irresponsible. This is not because the productivity and financial institutions of the first group were superior. They were not directly hit because they did not open up financially. The second interpretation of the Asian crisis is structural. On the surface, it is true that this crisis was a macro and financial phenomenon involving banks, nonbanks and borrowers. But deeper down, according to this view, the real cause was the structural weaknesses of the developing economies in East Asia.

As long as these weaknesses remain, similar crises can occur in the future. The real solution must be the removal of these structural weaknesses. However, one problem with this interpretation is that there are different views as to what exactly was the structural weakness es that caused the Asian crisis?

For example, the following candidates are often mentioned:. As an example, the World Bank report East Asia: Recovery and Beyond June argued that East Asian countries would not continue to recover unless they improved in three areas: i managing globalization; ii revitalizing business; and iii forging social contract and role for government.

Among these, "revitalizing business" means dealing with the under-capitalization of banks and high indebtedness of corporations, and reducing the government ownership of banks and corporations which were temporarily nationalized after the crisis. In normal times, it is difficult to introduce bold structural reforms because of political resistance of interest groups.

But when a crisis occurs and people expect changes, it may be politically easier to implement such reforms. Some people call this the "window of opportunity" [in Japanese, we say the "opportunity of one thousand years"]. Whether these structural problems were the true cause of the Asian crisis is less important than the fact that necessary reforms can now be implemented with popular support. Maybe it was a good thing that the Koreans began to criticize the triangular relationship among government, banks and chaebol big business groups like Daewoo, Samsung, LG But you must also be careful about the other risk--of doing too much.

corporate debt restructuring in east asia some lessons from international experience 98 Manual

It is hard to know which system works in your country and which does not. The evolution of social and economic systems is unique to each country and very difficult to predict or evaluate. In the excitement of post-crisis confusion, a country may adopt new systems without much deliberation. It may accept American systems or IMF conditionality too uncritically, but they may not fit your social needs. This is called "throwing the baby out with the bathwater. Are you sure they are no longer needed? The lesson is that post-crisis reforms for overhauling your society should be well balanced.

You should take advantage of the impetus for reform that the crisis has brought, but you must also be cool-headed about the scope and speed of the change. You should not "reform" in order to revenge and penalize big businesses. In the rest of this course, let us continue to analyze the Asian crisis from the macroeconomic and financial viewpoint.

From the historical perspective, what was so unique about the Asian crisis? Currency crises are very common phenomena. Balance-of-payments pressure and currency overvaluation, followed by speculative attacks and a large depreciation, occur all the time. The Asian crisis was a twin crisis in the sense that it was simultaneously a currency crisis externally and a banking crisis internally , with the two crises reinforcing each other.

This is more damaging than a currency crisis only. But even twin crises are not rare. They happen often. What distinguishes the Asian crisis of from other crises is perhaps its length and severity. It was not just one country or two that were affected, but the whole region suffered simultaneously. Contagion was very strong. Moreover, as the Asian crisis triggered similar crises in other regions Russia, Brazil, Turkey, Argentina Its cause was clearly bigger than the policies of affected countries. Economists and officials began to suspect that this kind of crisis was inherent in unstable private financial flows.

This prompted a discussion of reforming global financial architecture. The current account crisis is a traditional crisis with which the IMF is well acquainted. It is caused by inappropriate macroeconomic policy of the government and leads to the balance-of-payments crisis. Its sequence is typically as follows:. In general, macroeconomic tightening and economic liberalization are the right policy response to a current account crisis, although the speed and timing of implementation must be judiciously chosen so as not to unnecessarily damage the economy and people's living standards.

The capital account crisis is a new type of crisis caused by the instability of private capital flows. It is often observed immediately after the liberalization of the capital account. One salient feature of the capital account crisis is that there are two distinct phases: up and down.

At first, capital flows in, the domestic economy is stimulated, and everything looks rosy. But after the reversal, economic confusion is inevitable at least for one or two years. As to the current account crisis, there is no such break; the problem--overspending--basically remains the same throughout.

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These two crises, which require very different policy responses, should be clearly distinguished. The Asian crisis was a capital account crisis. The big problem was that policy prescriptions for a current account crisis was administered to this crisis. This was a mismatch between reality and policy see below. The Philippines and Malaysia were also badly affected--but not as severely as the above three. In all of these countries, credit crunch was experienced and non-performing loans NPLs mounted.

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Credit crunch is a situation where banks stop lending to firms even though there is a legitimate demand for credit. It is a temporary breakdown of the functioning of the banking system. If this happens, even sound firms cannot operate due to the lack of financing, and a recession may be generated. But the precise definition and measurement of credit crunch is operationally difficult.

Geopolitical analysis 2017: East Asia

One problem is the difficulty in distinguishing a supply-driven credit decline and a demand-driven one. Even if bank lending goes down, this may be due to falling credit demand at the time of recession--banks may be functioning properly and want to lend but cannot find good projects or customers. If so, it is the recession that causes a credit fall, not vice versa. But at first, the dynamism is good, and that was the case when structural adjustment first started in Indonesia in And it was the case again in India in Oh — well, yes, that was a totally different story.

It was a disaster.

http://pierreducalvet.ca/103414.php What went wrong? Well, the IMF misunderstood what was going on. Growth was said to be good, the budget situation was considered satisfying. Social issues, including disparities among different groups, were not considered. And when the crisis hit, the same people from the IMF blamed the government, complaining about corruption, institutional weaknesses et cetera.

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Ultimately, the crisis put an end to the Suharto regime. But that was wrong? Yes, it was. Indonesia was a case of contagion in the Asian crisis.

Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98
Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98
Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98
Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98
Corporate Debt Restructuring in East Asia-Some Lessons from International Experience: 98

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