To understand the Asian Economic Crisis you need to understand 3
technical concepts in Finance.
1. Currency peg - a system where the government fix currency
exchange at a rate say 1USD = 35Baht. This is to say their currency
would not fluctuate unlike Singapore where you have to check the
exchange rates daily.
2. Current account deficit - The country is importing more goods
than exporting
3.Short selling - e.g. Borrowing Thai currency for 30 days from
another friend (pay him 30 day interest), then sell on the currency
market today, buy Thai currency back (with USD) and return to
friend 30 days later.The Seller is betting the Thai currency would
drop in 30 days, hence making a profit from the decline.
In the case of Thailand, Indonesia and South Korea, they have
chalked up huge current account deficits (Importing more than
Exporting). The extra imports was financed primarily by borrowing -
they have lots of debts especially in USD.
What the currency speculators did was they knew the Asian countries
had so much US Debt, that if one day all the creditors decide to
ask for money, their foreign reserves would collapse maintaining
the artificially high currency peg.
They began their attack on the currency by short selling Thai
currency. Many other vultures joined in the attack because they saw
the Thai currency with so much US debt has little chance of
appreciating but a high likelihood to depreciate.( Nothing to lose,
much to gain)
When the Central Bank of Thailand's foreign reserves were depleted,
it became pandemonium. For Foreign investors holding Thai Currency,
they saw they Thai currency depreciating in seconds. Being fearful,
the converted their Thai investments in US currency which caused a
further decline in the currency. A further decline spark a greater
panic causing more investors to withdraw their investments and
convert to US currency spuring another cycle of further
decline.
The Rupiah for example fell from 1USD to 2000 Rupiah to 1USD to
18,000 rupiah.
The value of the currency has depreciated 11% of its original value
at one point.
If i did remember correctly, George Soros didnt really make much
from that crisis. Even if he didnt short sell the currencies, they
are plenty other hedge funds that would attack an unstable economic
system.
[/b]
