Thailand and Indonesia also suffer from being overbuilt during real estate booms that Reven2 were the result of huge influxes of cash by optimistic foreign investors. South Korea faltered under the weight of its huge foreign debt, decreasing exports, and weakening currency (Lochhead 4-5). Other major countries touched by the crisis are Japan, China, Malaysia, and the Philippines. Japan's economy is burdened by $300 billion in bad bank loans and a recession. Chinese banks may carry bad banks loans of up to $1 trillion.
Decreasing Current Account Deficit versus Increasing Capital Account Balance Mexico was running an increasing current account deficit from US$7.5 billion in 1990 to US$23.4 billion in 1993. This indicates an excess of private investing over private savings. However, the country was able to maintain an improving fiscal account from US$3.6 billion deficit in 1990 to US$0.7 billion surplus in 1993. The deficit in current account was financed through capital funds from abroad resulting the capital account to increase from US$8.4 billion in 1990 to US$33.8 billion in 1993. The over-dependent on foreign capital flows had made the Mexican economy very vulnerable to any sudden and major flux of this capital fund which was very much dependent on the investors?
Stock and property markets were also feeling the pressure though the declines in stock prices tended to show a less volatile but nevertheless downward trend over most of 1997. By 27 October the crisis had had a world wide impact, on that day provoking a massive response on Wall Street with the Dow Jones industrial average falling by 554.26 or 7.18 per cent, its biggest point fall in history, causing stock exchange officials to suspend trading. Countries such as Thailand, Indonesia, Malaysia and the Philippines have embraced an unusual policy combination of liberalisation of controls on flows of financial capital on the one hand, and quasi-fixed/ heavily managed exchange rate systems on the other. These exchange rate systems have been operated largely through linkages with the United States (US) dollar as their anchor. (1) Such external policy mixes are only sustainable in the longer term if there is close harmonisation of economic/ financial policies and conditions with those of the anchor country (in this case, the United States).
This severely exacerbated the decline of the Malaysian stock market, which already had been on a downward trend before the crisis, as the depreciation of the Ringgit led to panic selling by foreign investors. The huge drop of the Ringgit and the stock market had a devastating impact on highly geared enterprises, particularly those companies that had taken loans from abroad. The sharp decline of the stock market and the spectre of many of these highly geared companies unable even to service interest on loans then created pressure on bank liquidity. This liquidity crunch resulted in a general loss of confidence in the Malaysian economy, and eventually precipitated a massive contraction in the Malaysian economy from 7.3% growth in 1997 to a low of -7.4% in 1998. Per capita income fell from RM9.1 billion to RM8.2 billion in the same period while foreign dire... ... middle of paper ... ...eal economy and the financial sector as well as the prompt and prudent measures introduced by the Malaysian government during the crisis.
It was later found that The debt levels had climbed rapidly to dizzying heights: about US$150 billion for South Korea and Indonesia, and about US$100 billion for Thailand. Most of the debt (especially for Korea and Thailand) was contracted by the private sector. In particular, the build-up of short-term debts was becoming alarming. What transformed this debt build-up into a major crisis for Thailand, Indonesia and South Korea was the sharp and sudden depreciation of their currencies, coupled with the reduction of their foreign reserves in anti-speculation attempts. When the currencies depreciated, the burden of debt servicing rose correspondingly in terms of the local-currency amount required for loan repayment.
Economic policies that have repelled foreign investment are a major factor in the economy’s stagnation. A growing debt burden, persistent inflation, and a poor business climate led to disappointing growth in 2001. However, in December 2001 the government voiced a renewed interest in economic reform, seeking advice from the IMF and other financial institutions (World 7). After independence, Uzbekistan tried to support inefficient state enterprises and shield consumers from the shocks of rapid economic reform. These policies eventually led to severe inflation and an economic crisis.
When a country has an elevated investment rate, large amounts of capital stock are purchased. This means that an elevated rate of investment must be maintained in order to accommodate for the high levels of depreciation. In the early 1990’s when investment began to slip asset values imploded. As a result, banks were making bad loans. The Japanese government was not quick to react, and by 1998 many major banks were on the verge of collapse.
The failure of 1MDB to repay RM 2 billion debts on time directly affect the Malaysian financial system especially the biggest lenders, Maybank and RHB bank and erode the credibility of the government. In the case of Tabung Haji, it accumulated losses from overestimating the value of properties which caused it pay in higher price to the properties and the overrun of cost in project construction. Improper and ineffective control of the management increased the size of liabilities. Hence, Tabung Haji is in a weak financial position since it need more borrowings to sustain their operations. Moreover, corruption poses a potential threat as an issue, particularly in light of the 1MDB problem.
The prices then started to go down and the big financial institutes which were the major investors in subprime MBS lost heavily. In result of this the home prices started decreasing rapidly and it caused foreclosures. The foreclosure issue began in late 2006 in the U.S. and continued to drain wealth from consumers and the banking institutions. It affected the other loan types and default on those loans increased enormously and the crisis got bigger and started to affect other parts of the economy. The basic cause of the financial crises falls collectively on debt and mortgage-backed assets.
Most agree that the huge asset ‘bubble’ was the cause for the initial stagnation, but they disagree as to the reasons for why this persists. Some are of the opinion that the domestic sector’s lack of dynamism and an aging population are to blame because they hinder domestic spending (Samuelson, 2010). Other economists, such as Paul Krugman, believe that consumers and companies’ excessive savings are the root causes (Kuepper, n.d.). Very low interest rates drove stock market and real estate speculation in the 1980s. All the speculation during the boom cycle caused the beginning of the crisis.