Posts Tagged ‘Speculation’

In the last decade some have increasingly taken a different view in the wake of one currency “crisis” after another. The ?rst real currency crisis of the decade came not in the emerging markets but in the developed world. The ERM crisis of 1992 was a wake-up call to countries in a number of ways. On the face of it, it was manifested in the form of Scandinavian currencies breaking their pegs to the Deutschmark and ERM countries such as the UK and Italy being forced out of the system. Inevitably in the chaos of that time, many wrong lessons were learned. It appeared that the liberalization of the currency markets had allowed currency speculators to become such a huge force that they were now capable of dismantling exchange rate systems and causing the downfall of governments — or at least Prime Ministers. The UK Chancellor of the Exchequer Norman Lamont may have been said to have sung in his bath after sterling was expelled from the ERM, but Prime Minister John Major was not singing the same tune a few years later when his government was routed more completely than any government this century at the 1997 general elections. Headlines reporting that George Soros’ famous Quantum “hedge fund” made around USD1 billion by speculating against sterling only served to reinforce the misconception that currency speculators alone forced sterling out of the ERM, that they were indeed large enough to accomplish such a feat.
A year later and currency speculators were again on the attack, this time against the ERM system itself. Under enormous pressure, after having resisted through intervention for months, in August 1993 the governments of the ERM countries gave in and widened the ERM currency trading bands to ±15% from ±2.25%, thus de facto allowing a depreciation of their currencies against the ERM anchor, the Deutschmark. The idea of recrimination after a currency crisis is thought of these days as a feature of the emerging markets, indeed currency crises themselves are thought of as an emerging market phenomenon. Thus, it is important to remember the sense of outrage, fury and a desire almost for vengeance that permeated of?cial Europe in the wake of that exchange rate band widening. The enemy of the European project, of the European dream of integration and eventual uni?cation was clear, and it was “Anglo-Saxon” speculators. After the ERM crises of 1992–1993 however, it was indeed the turn of the emerging markets to see one currency crisis after another. Here the sense of betrayal at the hands of the “market” was particularly acute because many emerging market countries had adopted free market practices precisely to progress economically and eventually bridge the perceived gap between the emerging and developed worlds. Thus, the 1994–1995 currency crisis in Mexico was a very rude awakening indeed, not just for Mexico and its neighbours but also for the emerging market countries as a whole. After that, came the Czech koruna currency crisis in 1996–1997. Like the Mexican peso, it was pegged to a base currency. In the Czech case this was the Deutschemark, and like the Mexican peso it eventually was forced to de-peg from that base currency and promptly collapsed.
In 1997–1998, the Asian currency crisis exploded on the international scene. I remember it in the context that I was living and working in Hong Kong when it took place. It is an important realization in discussing the subject of currency speculation that countries facing a currency crisis experience a stage of siege followed by something very akin to bitter defeat. Blame is sought, or more accurately in some cases scapegoats are found. It is easy to forget in the 24/7 information society that we now live in just how that time was. It was a time of high drama and higher emotion. In September of 1997, the IMF held its annual meetings in Hong Kong (for the most part in the huge, new exhibition and conference centre made famous by the signing of the Handover of Hong Kong from the UK to China in that same year). The Thai baht had devalued on July 2 of that year and thereafter most Asian currency counterparts followed suit, albeit unwillingly. Answers to this crisis were sought and not surprisingly many were found, of varying accuracy. At those meetings, in front of a packed audience, the Malaysian Prime Minister Dr. Mahathir Mohammed, in all else a most erudite and educated man, thundered that currency trading was “unnecessary, unproductive and immoral”, that it should be “banned . . . it should be made illegal”, that the pro?ts of currency speculation “came from the impoverishing of others”. It should be reiterated that it was a time of high emotion, a keen sense of betrayal and great pain. Asian economies up until then had been viewed as the model for emerging markets generally within the of?cial community. The World Bank itself coined the phrase the “Asian miracle” — as close as the of?cial community has ever come to verbal irrational exuberance — to de?ne the Asian boom from 1985 to 1996. Asia was a success story for other regions within the emerging markets to only hope of emulating. Indeed, the Asian-related optimism, both within and without, went so far as to have the western media suggest that the economic centre of power was shifting from the West to the East. Given all the fundamental progress made and the resulting praise globally, how else to explain Asia’s collapse in 1997–1998 other than by malign, almost “terrorist” means? Indeed, the terrorist analogy was used speci?cally at the height of the crisis to describe the suspected hand of unnamed evil forces at work. While the remarks by Dr. Mahathir were undoubtedly the most prominent in re?ecting the backlash within Asian countries against the perceived evil of currency speculation, they were by no means the only example of this backlash. In Thailand, there was talk that the Bank of Thailandwas keeping a “black book” of suspected foreign banks which had speculated against the Thai baht, though the Bank of Thailand denied the existence of such a list. In Indonesia, the Indonesian Justice Minister was reported as considering that currency speculators could face subversion charges if their activities were found to damage the economy, and that the ultimate penalty for economic or political subversion was death. At around the same time, the Indonesian Republika newspaper published a public service announcement featuring a westerner (presumably a currency speculator) wearing a terrorist mask and kef?yah in the form of US 100 dollar bills, with an underlying question “Are you a terrorist of this country?” Indonesians were exhorted to “Defend the Rupiah, defend the nation”. Even in the Philippines, where the authorities had traditionally taken a benign view of market forces, there was some suggestion of blaming foreign speculators.