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Update June 2015

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Paul Gambles
Co-founder of MBMG Group


Update June 27, 2015

Asian experience can bring clarity to the waters of the Aegean: Part 2

In Part 1, I compared Greece’s current predicament with the Asian Financial Crisis of 1997. In the second part of the article, I look at how the IMF helped Asia out of crisis, what lessons it learned and whether these are or could be applied to Greece.

Solutions for Asia…

With the export figures in mind, and the fact that nothing can be done on a local level to counter the issue, it is worth noting that there is nothing to prevent Greece from pulling out of the Euro. Neither the founding EU Treaties nor the latest (Lisbon) Treaty make any provision for withdrawal from European monetary union.1 Even the people at the ECB cannot find a legal obstacle.2 Of course, while this may make some economic sense, it will eventually come down to political will - as did joining the Euro in the first place.3

In its 2000 report on the Asian Crisis,4 the IMF took a critical look at the effectiveness of its programmes to the countries affected. It categorised its assistance into four main parts:

* Tight monetary policies
* Fiscal objectives
* Structural reforms
* Clear government guarantees of bank deposits.

The IMF report concluded that, when firmly applied, tight monetary policies reversed pressures on the exchange rate and prevented inflationary spirals. In Korea and Thailand, the result was negative real interest rates; however, it also resulted in currency depreciation and rising inflation. So much so that, after a brief period, interest rates were raised to high levels bringing about stable markets and currency levels.5

The IMF now believe that the programme’s initial fiscal objectives were too tight: the affected countries’ economies were contracting and private demand collapsed, creating “massive current account surpluses.”6 This makes sense, as if a government tries to recoup more money, it is the private sector which will naturally have to pay. This then has the effect of reducing demand, as noted by my colleague at IDEA economics, Prof. Steve Keen in IDEA’s Outlook 2015 paper.7 Having noticed this, and recognizing that Thailand, Indonesia and Korea all had strong fiscal positions and low public debt before the crisis, the IMF eased its fiscal requirements to prop up demand.8 In Thailand’s case, this certainly seems to have worked. (See graph 1)

Graph 1 Source: National Statistics Office, Thailand

The IMF’s demands for financial sector reform varied according to the country. However, there were three common threads across Thailand, Indonesia and Korea: closing insolvent financial institutions; recapitalization of potentially viable ones; close supervision of weak financial institutions by the central bank; and a strengthening financial supervision and regulation up to international standards.

Although these measures were implemented, the IMF’s report suggests that the organization’s initial requirements didn’t focus sharply enough on the financial sector and corporate issues; and that pace and sequencing would need to be perfected in future cases.9 Especially, cynics might argue, if those future cases occur in developed economies whose citizens may be less willing to suffer the economic hardship inflicted on the citizens of South East Asia.

In reforming the financial sector, it became evident to the IMF that governments must give clear guarantees of bank deposits. During the 1997 Asian financial crisis, 16 Indonesian banks were closed down to prevent haemorrhaging of public money to support them. However, no guarantee of bank liabilities was announced until January 1998, creating public anxiety.10

… why not remedies for Greece?

If the IMF recognized that tight monetary policies were seen to be adversely affecting demand in Asian economies, why on earth is Greece being put through austerity measures now? It is clear that these measures have not helped the Greek economy emerge from its post-crisis troubles. In fact by 2013, Greeks were almost 20% poorer than the average EU citizen than back when the Euro began in 2002.11 (See graph 2)

Graph 2 Source: Eurostat

Similarly, a bank run was narrowly averted in Greece in February 2015: the Greek government was locked in talks with the IMF and other creditors and the lack of progress made bank depositors nervous. During negotiations, Greek companies and households removed EUR 7.6 bn from their bank accounts, reducing Greek bank deposits to their lowest levels in 10 years.12 The risk is apparent again: although Greek finance minister Yanis Varoufakis is hopeful a deal will be reached by 5th June - the next repayment deadline - he has admitted that Greece does not have the funds to make the payment.13

Yanis, along with some of the other leading characters in this latest Greek drama, is well-known to and highly regarded by the IDEA Economics team. However, some of us, or at least I certainly do, disagree with his deep and undoubtedly sincere commitment to keeping Greece in the Euro. Yanis would be very unlikely to initiate a unilateral exit from the single currency; however, it may not be his choice to make for much longer.

On 1st April of this year, the Greek government submitted a 26-page proposal14 to its lenders (the Brussels Group - IMF, European Commission and ECB), which included structural reforms to the financial services sector. These proposals included outlining a strategy to ensure stability of the Greek banking system; giving the Bank of Greece more power in consumer protection; and tackling the non-performing loans problem. However, this document was rejected by the two organizations because it “lacked detail and substance”, according to one EU official.15 On reading the document, I have to conclude the Brussels Group was right in this instance.

That said, surely this is an opportunity for the IMF to take the lead, as it did in Asia, and set out structural reforms which it saw work in 1997. Thailand is now ranked a creditable 27th globally in the Regulation of Securities Exchanges and a decent 37th in Soundness of Banks according to the World Economic Forum’s 2014-2015 Global Competitiveness Report.16

Instead of working with Greece to tackle its issues, it seems from the outside that the IMF is at the table - along with its Brussels Group colleagues - merely waiting to reject another new proposal from Greece17 and demand full payment whatever the consequences. Meanwhile normal people in Greece suffer (e.g. unemployment levels). (See graph 3)

Graph 3 Sources: St. Louis Federal Reserve & OECD

When it comes to historical analogies, perhaps it is more useful to look not to 1940 but to 1919, when in the Paris Peace Talks an entire nation was stripped of what liquid wealth it had and was demanded to make “impossible payments for the future.”18 That nation, by the way, was Germany.

“I cannot leave this subject as though its just treatment wholly depended either on our own pledges or economic facts. The policy of reducing Germany to servitude for a generation, of degrading the lives of millions of human beings, and of depriving a whole nation of happiness should be abhorrent and detestable, - abhorrent and detestable, even if it were possible, even if it enriched ourselves, even if it did not sow the decay of the whole civilized life of Europe. Some preach it in the name of Justice. In the great events of man’s history, in the unwinding of the complex fates of nations Justice is not so simple. And if it were, nations are not authorized, by religion or by natural morals, to visit on the children of their enemies the misdoings of parents of rulers.”
- John Maynard Keynes, the Economic Consequences of the Peace, 1920

4 Recovery from the Asian Crisis and the Role of the IMF, IMF 2000,
5 idem
6 idem
8 Recovery from the Asian Crisis and the Role of the IMF, IMF 2000,
9 idem
10 idem
11 Eurostat
16 252Fpersonal%252Fsimon%255Fh%255Fmbmg %252Dgroup% 255Fcom%252FDocuments%252FMBMG% 2520IA%2520Updates
18 John Maynard Keynes, The Economic Consequences of the Peace, Chapter IV, Part III, 1920.

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.

MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup

Update June 20, 2015

Asian experience can bring clarity to the waters of the Aegean: Part 1

With the breakdown of money economy the practice of international barter is becoming prevalent.
- John Maynard Keynes, the Economic Consequences of the Peace, 1920
Every October in Greece, blue-and-white national flags go up on almost every public building and residence, as well as on the front of buses.
This is to commemorate ‘Oci (No) day, the day in 1940 when the Greek population collectively raised its eyebrows, gave a large tut and said ‘No’ to the Axis powers’ demands to enter Greek territory.
Parallels can be drawn with the Greek debt crisis today. Historical images of plucky little Greece standing up to powerful adversaries may come to mind - especially with German tabloid newspaper Bild lampooning the Greek Prime Minister1 and Finance Minister2 and its Greek counterpart Dimokratía making references to Nazism.3
Added to this, the Greek Prime Minister recently claimed €160 bn in compensation for a forced loan to German occupiers and destruction of Greece’s assets during World War II.4
Whilst it may be of little help right now to look into Europe’s murky past, one more recent reference could provide some light at the end of the tunnel - and it comes from right here in Asia.
Asian Financial Crisis
In July 1997, the inability of the Thai authorities to continue to defend the Thai Baht precipitated the Asian Financial Crisis. This led to both a period of initially painful adjustment and then sustained economic growth and prosperity and also to a rethink of financial regulatory systems across Southeast Asia. Arguably, the region was also more protected from the aftershocks of the 2008 Global Financial Crisis (GFC) because of actions taken a decade before. Interestingly, there are some similarities between Asia in 1997 and Greece today.
Boom as a pretext
In the run-up to 1997, Thailand had been enjoying an economic boom: the average year-on-year GDP growth rate between 1987 and 1996 was 9.5%.5 In fact there had been similar economic trends across the region in the 1980s and 1990s.6 (See graphs 1 & 2)

Graph 1 Source: IMF

Graph 2 Source: IMF

In the ten years leading up to the GFC, Greece had seen an average year-on-year rise in GDP of 4%.7 Its growth rate was higher than all other Eurozone countries, except Ireland and Luxembourg. This didn’t last, however: by 2008 it had dropped to just 0.2% year-on-year.8 (See graph 3)

Graph 3 Source: IMF

In turn, Greece’s sustained economic boom and a lack of competition in domestic goods and services markets kept wage and price inflation consistently above Eurozone averages.9
Heavy borrowing
With the expansion of Southeast Asian economies came a huge increase in credit extensions - at a rate far higher than their GDP. A lending boom resulted, which expanded so rapidly that it ended up with excessive risk-taking, eventually to leading to heavy losses on loans.10
Greek public debt has been through the roof for some time, especially between 2000 and 2011 - it jumped by 50.5% in 1 year between 1999 and 2000, and has averaged at 8% more per year since 2000.11 The reason for such an increase before the GFC is that global credit conditions in the 2000s allowed Greece easy access to foreign borrowing12, although post GFC the increase in debt to GDP also reflects the contraction of GDP.
Whilst ECB and IMF reports use government debt as one of their main indicators, the level of household debt is more significant - especially as the crisis affects people as well as government, but also because private debt is a far greater driver of economic activity than government spending.
Liberalization of financial services in Greece triggered strong growth in private credit. This served to boost household consumption13 but it also put people in debt to jaw-dropping levels.
According to ECB figures,14 the ratio of household loans to disposable income jumped from 17.32% in 2000, to 90.95% in 2012. (See graph 4)

Graph 4

Fixed Currencies
For more than 40 years, the Thai Baht was pegged to the US Dollar. The fixed exchange rate had been changed three times, the last of which came in 1984 when the rate went from THB 20.8 = USD 1, to THB 25.15
External factors such as devaluations in China and Japan, a decline in semiconductor prices left the region’s economy vulnerable. The region’s financial structures were weak, leaving them at risk if there were a sudden withdrawal of capital.
That happened in 1997, as a net capital inflow of 6% of GDP in 1995 turned into a 2% outflow in 1997.16 Such a quick turnaround, coupled with a strong US economy, triggered a run on the Thai Baht and then on the Korean Won.17 Market confidence plummeted, the Baht was floated on 2nd July 1997 and its value had depreciated by 50% at the end of the year.18 The Won had been a managed floating currency and after 1990 its exchange rate with the USD fluctuated within certain parameters.
Having floated the Baht, the Bank of Thailand brought the currency to its ‘natural’ level and made exports more competitive, thus bringing in foreign currency. In January 1998, the Baht reached 55 to the US Dollar.19
As we stand, Greece does not have the luxury of floating. It no longer has its own currency and its monetary policy is mainly controlled by the ECB in Frankfurt. The only roles Greece’s central bank, the Bank of Greece, has today are printing Euros within Eurozone rules, selling gold sovereigns and trying to maintain price stability.
In the last ten years when the Bank of Greece was in charge of the whole system, the consumer price index (CPI) had fallen year-on-year from a catastrophic 18.02% in 1991 to 3.05%20 when it gave up most of its powers to the ECB in 2001. So, in spite of its previous difficulties in the 1980s and 1990s, it must have been doing something right.
What is noticeable is the difference in exports once Greece had joined the Euro. Year-on-year percentage changes had been volatile for a long time beforehand but, apart from a brief recovery in 2004, volumes went south. Even though there have been slight upturns since 2010, they are a world away from pre-Euro levels. (See graph 5)

Graph 5 Source: IMF World Economic Outlook April 2015

4 Financial Times: html?siteedition=intl#axzz3 UhUdMRTp
5 IMF World Economic Outlook, April 2015
6 Recovery from the Asian Crisis and the Role of the IMF, IMF 2000,
7 Eurostat
8 Idem
9 IMF Country Report No. 13/156
10 Frederic S. Mishkin, Lessons from the Asian Crisis, NBER Working Paper No. 7102, April 1999, JEL No. F3, E5, G2
11 IMF World Economic Outlook Database, April, 2015
12 IMF Country Report No. 13/156
13 idem
14 158.IEAQ.A.GR.N.V.LE.RF4D. S1M.A1.S.2.N.F.Z
16 Recovery from the Asian Crisis and the Role of the IMF, IMF 2000,
18 idem

Update June 13, 2015

Investment Markets: Is there anything to learn from 1929? Part 4

Benchmark for recovery?
Once the Great Depression took hold in the 1930s, FD Roosevelt famously promised a “New Deal for the American people.”1 Attempts to regulate the financial system and increase economic activity were hampered by unemployment, which was still close to 15% in 1940.2 As for industrial production: it took America’s entry into World War II for US figures to improve with any significance.
Thus we currently have no practical benchmark for emerging from any downturn as prolonged as the Great Depression, without resorting to destruction of the planet (see graph).

Source: St Louis Federal Reserve.

The debate rolls on
86 years on, there is still widespread disagreement among academics as to what caused the 1929 Wall Street Crash and the Great Depression of the 1930s. One Princeton professor wrote a book in 2004 analyzing the causes of the Great Depression, in which he suggested, amongst other things, that flooding the system with money would help avoid a depression.3 That professor was one Ben Bernanke - Fed chairman during the GFC. Along with Larry Summers, Ken Rogoff, Paul Krugman and the IMF’s Olivier Blanchard - his former colleagues in Stanley Fischer’s MIT class - he shows tendencies towards Milton Friedman’s thinking that the economy is linear and the objective is a return to normal.
Others question the actual existence of normal. Economists such as Nikolai Kondratieff, Charles E. Mitchell and Joseph Schumpeter claimed that the Wall Street Crash was part of an economic wave and its impact was merely to speed up the arrival of a depression that was coming anyway.4 Some economists, including Steve Keen (my colleague at economics think-tank IDEA Economics), believe that this is analogous to the situation we’re in today. Steve, unlike Bernanke and friends, was one of only 13 economists who predicted the GFC.5 He has spent many years developing an economic model that is actually able to replicate upturns and downturns, rather than merely being able to be manipulated to produce never-ending expansion.
It’s quite possible then that the cycle theory is the correct one and that the market manipulation being attempted today will merely create stability. Hyman Minsky argued that stability was the exception rather than the norm, leading us to revise our expectations upwards, thus causing speculative bubbles.6 Persisting in following this path upward path could well mean that collectively, we have learnt nothing whatsoever about 1929 and its consequences.

1 The Roosevelt Week, Time, 11 July 1932
2 Gene Smiley, “Recent Unemployment Rate Estimates for the 1920s and 1930s”, Journal of Economic History (1983) 43#2 pp. 487–93
3 Ben Bernanke, Essays on the Great Depression¸ Princeton University Press, 2004
6 Hyman P. Minsky (1982). Can “it” happen again? : Essays on instability and finance. Armonk, N.Y., M.E. Sharpe. p. 24, extracted from

Update June 6, 2015

Investment Markets: Is there anything to learn from 1929? Part 3

In Parts 1 & 2, I looked at how the Roaring Twenties led to the Wall Street Crash and the Great Depression. In Parts 3 & 4, we discover how the past can cast shadows on our future.
Taking the post-1929 situation as a benchmark, let’s have a look at two possible future scenarios. First of all, imagine the pre-crash peak is 18,289 - the highest price reached in March of this year - this is how the next fourteen years could look if history did indeed repeat itself (see graph 1):

Graph 1 - Source: Author.

However, in a perfect mirror of history, today might equate more closely to 1928 than to 1929 and therefore the DJIA could be expected to rise as high as 23,500 points in a re-run of the precursor to ‘The Crash’. In which case a similar pattern over a prolonged period might look something like this (see graph 2):

Graph 2 - Source: author

An accident waiting to happen
If the timing of the Wall Street Crash was blamed on the Hatry fraud (mentioned in Part 2 last week) or any other trigger, the fact that the market was so fragile came from the speculative boom of the late 1920s. Key indicators, such as property, show significant price rises and the amount of money borrowed was an astounding 1.8 times greater than the real money in circulation (see graphs 3 & 4).

Graph 3 - Source: Harvard Business School.

Graph 4 - Sources: Federal Reserve, San José State University, Financial Times.

One product where the prices did go down in the 1920s was wheat (see graph 6). However, this was due to oversupply, meaning that farmers were becoming considerably poorer. Similarly, oil prices have taken a nosedive over the past year: on 20th June 2014, WTI prices hit USD 107.95 a barrel; eleven months later they were at USD 56.25 and have hovered between USD 55 and USD 60 ever since, going into mid-May 2015 (see graph 5). This dramatic drop and subsequent low level has far-reaching repercussions; not least for the shale gas market.1

Graph 5 - Source: USDA.

Two dramatic days on Wall Street in October 1929 saw the Dow Jones Industrial Average drop by 12.82% on Black Monday and a further 11.73% on Black Tuesday. Whilst the Wall Street Crash may be seen as lighting the blue touch paper to the Great Depression, we mustn’t forget that, back in the late 1920s, only around 16% of American households owned stocks and shares.2 Nowadays, that figure is around 48%,3 meaning that a future crash could have far wider consequences than that of 1929.

Graph 6 - Source: St Louis Federal Reserve.

After the 1929 crash, measures were taken by governments and stock market authorities4 to protect markets against such collapses thereafter - including halting trading during particularly turbulent times and regulating the activities of banks (separating commercial and investment banking).5

Over time the regulatory landscape based on the Glass-Steagall Act of 1933 eroded, as financial products evolved to circumvent the Act which wasn’t updated or revised accordingly6 meaning that by 1999, when Glass-Steagall was finally repealed, it had become largely marginalized and toothless; plus, the Bank Holding Company Act was amended. This change came after Citigroup and Travelers merged7 and it allowed affiliations between financial services companies; such as banks, securities firms and insurance companies. The new regulations therefore removed the very barriers that Glass-Steagall had erected.8

In the aftermath of the 2008 Global Financial Crisis, the US government implemented the Dodd-Frank Act, giving itself more powers against banks in areas such as mortgage-lending and derivatives trading.9 Part of this Act was the Volcker Rule, which banned proprietary trading and was designed to curb risky trading activities by banks.10

Consequently there has been a move towards restricting certain aspects of financial activity. However, that doesn’t mean that bubbles will no longer occur. The crash of October 1987, for example, saw a 34% drop in the DJIA in just 2 weeks,11 yet Glass-Steagall was still 12 years away from being fully repealed.

Not only that: in its QE and its near-zero-interest-rate programmes,12 one of the Fed’s stated objectives is to encourage the public to borrow more money.13 That seems a strange move, given that household debt was at its peak of 135% of disposable income14 when the GFC began in 2007. It also raises the question as to whether this is purely a coincidence.
To be continued…

2 Russell Napier, Anatomy of the Bear: Lessons from
Wall Street’s four great bottoms, CLSA Books, 2005
4 For example: by the NYSE in line with the US Securities and Exchange Act 1934
5 Banking Act 1933, often referred to as the Glass-Steagall Act
6 Barry Ritholtz, A Brief History Lesson:
How we ended Glass-Steagall
7 idem
11 See for the story of the 1987 Crash

Please Note: While every effort has been made to ensure that the information contained herein is correct, MBMG Group cannot be held responsible for any errors that may occur. The views of the contributors may not necessarily reflect the house view of MBMG Group. Views and opinions expressed herein may change with market conditions and should not be used in isolation.
MBMG Group is an advisory firm that assists expatriates and locals within the South East Asia Region with services ranging from Investment Advisory, Personal Advisory, Tax Advisory, Corporate Advisory, Insurance Services, Accounting & Auditing Services, Legal Services, Estate Planning and Property Solutions. For more information: Tel: +66 2665 2536; e-mail: [email protected]; Linkedin: MBMG Group; Twitter: @MBMGIntl; Facebook: /MBMGGroup


HEADLINES [click on headline to view story]

Asian experience can bring clarity to the waters of the Aegean: Part 2

Asian experience can bring clarity to the waters of the Aegean: Part 1

Investment Markets: Is there anything to learn from 1929? Part 4

Investment Markets: Is there anything to learn from 1929? Part 3



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