CURRENCY CRISES:
LESSONS FROM THE ASIAN AND
LATIN AMERICAN CRISES
OF THE 1990’S
BY
DR. MEROUANE LAKEHAL-AYAT
ST. JOHN FISHER COLLEGE
BITTNER SCHOOL OF BUSINESS
ACCOUNTING AND FINANCE DEPARTMENT
ROCHESTER, NY 14618
IEMS 2001 CONFERENCE
INTRODUCTION
ANALYTICAL FRAMEWORK
LESSONS LEARNED
CONCLUDING REMARKS
INTRODUCTION
• Global interdependence of the global
financial system.
• Frequency and severity of these crises
has increased the need for a quick and
effective response.
• Use Latin American and East Asia to
address the key issues.
ANALYTICAL FRAMEWORK
• OVERVALUED CURRENCY
• CAPITAL FLOWS, OVERBORROWING
AND ILLIQUIDITY
• TROUBLED BANKS
ANALYTICAL FRAMEWORK
OVERVALUED CURRENCY
• Issue with exchange rate system
• Tendency of pegged currencies to become
overvalued
• Watch for reserves decline and capacity to
borrow
• Solution lies in the adoption of flexible
exchange rates
ANALYTICAL FRAMEWORK
CAPITAL FLOWS, OVERBORROWING
AND ILLIQUIDITY
• Level of foreign borrowing precedes crisis
• Exchange rates are driven by capital
transactions
• Regulate capital flows
ANALYTICAL FRAMEWORK
TROUBLED BANKS
• Blame crises on weak institutions
• Strong banking sector fundamentals
• Repair banks and set-up strong regulatory
system
LESSONS LEARNED
LATIN AMERICA
• Fiscal Lessons
• Financial Lessons
• External Lessons
LESSONS LEARNED
LATIN AMERICA-Fiscal Lessons
• Strengthen the tax system
• Privatize public enterprises
• Reform social security
• Eliminate central bank financing
• Strengthen rules and procedures for budget
approval and execution
LESSONS LEARNED
LATIN AMERICA-Financial Lessons
• Impose adequate capital standards
• Check compliance with capital adequacy
requirement
• Impose sound liquidity
• Facilitate foreign banks participation
LESSONS LEARNED
LATIN AMERICA-External Lessons
• Move from fixed to flexible exchange rates
systems
• Positive impact on reserves and liquidity
LESSONS LEARNED
EAST ASIA
• Problems
• Policy Prescriptions
• Lessons Learned
LESSONS LEARNED
EAST ASIA - Problems
• Government involvement in lending
• Poor supervision
• Lack of regulations
• Inadequate legal infrastructure
• Absence of “a credit culture”
• Underdeveloped bond market
LESSONS LEARNED
EAST ASIA - Policy Prescriptions
• Blank guarantees of bank deposits
• Closure of insolvent institutions
• Bank restructuring and recapitalization
• Supervision and regulation
LESSONS LEARNED
EAST ASIA - Lessons Learned
• Bank closures effect
• Balance Sheet clean-up
• Level of external financing
CONCLUDING REMARKS
• Same symptoms but differences from
case to case
• Debate should not be limited to national
policies
• Focus on the volatility in financial
markets
• Need for coordination and market
discipline