Summer 2019 POL 241- Chap 8- Stephen Haggard, “The Politics of the Asian Financial Crisis”


Elayne Guzman

Chap 8- Stephen Haggard, “The Politics of the Asian Financial Crisis”
Quote:
  “When countries exhibit signs of financial vulnerability, the reaction of markets is based in part on expectations of how governments will respond. When crises actually break, an even wider array of actors sit in direct judgment on a country’s adjustment efforts, including international financial institutions, ratings agencies, financial analysts, banks and institutions. Their assessments also are influence by political expectations.”

Meaning/Chosen:
   The moral hazard problem in Asia magnified the financial vulnerability of the region during the process of financial markets centralization in the 1990’s, exposing its fragility via the macro economic and financial shocks that occurred in the period 1995-1997. Investments rates and capital inflows in Asia remained high eve after the negative signals sent by the indications of profitability. In part this occurred because the interest rates fall in industrial countries (especially in Japan) lowered the cost of capital for firms and motivated large financial flows into the Asian countries. However, the crucial factor underlying the sustained investments rates was the financial side of the moral hazard problem in Asia, leading national banks to borrow excessively from abroad and lend excessively at home.
   The core implications of moral hazard are that an adverse shock to profitability does not induce financial intermediaries to be more cautious in lending and to follow financial strategies reducing overall riskiness of their portfolios.

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