The World's First Modern Financial Crisis: 1997 Edition

the largest in Asia. Those were the kind of issues that dominated headlines around the world, and the journalist Gift was sure to keep giving right wrong, right region, wrong country, I mean sorry, special administrative region. Welcome to benchmark. I'm Malcolm Scott in Hong Kong, and you're right. Then, just one day after Prince Charles sailed out of Hong Kong, harbor financial calamity erupted in Bangkok and proceeded to ripple

through Indonesia, South Korea, and eventually Russia and Brazil. It was the first truly global financial crisis of the modern era, and in retrospect, a harborer of things to come in the US. Today, Dan and I take stock of the Asian financial crisis and the lessons we learned or the ones that we ignored to our peril. Why is it that these crises keep erupting our disruptions, such as the two thousand and eight US mortgage implosion the inevitable consequence

of a capitalist market system. Joining us are Bloomberg journalists who covered the Asian financial crisis as it unfolded, starting with that fateful decision by Thailand to stop defending its currency the BART. I watched the Bart's implosion from next door in Malaysia. Let's introduce the rest of the panel. Alec McCabe reported on the region extensively from Hong Kong. Former Hong Kong Bureau chief reminds us was born in

Hong Kong. Lee Miller Bureau chief in Bangkok at the time, and Malcolm you are now managing editor Frasier Economics based in Hong Kong. Well, let's put this in some sort of context. Remember, Asia's relationship with the West was very different twenty years ago. It was the era of the Tiger economies. Nations that had suffered economically since the end of the Vietnam War not only regained their footing, were poised to remake themselves and in some instances had as

low cost manufacturing powerhouses. It was around this time we began to shed the phrase third world country in favor of less developed nation, a subtle but powerful hint of a new respect for Asia. So when Thailand surrendered its currency, it was as if the first spider web of cracks had appeared in the new narrative. Let's listen in as ALEC interviews economist David one week after Thailand's decision. Thailand's decision to flow to the currency he bought has big

implications for other Asian countries. Joining us in Hong Kong is David Roach. He's the president of Independent Strategy. For a look at what lines ahead for Thailand and post hand over Hong Kong, thanks for being here today. It's nice to be here again. There are implications, of course, because in any area like this, if one country changes a currency regime which is not that different to the general rules of the game out here, then obviously everybody

is attacked. And the big theory is that you've get a domino effect, this time in finance rather than the military matters. So Alec, again, you were reporting for Bloomberg in Hong Kong. At the time, it really did seem like the biggest thing ever. Right, Oh it was, and it had been so in the minds of journalists for months, if not years. We've been preparing for this um the most the hippest club in Hong Kong for all those years club marking over. We had invested all sorts of resources,

we and the world's press to be there. And maybe it was just because I was born in Hong Kong and my kids were born in Hong Kong. But for me it was a very personal handover, and in some ways because China was taking over peacefully a capitalist society for the very first time in the world, this was happening, a peaceful transfer of power was happening. It seemed like this was the moment for Asia to step up to the world stage and really start leading the world economically

and perhaps politically as well. You know, it's one of these situations where an event that has been cut and raised, careographed for such a long time happens, and yet something seemingly small in a very different type of place ends up being the big thing, and that events that had been prepared head full for more than a decade all of a sudden just didn't seem that important. It didn't. And Lee, you were in Bangkok a day was it a day or two days after the handover? It was

the next day, actually it was July seven. So um, you know, we were all caught a little bit unprepared. We had seen things kind of melting down rather quickly in Thailand, but the when when the devaluation was announced and they used some tooth phrasing. But when we realized what it was and we sent the first headline, you know, we were just like, Wow, this is not the handover of Hong Kong. This is something big, and this is

kind of the meltdown of a single economy. And then not long after that, you know, Dan was working south in Malaysia. I think that you probably felt the jolt coming from Thailand. Well, you know, my parents were visiting me in Kuala Lumpur at the time, and we had watched the handover on TV the night before, so we slept in I'm not going to call from My colleague in the office called me at home and he said, Thailand's just let the bot go and everything's going nuts.

Can you come in? And the interesting thing about that at the time was you know, Thailand had been the world's fastest growing economy from something like seven too, so you know that was before China became the world fastest growing economy. And so we saw this tremendous boom going on. Alec was talking about the brand of of nightclubs and everything.

At one point, I think Thailand became the world's second largest market for Johnny Walker Black label with and so so, I mean, you know what was the first the US? I think you don't expect things to melt down so quickly because you know, even even to the point where Herod's department store in London actually started putting signs up in time because so many ties had money and we're flying to London to go shopping. That's amazing. So what

happened next? I mean, Thailand, the Malaysia Mark Can you have a timeline, right, w don't you just run through that timeline? Let me rattle through it. Actually, let me go back one step, because we've missed what what this is all about, and this is this rapid reversal of capital flows. Money had been flowing into these tiger economies, all of a sudden it went the other way. And it hurt the economy's big time. So July two is where it started. That was where the spark lit in

the powder kick blew up. That was the devaluation that Leisa spoke of. Uh. Some days later, the Philippine Pesso was devalued. We didn't see huge while we saw implications, but not to the extent that some of the other economies that followed. Indonesia it widened its trading band soon after then we had it eventually abandoning its trading band, allowing the currency to float freely in August mid August, and predictably it collapsed. Hong Kong stock market was hid.

In October, there was speculative attacks on the Hong Kong dollar peg. It endured and lasts still to today. But into October, then South Korea's one began to weaken. We had the I m F loan packages start to unfold from Thailand and Indonesia, but it got very nasty for South Korea. Towards the end of nineteen South Korea having to request I MF aid. The one weakening throughout the IMF in December early December approved the fifty seven billion

dollar bailout package. For South Korea, and then into January it really swung back to Indonesia the roup. He was in free fall, then really nose diving. It lost as much as more than of its value. The shelves were bare, and people were stacking up protests through the streets amongst students. And of course, then less than a year after the first onset of that crisis, we had the departure of

Sahato after thirty two years in power in May. That's a very good point, and as compelling as some of these economic and financial superlatives are, let's not forget in some instances what resulted from this economic crisis was nothing short of a revolution. Yes, it did force Sahato to stand down. We thought that would inconceivable at one point in Korea, it ultimately meant the election of the first opposition president. Now in Korea, presidency changes hands between parties

pretty regularly and no one cares big thing. Back then, an Indonesian out Still after a tumultuous, ranching period, it's regained its place as Southeast Asia's leading economy, the leading economy of action, and it is a vibrant, rambunctious democracy. Who would have thought we thought the Asian white quote unquote was the way they had it right. The West was in decline. And there's some images that spring to mind during that whole period of bailouts lee. You remember

the I m F delegation staying in Bangkok. Where were they staying, Oh, they were staying well it was it was actually called the Oriental Hotel at that time, but it was part of the Mandarin Oriental chain and every year the Oriental would win either the best hotel in the world or the second best hotel in the world.

And I if I'll give me a moment to tell a story, because the I m F came in and they browbeat governments to slap they're spending, which you know, maybe in retrospect was what they the opposite of what

they should have been doing. And I remember going to the the hotel for a press conference and the I m F chief, Michelle camde Sux, who was this powering Sorbone educated economist, and he made it clear that he was, you know, sort of the financial overlord in Asia to help get all these governments together and put their financing

back together. And um, you know, the I m F brought in dozens and dozens of senior bankers to to Uh sort of look over the shoulders of the different countries, and they were staying at the Mandarin Oriental in Bangkoks those calm da su came in and Uh I couldn't resist. I had to ask him, I said, why is your entire team of bankers staying at the most expensive hotel in Bangkok? And he kind of got all upset, and you responded that the professional bankers need certain standards of

living to complete that. Then you remember a moment too, write it's fair to say the I M F s PR operation in those days was not as sophisticated as it is now. For me, the great moment was watching the same Michelle come to Sue standing over Sahato on national and international television with his arms folded while Sahato sat hunched at a table signing the agreement. Several commentators said at the time, he looks like a Dutch colonial

plantation owner. Now it's inconceivable that Christine Legarde would say what was said to Lee and have the body language that transpired in Jakarta inconceivable. So you know, the lenders

have changed significantly as well. It's an interesting point, because the whole austerity versus bailout debate, of course, that we saw through the European crisis most recently started back then, back in January, before the worst of the crisis was even upon Indonesia, already Joseph Stiglets, then Chief Economist of the World Bank, was already questioning the sort of Washington consensus view and some of the prescriptions that were being put in place during that time. That's right, and the

Bank didn't thank him for it either. Well, it begs the question have we learned anything? Did we learn anything from Asia through the latest crisis in Europe that we've got the world banking community still employing the same prescriptions that didn't really work that well twenty years ago, Well, you know, alec during any global financial crisis that followed.

A decade later, there was a very interesting moment at a press conference in Washington where Dominique strauss Can, one of Canvasser's successes at the MF, talked about fiscal expansion being the way to go. The economies in crisis needed to spend much much more, and that really was seen

as a Nixon goes to China moment. Dan the I M f I think it was last year published a bit of a mere culper paper which acknowledged some of the mistakes of that period and the certainly you could say the austerity first response has changed, although some people in Greece may argue differently. It's going to say, right, you know something else in retrospect, there were many predictions that China would actually allow its currency to loosen. Instead, it kept the peg that's the yuan's formal tie to

the dollar intact throughout this period. And you know, China's economy was much much smaller than than it is now. But looking back, was that the first real sign of China leading, if not the region, then at least the world. It certainly was a move that did help stem the contagion that at certain times there must have felt like it was never ending, the fact that they didn't devalue

to maintain their export competitiveness. But remember then China was only just becoming the export powerhouse in it that it is today. But that as we look back twenty years on from the crisis, is the moment where China took a notable global step that contributed to the stability of the world. And to see how just how important that you aren't anchor is to developing markets. You only have to look back now two years to mid where there

was that decision to slightly free up. You are not a free flow, just a slight change to the to the mechanism. It only moved one point seven percent on the day. Remember in mid and global markets went haywire. So that in itself shows just how important that you aren't anchor is today. And it all started twenty years earlier. If you want an indication of where China is today, it was just this month that MSCI put the domestic Chinese stock market in the indexes. The share market was

now considered to be one of the world's biggest stock markets. Lee, I'm wondering if this episode that we're discussing here is also a lesson and a lesson we all needed in retrospect about the impermanence of perceptions and of grand modeling. You know, we said at the start of this program, this is very much the era of the Asian Tiger, the Asian way. They had it all figured out. The West was in decline. By the end of the tables were turned and the West was again in the ascendancy.

And that's highly arguable again today, is that what's really happening here? This was about the death of perception. Well, I don't think that, Uh, it's really about the perception. I think that it's more about history repeating itself. I mean, uh, was a crisis two thousand and eight was it was a crisis we if you want to look at Greece and sort of an ongoing crisis, I don't I think that economically, no matter what we have in place, Uh, we're we're going to see some of these crises happen,

and once they happen, there's a contagion to it. Should we also be careful about constructing grand paradigms about the era in which we live. I certainly think that that's a that's a case. I mean, that's especially when you're living through it. It's hard to have a grand perception of it. Maybe that's what you know, for historians can do fifty years from now or fifty years or a

hundred years from now. But it's awfully, awfully hard. And and you know, we we were all on the firing line as journalists when things were happening so fast, and now things happen even faster because back then there really was very little Internet. There was very little email traffic that went on. There was no Twitter or anything. So um, you know, when you're at ground zero of an event happening, it's very hard to have a wide perspective. Benchmark will

be back next week. Until then, you can find us on the Bloomberg terminal, Bloomberg dot com, our Bloomberg app, as well as Apple Podcasts, pocket Cast and stitch. Why are there Take a minute to rate and review the show? Some more listeners can find us and let us know what you thought at the show. You can follow me on Twitter at Moss Underscore, Echo, Alec a d b mcse and Mal Malcolm Scott eight Lee. Oh I'm a old world Adam, I don't use Twitter. Talk about the

absence of a new paradigm. Benchmark is produced by Sarah Addison. The head of Bloomberg Podcasts is the same Alec McCabe. Thanks for listening. Next time, h