How did the dollar get its name?

Claus Koehler
Speculation versus development policy. An Analysis of the East Asian Currency Crisis

Preliminary version

In the second half of 1997, the currencies of Asian countries were the target of speculative transactions. Usually, such transactions are hardly noticed because they take place mainly in markets with major currencies, the US dollar, the yen and European currencies. With these "normal" speculations the expectations come true and the speculation wins or the prognoses of the speculation do not come true and losses arise.

What makes speculation with the currencies of smaller Asian countries so explosive is that it was about power struggles between speculation and national central banks and governments. The speculation competed against the fixed, dollar-pegged exchange rates of the currencies of smaller Asian countries. She felt strong enough to overcome defense efforts in these countries. In most cases, speculation prevailed.

Towards the end of the first half of 1997, speculation followed a yen-based investment strategy. She expected the yen to depreciate and the US dollar to appreciate. Therefore, she borrowed in yen and invested the equivalent in dollar securities. In addition, there was a large interest rate differential between the United States and Japan. Yen could be borrowed on the Japanese money market at an interest rate of around 1/2%. Fixed income dollar securities, on the other hand, returned over 6%. The speculation ended when interest rate hikes were expected in Japan and thus an appreciation of the yen. Speculation was looking for new fields of activity. She first found them in the Czech Republic.

The basic pattern of speculative techniques in the foreign exchange market

The starting point of every planned speculative transaction are expectations about price developments on the currency markets. If one expects a devaluation of foreign currencies and an appreciation of the domestic currency, then the speculator will get into debt in foreign currency, exchange the foreign currency in domestic currency and invest the money in the domestic market. If, as expected, the foreign currency devalues, the speculator does not have to exchange the entire domestic investment in foreign currency in order to repay his debts in foreign currency. It is sufficient to exchange part of the investments to pay off the debts. The remaining part is the speculator's profit.

The principle of devaluation speculation, of getting into debt in the suspected devaluation currency and investing the equivalent in the suspected appreciation currency, is not always easy to implement. The lending bank often requires collateral in its currency. Various transactions then have to be carried out.

In the case of "normal" yen-based speculation, it should have played out something like this. The speculator owned US dollars ($ 100) and expected the yen to depreciate from ¥ 125 to ¥ 140. He first had to borrow in yen and invest the equivalent in US dollars.

For the planned borrowing in yen, the speculator had to provide the Japanese bank with a security in yen. So he exchanged his US dollars for yen ($ 100 x ¥ 125 = ¥ 12500). For these exchanged yen, the speculator bought yen bonds. He deposited this with the Japanese bank as security and received a yen loan (¥ 12500). The debt in the suspected depreciation currency yen was completed. The speculator then exchanged the yen (¥ 12,500) received from the loan for dollars ($ 100) and invested them in dollar bonds.

Speculative transactions require open positions. In our case the liability in yen must be "open". So you are not allowed to have any yen credit balance; it must not be "closed". If the yen depreciates (to 140 ¥, then the speculator pays back the debt (12500 ¥) with a smaller dollar amount (89.30 $) than he originally spent (100 $). If the position were "closed" then the speculator would receive less US dollars (89.30) than he originally wagered ($ 100) for a yen balance (¥ 12500) after the devaluation.

The requirement of Japanese banks to provide security in yen for the loan they are granting has resulted in the speculator having a "closed" yen position. The yen debts are offset by the yen bonds deposited as collateral. He must therefore "open" the yen position. This is done by the speculator hedging the yen bonds through a futures transaction. He buys dollar futures at the rate at which he converted dollars into yen (125 ¥). As a result, the dollar value of the yen bonds remains unaffected by a yen devaluation.

If the yen depreciates (140 ¥), the speculator sells part of his dollar investments (89.30 $) and converts this amount into yen (12500 ¥). The amount is enough to repay his debt to the Japanese bank. The speculator receives back the Japanese bonds deposited as security (12500 ¥) from the Japanese bank. Since they are exchange rate hedged, he gets back the originally used dollar amount (100 $). At the end of the speculation, the speculator has a higher ($ 110.70) than the original dollar amount ($ 100) in his portfolio.

The course of speculation against East Asian currencies

The dress rehearsal: speculation against the Czech crown

After speculation ended her yen-based investment strategy, she looked for new fields of activity. She first found them in the Czech Republic. This devaluation speculation against the Czech crown in May 1997 was the dress rehearsal for speculative attacks against the currencies of the Asian developing and emerging countries. When speculation began, the krona was tied to a shopping cart that contained US dollars and Deutschmarks. The aim of the speculation was to force the government and the central bank to devalue. On the Czech foreign exchange market, kroner was offered to a considerable extent and dollars were in demand. A market report mentions that the Czech National Bank supported the krona with $ 500 million and increased interest rates dramatically. There was talk of a real war between the central bank and the speculators. If you take into account that speculation, especially hedge funds, has tens of billions of dollars at its disposal, then it becomes clear that the Czech central bank, on its own, had to lose this war. The Czech government eventually devalued the krona by 20%. Speculation reaped the profits.

The wave of speculation from Thailand to Korea

Even during the period of speculation against the Czech crown, there were foreign exchange market reports that Thailand was repelling speculative attacks on its currency. But when the speculation against the Czech koruna was over, it started fully against the Thai baht. Again, the country tried to intervene in the foreign exchange market to defend the exchange rate pegged to the dollar. Again the central bank raised interest rates and again lost. The baht was released and lost up to 30% of its value. Speculation won accordingly.

The neighbors of Thailand viewed these events with discomfort. They suspected, not without good reason, that they might be the next victims. As a precautionary measure, these countries raised their interest rates. That should curb an outflow of capital and attract capital. But what are a few percentage points higher interest p.a. against 20-30% profits in a few days. And so it happened as it had to happen, speculation turned against the Malay ringgit, the Filipino peso and the Indonesian rupiah. Again and again it was said, "The massive dollar sales and the increase in money market rates by one percentage point, however, only had a temporary effect." One state after the other had to surrender to the speculative waves and released its exchange rates. "... the speculators had smelled blood and began to bet against the other currencies of the region. Very soon the Malaysian ringgit, the Indonesian rupiah, and above all the Philippine peso lost very much in value." Speculation earned accordingly.

As other currencies, the Singapore dollar and the Hong Kong dollar came into the line of fire. Here, too, intervention was made and interest rates were raised. The Singapore dollar could not withstand the pressure and also depreciated significantly. Only the Hong Kong dollar resisted. Speculation had bet that mainland China, true to the phrase: one country, two systems, would not intervene. The speculation was not wrong. But Hong Kong's foreign exchange reserves are quite large. The speculation could not prevail despite several runs. The Hong Kong dollar was the only currency in the region to remain pegged to the US dollar at a fixed rate.

Even the Korean won could not escape the onslaught of speculation. But there was also the fact that an economically important company, the Kia-Automobilwerke, went bankrupt and was taken over by the state. This event helped weaken the won. It also lost a lot of its value.

Judge before and after

In the years before the speculative attacks, the economy and the public paid full praise to the "emerging" Asian states. They would have been open to foreign investment, followed a liberal concept and maintained stability in their countries. "The DIHT praised the extraordinary economic development of the Asian country [Thailand]. A successful change from an agricultural to an industrial state had taken place; the infrastructure policy shows remarkable results ...".

When the speculative waves reached their peak, many judged that the debacle was due to poorly foreseeable homemade economic policies by the Asian countries. "The currency crisis in the region of the Southeast Asian community of states Asean is neither rocket science nor the result of devious, faceless speculators. Rather, it is largely homemade, the result of serious structural deficiencies. The politicians hesitated for too long to remedy these deficiencies. Highly intolerable in the long term Trade and budget deficits, sick, unsound financial institutions, lax banking supervision, a speculative real estate boom, insufficient investment in infrastructure and education, corruption and serious errors in exchange rate policy all worked together and prepared the crisis ".

It would have been good if these findings had been presented before the crisis. But the reality looks different too. "In fact, until the collapse of financial stocks, there was hardly any question of economic problems. The East Asian countries were indeed on a slower growth path, but on average they were still more than twice as fast as the industrialized countries. A noteworthy one No rise in prices or even accelerating rates of inflation could be discerned. Without exception, the budget bills were in surplus, and most countries had amassed comparatively high foreign exchange reserves. "

Above all, the fixed exchange rates of many developing and emerging countries and not speculation are repeatedly made the scapegoat for the currency disaster in these countries. "The central banks want to defend an overvalued currency against the background of an expansive monetary policy. ... The obviously absurd monetary and currency policy leads to capital flight, whereby the central banks capitulate in the end in front of the flood of outflowing capital and the determination of the currency exchange rate to free play to be left to market forces ("floating"). " But no sooner have the exchange rates been left to the free play of forces that devalue currencies by double-digit rates than concerns. "The currency crises in Asia could dampen economic growth all over the world. The economies in America and Europe have to prepare for an export offensive by Asian companies on price, which is being promoted by the massive currency devaluations. Further growing current account surpluses of the Asian countries could become one renewed trade conflict with the United States. "

But even banks have probably not seen such homemade problems, otherwise they would hardly have made purchase recommendations for the markets of these Asian countries. Apparently they believed that prices on the stock markets would continue to rise. "In Hong Kong, the house of cards was now collapsing, which had become ever higher due to unrestrained speculation [and] euphoric buy recommendations from international investment banks. In the end, as a chief economist of a well-known bank put it, the Hong Kong prices seemed to live only on expectations that in the end there will be an even dumber one who will buy the already overpriced values ​​at even higher prices. World-famous American and French banks have already predicted a price development of more than 18,000 points in the Hang Seng. "

Those affected, however, saw the events completely differently. The Malaysian Prime Minister Mahathir Mohamad accused Western countries of playing dishonestly. "Asia opened its markets in good faith and let multinational companies in; now the speculation is coming and cheating the Asians out of the fruits of their hard-earned success."

Such a judgment against speculation obviously violates the spirit of a free market economy for many. "His remarks in connection with the stock exchange and currency turmoil that struck Southeast Asia, however, now cast doubts on observers about his economic expertise." But apparently the statements of the Malaysian Prime Minister are not so absurd, because the same analysis can be read: "This is correct insofar as the country in the 16 years in which Mahathir has now held the highest government office, on the arduous path from the raw material-producing third world state has already come a long way to the modern industrial nation. ... Foreign investors have so far valued Mahathir's economic expertise, which he displayed in his work. " The reason for the harsh criticism of the Malaysian Prime Minister is also given: "Mahathir's recent tirades against Western currency dealers and portfolio managers may also be partly due to the fact that he accuses these circles of speculative attacks on the Malaysian currency and the withdrawal of To have destroyed his life's work with investment money at the moment when he already had his goal - to bring his country to the Association of Fully Industrialized Nations by 2020 ".

The truth is unlikely to be reflected in judgments such as "The bubble has burst" or "Speculation has destroyed everything". As always, it lies between the extreme judgments.

Standards for developing and emerging countries and speculation

The standards for developing and emerging countries

One should only judge events if one has standards against which one can measure reality and if one makes such a comparison with the help of statistical documents. First of all, one should be clear about the conditions that enable stable and high economic growth in developing and emerging countries. These countries are generally characterized by relatively high rates of price increase, a lack of investment capital and inadequate infrastructure.

In principle, as in the industrialized countries, inflation in developing and emerging countries must be curbed by an appropriate monetary and credit policy. This is not easy in the developing and emerging countries, as there is usually a lack of developed money and capital markets, which are simply necessary for an effective monetary policy. Therefore, it makes sense to link the currencies of these countries with other currencies, e.g. with the US dollar, using fixed exchange rates. Since the price increases in developing and emerging countries are generally higher than, for example, in the USA, the pegging of these currencies to the US dollar means that the currencies of these countries appreciate in real terms. This supports the efforts of the central banks to stabilize the price level. "As is well known, the [Estonian] kroon has been in a fixed exchange ratio of 8: 1 to the D-Mark for five years, an arrangement that is not only a key stabilizing factor for the country's economy, but also ensures the value of foreign investments."

However, a fixed exchange rate with relatively high inflation rates also stimulates economic growth. The dampening of economic development associated with the real appreciation creates an incentive for companies to strengthen their national and international competitiveness through additional investments. The fixed exchange rate also gives everyone involved a secure calculation basis. This facilitates export and import as well as cross-border money and capital transactions.

If the rate of price increases in developing and emerging countries are higher than in the US, then purchasing power parity indicates a decrease in the value of these currencies. However, this does not necessarily have to be followed by a devaluation. The currencies of developing and emerging countries are often so undervalued that initially only the undervaluation is reduced. In other words: these countries have a period of time at their disposal in which they can reduce the rate of price increases through appropriate monetary and credit policy, supported by real appreciation. If they fail to do that and the currency tends to be overvalued, then exchange rate corrections are inevitable. Any devaluation that is necessary then, however, leads to renewed price surges.

Developing and newly industrialising countries will only be able to eradicate poverty and hunger in their countries and raise the low standards of living only if they receive capital aid from outside. Above all, the industrialized countries, states and companies provide such assistance in various technical forms, e.g. through transfers, loans and investments. This means that the capital accounts of the developing and emerging countries show surpluses. Since a balance of payments is always in balance, the current account must show a deficit. Anyone who calls for the balance of payments in these countries to be balanced is also calling for monetary aid to be suspended.

Deficits in the current accounts of the developing and emerging countries are a reflection of the necessary capital imports. Only the extent of such deficits and the structure of capital imports can be controversial. Above all, the capital import should enable additional investments. It has been criticized that too much capital was imported, which mainly flowed into financial investments. However, funds that flow into investment funds also benefit the development of an economy, either directly or indirectly. In addition, before the speculative attacks, the liberality of many Asian countries in capital transactions was praised. This liberality also includes financial investments.

In the developing and emerging countries - but not in the Southeast Asian countries - public expenditure and revenues tend to be in deficit in general. Since the national product per capita and thus the income are relatively low, the tax revenue is also modest. On the other hand, the budget needs of public funds is great. Above all, the infrastructure investments that are necessary to enable private investments devour considerable resources.

The criteria for monitoring the budgetary situation by the Commission of the European Union can be a yardstick for assessing the level of government deficits to be tolerated. They demand that public debt should not exceed 60% of GDP. With normal economic growth in Europe of 3% in real terms and an unavoidable rate of price increase of 2%, i.e. a growth rate of the nominal national product of 5%, this results in a maximum tolerable current deficit of 3% (5% of 60%). The International Monetary Fund assumes that after the "ginseng crisis" the national product of the Southeast Asian economies can again grow by 7-8% in real terms. With an unavoidable rate of price increase of 3%, the nominal national product rises by around 10%. If the public debt in Asia is not to exceed 60%, then a current deficit of a maximum of 6% (10% of 60%) is compatible with the economic conditions in this area.

A statistical finding

One should first look at a few figures that reflect the economic situation in the Asian countries in the years before the speculative waves. A look at the basic economic data in Thailand is representative of these countries.

The economic growth there was considerable. With around 8% it corresponded to the ideas about the economic development of developing and emerging countries that want to catch up with the industrialized countries. The efforts to contain inflation have been remarkable. The price increase rates were single digits. Thailand succeeded in repeatedly approaching the finish line of a developing and emerging country of around 4%, even after setbacks. The real appreciation that resulted from fixed exchange rates against the US dollar contributed to the success.

Monetary policy in Thailand has also led to this stabilization. With economic growth of around 8% and a rate of price increase between 3% and 6%, growth rates in the money supply between 12% and 18% are still within the tolerable range. The argument that is occasionally heard that the money supply has grown too rapidly in the South Asian countries cannot be substantiated.

At around 5% of the nominal GDP, the balance of Thailand's current account was quite appropriate. Its rise to 8% in 1991 and 1995 may be viewed as too high. But the country also received substantial funds from abroad. In 1996 that was $ 19.5 billion. They largely benefited private and public investment. Only 3.6 billion US dollars or 18.5 percent of the inflows were portfolio investments. In view of the favorable economic development and in view of the expectations of a continuing economic upswing, they were not excessive.

When an economy is expanding and the prospects for an upswing are favorable, then there are exaggerations. The building boom in Thailand and other South Asian countries has exceeded demand. However, there are also such phenomena in industrialized countries. Japan is an example of this. In Germany too, commercial construction exceeded demand. Office space is empty. However, none of this justifies speculative attacks on the currencies of these countries, which lead to severe setbacks in economic development.

Again and again it is emphasized - also in the cited analysis by Carola Kaps - the public deficits are too high in the "ginseng states". Neither in Thailand nor in any other Southeast Asian country whose currencies were attacked by speculation, there were public deficits in the central budgets. Rather, all of these states had surpluses. Based on the data published by the International Monetary Fund, it is difficult to find a justification for the speculative attacks.

The assessment of speculation

Speculation did not see conditions for stable and high economic growth in the structure of macroeconomic variables in the developing and emerging countries, but it used this structure as an occasion for its speculative attacks. She did not see the combination of fixed exchange rates and high inflation rates as a means of curbing inflation through real appreciation. Rather, she saw the combination as untenable. For speculation, deficits in the current account were not a reflection of voluntary, mostly private capital imports. She was of the opinion that the developing and emerging countries would live beyond their means. Speculation did not consider public budget deficits to be necessary in order to enable the largest possible infrastructure projects as a prerequisite for private investments. Speculation saw such deficits as, for example, in the Czech Republic, an unsound budget policy.

All the currencies in Asia that were exposed to speculative attacks in the second half of 1997 had a picture that corresponded to the structure of speculation. The unrest in other developing countries around the world is based on the fact that they too present a very similar picture to the Asian states hit by speculation.

The only way that developing countries can reduce their lag in living standards is to achieve higher economic growth than the developed world. But even that has been questioned. "The economist Walden Bello (Manila and Bangkok) ... is convinced that the current crisis is not a short-term phenomenon, but rather the crisis of a development model: The attempt, with powerful leaps, is made possible thanks to generous inflows from abroad Capital to reach the level of developed western industrial countries in a short time has proven to be an illusion. " After all, it took the Southeast Asian states more than two decades to achieve a level that was still far removed from the standard of living in the industrialized countries.

The assessment of the macroeconomic structure by speculation and the speculative attacks based on it have seriously damaged the development strategy. The structure necessary for the economic development of the East Asian countries has collapsed. These countries are being held back in their development.

On the power and political role of speculation

If speculators succeed in forcing a government and central bank to devalue their dollar-pegged currency, then they must have substantial resources and thus power to enforce it. Obviously that is the case. It is reported again and again that speculation can dispose of tens of billions of dollars in US dollars. The name of a speculator is often mentioned: George Soros. His name has already been mentioned in connection with the currency speculation in the European monetary system. "With massive speculation, Soros contributed to the collapse of the European monetary system in 1993". Of course, he was also involved in the speculation that a devaluation of the yen was expected. According to industry analysts, investor George Soros was one of the biggest 'players' in the yen-based investment strategy. Soros, who manages more than $ 17 billion through Soros Fund Management, is known for attacking bond and currency markets around the world . " The "ginseng crisis" is also associated with his name. The Malaysian Prime Minister Mahathir stated bitterly: "We have worked 20 to 40 years to bring our countries up to date - and then a man comes with a few billion dollars and almost destroys our work within two weeks."

The activity of speculation apparently also has a political dimension. "The Association of Southeast Asian Nations (Asean) has accused American financier George Soros of having contributed to the currency turbulence of the past few weeks" for political reasons. Soros admitted that he had tried to prevent Burma from being accepted. " At that time, the Asean intended to accept Burma as a further member of their community. The US has opposed this because Burma is violating human rights. The Asean finally accepted Burma as a member anyway.

In October 1997, when speculative attacks on Southeast Asian currencies had peaked, Soros visited Russia. His foundation "Open Society", which pursues the goal of promoting civil liberties and political pluralism (alleged assets 5 billion US dollars), promised the country funds of 500 million US dollars. "With a private donation, the American financier and philanthropist George Soros promised Russia more development aid than the United States." In 1996 the United States provided Russia with US $ 95 billion in development aid. It is a problem when an individual pursues development aid policy on his own. Possibly, with such differences in amounts, it thwarted the strategic line of the United States and international organizations.

Effects of the "ginseng crisis"

Loss of confidence

The heaviest burden the economies of Southeast Asian countries faced was the loss of confidence from foreign investors. Trust is based on the continuity of development. The rest of the world saw that the Southeast Asian states showed high economic growth and thus approached the standard of living of industrialized countries. They registered that these countries did not let the price increases get out of hand and showed no or no excessive public deficits. Calculation security was given by the exchange rates, which were firmly linked to the US dollar. Under these conditions, they made capital available, for which they calculated a good return. The current account deficit in these countries was in line with investor behavior.

If a stone breaks out of a building like this, investors are unsettled. In the monetary markets, however, uncertainty means that one shuts down one's business and, as far as possible, withdraws the funds in order to wait and see how things develop further. A crisis of confidence arises. "The moment that confidence in a developing country wanes, almost regardless of reason, capital inflows slacken and the warrented exchange rate falls to bring the export / import balance into line with the new capital flows reading." Such a loss of confidence means that the negative influences that emanate from "successful" speculation are intensified. Hardly any new funds are made available to these countries; rather, funds are withdrawn from these countries. This leads to a further increase in the supply of national currencies and an increasing demand for fixed currencies on the foreign exchange markets. The devaluation forced by speculation continues.

Effects on the Asian countries affected

The East Asian countries affected by speculative attacks initially defended themselves by intervening in the currency markets and increasing interest rates. They lost a considerable amount of foreign exchange reserves. If such a defense does not succeed, as in the case of most Southeast Asian economies, and if there is a loss of confidence with further devaluation, then interest rates are raised further, often drastically, in order to curb capital outflows. But even then, the outflow from these countries is considerable. Outflows from the Southeast Asian countries mean that the current account deficits can no longer be financed through capital imports as in previous years. The adjustment between the current account deficit and the low capital account surplus, perhaps even deficit, takes place through exchange rates. The devaluation will not end for the time being.

Strong interest rate hikes to keep capital outflows low, of course, have repercussions on economic growth. You dampen it. In addition, many investments now promise losses rather than returns. This is the case with the majority of investments. They are mostly financed by borrowing in foreign currencies, especially US dollars and yen. The investment calculations were based on continued fixed exchange rates. Now many companies in the affected countries are no longer able to pay interest and amortization after the strong devaluation of their currencies. Investments, but also entire companies, become ailing. Economic growth will continue to be slowed down. All affected countries have revised their growth forecasts for the year ahead. Growth rates are expected to be at most half as high as in previous years.

Such developments lead to corporate insolvency in Southeast Asian countries. But that does not leave the banking system of these countries unaffected. Loans go bad. Banks, too, have often raised funds in foreign currencies - Japanese yen and US dollars. Because of the fixed exchange rates, hedging was largely not carried out. It is also difficult for banks to service their foreign currency liabilities. The banking system is weakened. The regulators are being forced to close the counters of relatively many banks.

The only positive thing about the strong devaluations in the affected countries is that they stimulate exports and throttle imports. This helps reduce the current account deficits. This in turn forms a counterweight, albeit a small one, to the recessive tendencies that are emanating from the devaluation.

With such serious changes and the prospect of a rather recessive development, it is not surprising that the stock markets of the countries concerned are reacting with sharp price declines. In view of the previous positive assessment of the economic development of these countries, many foreign investors, including investment funds, had invested in these stock markets. Their withdrawal contributed to the collapse in the stock markets. But other exchanges, such as the metal exchange in London, felt the turbulence on the East Asian markets. "Most of the metal prices on the London Metal Exchange (LME) have fallen. The reason given on the market is the clear signs of cooling in the Asian economy."

Effects on third countries

In a global economy, serious changes in economic framework data that arise in one part of the world spread to all markets of the globe. The vehicle is called caution. Price losses are then inevitable on the stock exchanges in industrialized countries. "In the wake of the drop in prices on the Hong Kong Stock Exchange ...prices on the German stock market also collapsed. "

A worrying problem is that, following currency speculation with forced devaluations, countries are now also voluntarily devaluing. This applies to Taiwan, for example. This "little tiger" was largely spared from speculation. The extensive foreign exchange reserves of this country probably frightened the speculators. Even so, the Taiwanese government devalued the NT dollar. "The fact that it finally came about anyway had to do with maintaining the competitiveness of Taiwan as an industrial location." This measure is worrying because it can very easily lead to a general race to devalue, as was the case before the Great Depression of the 1930s. Many countries see their international competitiveness as being restricted as a result of the devaluation of Southeast Asian currencies.

Increasing exports and reduced imports as a result of the devaluation of Southeast Asian countries are of course also noticeable in Europe and America. It will be easier for the Southeast Asian countries to sell goods in the industrialized countries. It is more difficult for industrialized countries to deliver goods to Southeast Asia. In addition, the Asian countries are saving more in the face of declining growth rates in public budgets. The realization of planned large-scale projects, such as dams and subways, will be postponed or canceled entirely. However, this often means that orders that European or American companies have already been certain of are dropped. As a result, economic growth in the industrialized countries is negatively influenced by the "ginseng crisis".

After all, banks outside of the East Asian countries are being hit by the crisis. These banks have provided loans to Southeast Asian banks and commercial enterprises. There was no exchange rate risk for them, as they provided these loans in their national currency, e.g. yen or US dollars. But now they have to find out that the debtors have become or are partially insolvent as a result of the devaluations. Increased write-downs of non-performing loans will also be required at banks in the industrialized countries. "The collapse of a major Japanese bank reveals the first real economic effects of the Asian financial crisis. After the US Federal Reserve, the European monetary authorities are now likely to revise their growth forecasts."

Not only Southeast Asian countries felt threatened by the speculation. Speculative attacks are not ruled out in South America either. Many of these American developing and emerging countries have fixed exchange rates against the US dollar, have current account deficits and attract foreign capital as promising future markets. "Against this background, it is not surprising that the stock exchanges in Mexico, Argentina and ... Brazil also had to accept major corrections." Brazil and Argentina in particular felt the first waves of speculative developments. Brazil was "for the time being able to withstand the latest run on the stability of the real ... with the help of a drastic increase in interest rates". But here, too, investors became restless, confidence in the Brazilian economy waned and capital was withdrawn. The government was forced to adopt packages of measures to reduce public deficits and the current account deficit. These measures were "officially described bluntly as a tough and unpopular austerity package to regain investor confidence".

The Eastern European countries are also developing or emerging countries. They show a macroeconomic environment similar to that of the Southeast Asian countries, namely public deficits, deficits in the current account, relatively high rates of price increase and in some cases fixed exchange rates. So they too were drawn into speculation about a devaluation. That was the case, for example, in Estonia, whose currency is firmly pegged to the D-Mark. Russia too felt the effects of the Southeast Asian currency devaluations. "The central bank decided to adjust its monetary policy under the impression of the recent turbulence on the international financial markets, which led to a 20% fall in the price of the Moscow stock exchange.

Necessary measures

Towards the end of September 1997, the annual meeting of the International Monetary Fund and the World Bank took place in Hong Kong. In this context, the Group of Ten (G10) also dealt with the Asian crisis. The Interim Committee of the Board of Governors of the International Monetary Fund stated: "The Committee stressed the importance of openness and accountability of economic policy making, and of transparency, to achieving policy credibility and confidence building in a global environment." This phrase describes a strategy for avoiding crises similar to the "ginseng crisis". However, it still has to be formulated in detail. Six points seem important:

1. An exchange rate order in the international monetary system: It is to be avoided that free exchange rates are repeatedly tested as the pawn of speculation and fixed exchange rates by speculation. In a global economy, exchange rates should follow the course of purchasing power parities. This is to be ensured, if necessary, through joint foreign exchange interventions. Just the announcement of joint action will be enough to return speculation to its real task, namely to have a stabilizing effect. If the exchange rates follow the path of purchasing power parities or if speculation is being made against a currency that is still undervalued, the International Monetary Fund should intervene together with third countries to safeguard the exchange rate system and help avoid a crisis, also by using its own resources. Successful defense against speculation means that the funds used will then flow back again. So you would not be lost to the International Monetary Fund.

2. An Asian monetary system: The Asean countries would be advised to set up an Asian currency system similar to the European currency system with fixed exchange rates, bandwidths and level flexibility. Interventions to ward off speculation when exchange rates are fair makes more sense than double-digit billion dollar aid after speculation has prevailed. At a meeting of twelve Asian countries, the USA, Canada, Australia and New Zealand as well as the IMF, the World Bank and the Asian Development Bank, it was emphasized that "the International Monetary Fund (IMF) will play an important role in a new framework for future currency crises in Asia regional cooperation must play. "

3. Liberalization of the movement of money and capital: It should be handled carefully in developing and emerging countries. It must be ensured that a free cross-border exchange of goods can also be accompanied by the necessary monetary transactions. Any liberalization going beyond this requires such a high level of development that is usually not the case in these countries. India, for example, has gradually liberalized its capital movements; it was little affected by the currency crisis. "The recent stock market crisis has strengthened the government's stance to continue to steer a cautious course in its move towards full exchange rate liberalization. ... But the economic advisor sees more than ever the need for a permanent trade deficit reduction and a strengthening of the financial system and low inflation before full convertibility of the rupee is achieved. "

4. Monitoring by the International Monetary Fund: It is to be welcomed that the IMF has developed and is still further developing a "Special Data Dissemination Standard" with which it monitors the economic development of the member countries. Such a system can make a significant contribution to the early detection of weak points in a country's economic development.

5. Transparency: The foreign exchange markets must be informed whether and to what extent a currency is undervalued or overvalued. The foreign exchange markets should therefore be informed of changes in purchasing power parities. Corresponding statistics are still only available in some countries and only for some currencies. The IMF announced the results of its monitoring of member countries to the press for the first time. So far this has not been done, as it was feared that potentially unfavorable reports could have negative consequences for the markets in that country. The future will show whether such a thesis is correct.

6. Banking supervisory measures: The cross-border movement of money and capital is a counterpart to the cross-border movement of goods and services. It should be the job of banking supervisors to take a look at how money and capital transactions are developing in comparison with the flow of goods and services. Speculation against Asian and other currencies generally presupposes that speculation raises billions in banks in the currencies to be attacked. This happened even in countries where it is not allowed to offer local currency to non-residents, such as Ukraine: "The chairman of the central bank, Yush-chenko, accused the commercial banks of grossly disregarding the rules for selling hryvnia for dollars . " It is therefore necessary for the banking supervisory authority to intervene more strongly in such situations and to warn the banks to exercise restraint.

Even in a permissive global economy, a regulatory framework is required that seeks to prevent disruptive speculative transactions. If that does not happen, then it can be foreseen when voices will be loud to restrict the free movement of international trade.