Repeating History

I’m no global finance expert.  I couldn’t hope to adequately explain what’s happening in Greece right now in this short blog entry.  But I do want to share some thoughts about this crisis, and suggest there are a few parallels to what happened in 1997 in East Asia.

In an earlier post I wrote about the MIM history class and how it has taught us analyze the past to help explain modern behavior.  But if you believe that history is doomed to repeat itself, there is another lesson to be learned.

I’m sure you are aware of the Greek debt crisis.  It certainly has captured the world’s attention, especially as the global economy begins to crawl out of recession.  For anyone interested in Asia, the current situation should call up memories of the East Asian crisis in 1997.  If you aren’t old enough to remember, or never studied it in school, I recommend starting with this Wikipedia article.  But briefly here’s what happened.

  • East Asian economies are growing at an average of 9% annually encouraging rabid investment
  • Western investors get skittish about a possible bubble
  • The Thai baht starts loosing value after massive sell-offs
  • The Thai government (followed by several other local governments) un-peg their currencies
  • The values of all these currencies crash against the dollar  (contagion!)
  • This makes loans in Asia that had been taken out in dollars much more expensive
  • Creditors fear default
  • The IMF steps in and offers bailouts to the affected countries in return for austerity agreements

Of course, this is an overly simplified version of the story.  What strikes me is how similar the problems in Greece are.  While the crisis in Asia was precipitated by fear of an asset bubble, and Greece’s problems are more related to over borrowing, the lesson is more in how interconnected the global economies are.  The fall in the baht sent shockwaves through the region leading to fall out in Indonesia, Malaysia, Japan, Korea, and even the US.  Greece seems poised to start a chain reaction that goes through Spain, Portugal, Italy and Ireland. What remains unclear is how the euro will affect the outcome.  The Asian crisis involved several different currencies.  That insulation probably helped to stem the tide somewhat.  Traditionally, a country experiencing economic emergency has a few currency tools it can use to react.  But in the case of Greece, it shares the euro with so many of it’s creditors and trading partners, the same tools aren’t available.  It will be fascinating to watch what unfolds in the coming months.

Stay tuned

-Austin

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