The Washington Post
Navigation Bar
Navigation Bar

Enter symbols
separated by a space:


Look Up Symbols
Portfolio

Made Possible by:
E*Trade

  Currencies In Crisis
In Decade, a World of Currency Woes

By John M. Berry
Washington Post Staff Writer
Sunday, February 7, 1999; Page H15

 
Currency Report
Currencies in crisis
Euro The Beanie Baby guide to currency
A world of currency woes
Traveling abroad: Using foreign money
The value of a strong dollar
Exchange Rates
Major Currencies
Africa | Asia | Europe
Middle East | North America
South America | South Pacific
Euro Report
Europe and the Euro
Euro-Conversion Timetable
Quiz: Test your Euro smarts
The Euro and travel.
News, Data & Reports
International Markets
Brazil Economy
Asian Economy
U.S. Markets
Recent Post news on foreign markets and currency
In the 1990s, one nation after another has been hit by violent changes in the value of its currency in foreign exchange markets.

Major industrial nations, including the United States and Japan, have seen their currencies both soar and plummet. In Europe, a precursor agreement to this year's monetary union almost collapsed at one point. That episode drove Britain out of that agreement, known as the exchange rate mechanism, the key reason the pound sterling remains an independent currency rather than being replaced by the euro.

But it is in a series of developing countries and a few formerly centrally planned economies that the greatest currency upheavals have occurred. In every instance, a government had pegged its currency to the value of another -- in all but one instance the U.S. dollar -- but then failed to pursue economic policies that allowed it to maintain the peg. Problems in one country often helped precipitate difficulties in another -- called "contagion" -- as international investor confidence was undermined.

Often, either the government, banks with implicit government guarantees or private firms borrowed large amounts of dollars from foreign lenders at relatively low interest rates but then didn't have enough dollars to repay. The dollar shortage usually was precipitated by the lenders' refusal to renew outstanding loans because they feared the borrowers would not be able to repay them. As the commercial banks ran out of dollars, they turned to their respective central banks for help, but the central banks, too, watched their reserves of dollars dwindle.

At some point, each country was forced to abandon its currency peg because it could not continue to sell dollars to support the desired value of its own currency. As their currency plunged, the institutions and firms with dollar-denominated debts scrambled to buy dollars that suddenly were much more expensive, and that drove their currency down even more. The currency fall was accompanied by collapsing stock prices, massive layoffs of workers and a severe overall economic decline.

In most instances, the governments reluctantly turned to the International Monetary Fund, the United States, Japan and other countries for financial help. In exchange, the governments promised major economic reforms.

The latest casualty, Brazil, is now coping with a huge decline in the value of its currency, the real. The economic slumps in several of the other developing countries may be nearing their bottom, though. Stock prices are off the floor but still far below their earlier peaks.

MEXICO

The Currency

Dollars per peso

Down 69.2%

The Cause

December 1994: Rapid economic growth and surge of imports contribute to large current account deficit. Government borrows short term to cover budget deficit, with investors guaranteed against exchange rate losses. Privatization of state-owned banks, very rapid expansion of credit with banks unable to assess ability to repay. Outflow of dollars saps reserves, forcing devaluation. Foreign investors pull more money out, deepening currency plunge.

The Results

Stock market declines 40 percent, value of peso cut in half. Interest rates soar, with most borrowers paying floating rates, many consumers and businesses can't stay current and default. Banking system in chaos. Manufacturers initially can't get foreign currency to buy needed imported materials. Economy quickly falls into severe recession, inflation soars. Contagion -- so-called tequila effect -- hits other developing countries.

The Response

Government launches austerity program and boosts overnight interest rates to 50 percent to try to reattract foreign investors. Promises sweeping reforms, particularly of banking system, and monetary policy in exchange for massive $52 billion rescue package with about $20 billion each from the United States and the IMF. Infusion of capital reassures investors, currency begins to stablize.

The Future

After economy contracted more than 6 percent in 1995, the U.S. and IMF aid and government policy reforms helped trigger a strong recovery. Inflation is down from a high of 35 percent in 1995 but still higher than before the crisis. Peso still gradually losing value. But growth prospects remain healthy and unemployment is coming down. Government has repaid all the emergency loans from United States.

CEZCH REPUBLIC

The Currency

Dollars per koruna

Down 18.5%

The Cause

Spring 1997: Koruna pegged to a basket of European currencies to provide guide for central bank monetary policy but real value rises, hurting exports. Rapid economic growth in 1995 and 1996 triggers flood of imports and rising current account deficit. Value of koruna begins slide and central bank raises interest rates sharply to defend currency, infuriating government leadership.

The Results

High interest rates cause fast growth to slow and unemployment rises. Severe flooding adds to woes. Consumption falls, imports drop and current account deficit declines, easing need for foreign capital. But corporate profits drop and inflation remains high. Economic crisis and political scandals force a change in government.

The Response

Central bank raised interest rates sharply and government forced to reduce spending. Competitiveness of Czech exports was improved by 1997 devaluation, and current account balance was reduced. Capital inflows resumed and exchange rates rose again early last year, requiring more interest rate increases aimed at reducing inflation.

The Future

Like some other Eastern European economies that were centrally planned until a few years ago, it still faces problems in moving more fully to a market oriented economy. Wage setting is still a problem since managers are still feeling their way in a competitive world. Capital flows are also a problem since they can cause the koruna to rise and lead to an increasing current account deficit again.

THAILAND

The Currency

Dollars per baht

Down 27.0%

The Cause

July 1997: Strong economic growth, increased current account deficit and inflated stock market and property values. Increased foreign borrowing causes large capital inflows. Currency pegged to dollar, which went up against the Japanese yen, making exports less competitive, further increasing external deficit. Reserves of dollars flow out, government forced to drop currency peg, setting off downward spiral.

The Results

Baht collapses, economy stops in tracks. Banks and private firms with dollar-demoninated debts can't repay. Credit cut off even to solvent firms. Work on factories and buildings under construction halted. Workers laid off. Growth of 5.5 percent in 1996 turns negative in 1997 and decline accelerates last year. Standard of living falls. Stock prices fall to one-quarter of previous peak.

The Response

After initially resisting, the government agreed to widespread reforms in fiscal and monetary policy and banking system in exchange for $17 billion rescue package from IMF, World Bank and Japan. Interest rates raised sharply to halt currency plunge, which contributed to bankruptcies and banking losses. It takes a year, but model banking reform plan launched last summer.

The Future

Stock prices and the baht have recovered some of lost value. Floating currency allows exports to regain competitiveness, but widespread recessions in the region, including in Japan, and low and falling commodity prices have hurt prospects for recovery by hurting exports. Nevertheless, the drop in consumption and investment have been so large that imports are down so much that the current account is in surplus.

INDONESIA

The Currency

Dollars per rupiah

Down 72.5%

The Cause

Fall 1997: Caught in contagion following Thai crisis since it had many of same problems exacerbated by unpopularity of Suharto government, which resisted reform proposals. Currency peg falters during fall. By January, rupiah is down more than 80 percent. Government-directed lending contributed to bank losses. Strong growth had led to borrowing of dollars. Reserves lost in vain effort to support currency.

The Results

Hurt worse than any other country by its currency crisis, with possible exception of Russia. Currency collapse so extreme that prices of basic commodities and food went beyond reach of some families. Rioting, attacks on ethnic Chinese merchants and eventual Suharto resignation. Severe recession with many banks closed with depositor losses.

The Response

Eventually government agreed to reforms to get $43 billion rescue package from the IMF, the United States and others, but then dragged heels in implementing many of them, including some affecting Suharto family. The drop in consumption turned current account deficit into surplus, providing some foreign currency. Need to add capital to banking system was a further strain on government budget.

The Future

The rupiah is worth only about 25 percent of its value before the crisis. But despite great price competitiveness of its exports, recovery is hampered by the lack of a market for many of its products in the depressed Asian region. Meanwhile, the price of oil, a major export priced in dollars, is down sharply. Banking system woes remain as does significant political instability. Recovery remains uncertain.

SOUTH KOREA

The Currency

Dollars per won

Down 16.7%

The Cause

Fall 1997: Won pegged to the dollar and both banks and private firms borrowed heavily in dollars, partly because of lower interest rates. But large current account deficit meant steadily more borrowing while economy grew rapidly. Implicit government guarantees for banks allowed indiscriminate lending, particularly to big conglomerates. But reserves were used up defending peg and lenders wanted out.

The Results

Value of won cut in half and imports slashed as recession begins. Initially, major firms prevented by law from laying off workers, which kept unemployment low but increased firms' losses. Sharp decline in consumption hurts growing middle class. Bank losses mount and credit not available for many borrowers. Stock prices fall 60 percent. But compared with other Asian nations, recession is mild as is rise in inflation.

The Response

Crisis struck shortly before presidential election. An outsider with ties to labor won, but reforms required by IMF as part of a $57 billion rescue package still faced major opposition before passage. Labor laws eased and more layoffs followed. U.S. and other banking authorities persuade major foreign banks to renew loans. Interest rates raised to support won.

The Future

Industrial production has rebounded and could soon reach its precrisis level, though economy not out of the woods entirely. Growth will be hurt by regional recession and depressed commodity prices. Current account is now strongly in surplus and foreign currency reserves are mounting so rapidly that some experts are worrying that could hurt other countries.

RUSSIA

The Currency

Dollars per ruble

Down 73.6%

The Cause

August 1998: An economy beset with almost every imaginable problem and a pegged currency. Weak, even dysfunctional government. Could not collect enough taxes to reduce budget deficit, so relied on short-term borrowing. Needed a constant flow of IMF money to maintain currency peg and pay foreign debts. But after one last infusion of cash in July, IMF said no more until reforms and government defaulted on debt.

The Results

Ruble collapses as economy increases reliance on barter rather than money for transactions. Inflation soars and production, which had been falling for years, declines further. Strains so great that power of government becomes even weaker. Banks, which held government debt, are insolvent. Unilateral debt default sours foreign lenders who have major losses.

The Response

Essentially there has been no response. Economic policy has been chaotic under a new prime minister and government. Foreign lending and investment have disappeared and government unwilling in negotiations to make concessions that could lead to debt restructuring. IMF still talking to government, but the initial problem of taxes and deficits remain.

The Future

Outlook could hardly be worse. The economy is chaotic and the government isn't able to do much about it. The standard of living continues falling.

BRAZIL

The Currency

Dollars per real

Down 33.3%

The Cause

January 1999: Large government budget deficits, foreign borrowing and pegged currency, but large foreign currency reserves. Investor loss of confidence late last year leads to dollar outflow and loss of reserves. Interest rate increases don't stem outflow. United States and IMF offer $41.5 billion assistance package but outflow continues. Without warning, government drops peg of real.

The Results

Too soon to tell. Currency plunges more than 40 percent before small recovery. Already high interest rates disrupt economy and ensure recession in Latin America's largest country. Real was pegged in first place to control chronic high inflation. Now inflation is taking off again.

The Response

President was reelected last fall promising to stablize the situation by cutting government spending. But great opposition in legislature to reducing many benefits required by country's constitution. Some reforms have been enacted but many more remain on list. Government promises IMF more action to reduce budget deficit.

The Future

Outlook is uncertain. Current account deficit remains problem, but devaluation should make exports much more competitive. As in Asia, however, slow world growth will hurt export markets. Key is probably whether government can finally get control of its budget and restore investor confidence. Economy is widely regarded as fundamentally sound.

EUROPEAN UNION

1992: Many European governments had agreed to keep the value of their currencies relative to each other within a very narrow band, with central banks supposed to buy or sell currencies to meet that goal. But there was no requirement for coordination of monetary policies. Over time divergent policies and economic conditions raised questions whether the relative currency values were the right ones.

At various times, speculators mounted attacks on weaker currencies. Despite a strong defense of the values, particularly by the Bundesbank, the German central bank, the exchange rate mechanism, as it was known, had to be significantly altered. The Italian lira was devalued and the British, rather than accept the monetary policy restraints inherent in the ERM, pulled out.

The episode helped convince policymakers that policy coordination was essential if currencies were to be linked. When they decided to proceed with creation of the euro, a single currency that is replacing those of Germany, France and nine other nations, the policy convergence came first.

The euro was launched on Jan. 1 and the exchange rates of the 11 currencies, which will continue to be used for cash and some other transactions for another three years, can no longer fluctuate. Along with one currency, the nations created a new European Central Bank to set a single monetary policy that applies in all of them.

JAPAN

Dollars per yen

Down 10.7%

1995-99: Neither the United States nor Japan has any shortage of foreign exchange reserves, particularly the former since it can create dollars at will. And neither has pegged its currency rigidly against the other since currencies began to float in the early 1970s. Nevertheless, the values of the currencies have sometimes swung sharply against each other in a crisis atmosphere.

For instance, in early 1995 the dollar plunged from about 100 yen to nearly 80 yen at a time when many Japanese investors were selling dollars for yen to cover losses in Japan. As often happens in foreign exchange markets, a small shift in fundamentals had an exaggerated effect. Nothing going on justified a 20 percent drop in the dollar's value. In fact, the dollar fell far less compared to the German mark.

Within a few months, the dollar had bounced back and began a rise that continued until last summer. One reason was that foreign investors were borrowing yen at extremely low interest rates, selling the yen for dollars and investing at higher rates in the United States. Both Japan and the United States intervened last June in currency markets to support the yen, signaling that the dollar was higher than they wanted it. When the Russian default in August and its aftermath caused the Federal Reserve to begin cutting U.S. rates, investors began repaying their Japanese loans and in the process strengthened the yen.

© Copyright 1999 The Washington Post Company

Back to the top

Navigation Bar
Navigation Bar