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Tuesday, December 19, 2006

Brad Setser, The Times They Are A Changin, And How!

Brad Setser has a post today about the Thai Baht issue I mentioned yesterday. As Brad Says, a sign of the times, Jimmy, a sign of the times:

In 1998, Russia defaulted after Treasury Secretary Robert Rubin refused to throw good money after bad, and blocked NSC pressure to continue disburse more than $5b of the IMF's $15b credit line to Russia. In 2006, Russia added over $100b to its reserves even as it repaid almost $25b of debt to Germany and a host of other official creditors.
RGE Media Center

In 1998, credit spreads blew out. Volatility went crazy too. In 2006, credit spreads collapsed. Volatility fell to record low -- some would say crazy low -- levels.

In 1998, private capital flowed out of emerging economies in a big way. In 2006, private capital flowed into emerging economies in an even bigger way. Into emerging market funds. But also into emerging economies -- and specifically into the coffers of emerging market central banks.

In 1998, an Asian emerging economy facing responded to pressure on its currency by imposing draconian capital controls. Well, that hasn't changed. In 2006, another Asian emerging economy responded to pressure on its currency by imposing draconian capital controls.

Back in 1998, Malaysia was worried that speculative pressure was driving the ringgit down too far and too fast. Thailand, by contrast, is currently worried that speculative pressure is driving the baht up too far and too fast.

A sign of the times.

So Ok, we know that the weather has changed - since money is now fleeing into emerging economies and not out of them (see eg the comments on this post on property in India) - the question is what drives the weather. Whoever gets to understand that will have understood a lot.


The Thai government have now revoked the main part of the measure. The reaction was just too fierce for them, but this still leaves the question of why funds are flowing in this direction, and why it is proving so hard to stem the flow.

Thailand was forced into revoking draconian controls on equity investment one day after imposing them, after Bangkok stocks suffered their biggest drop since 1990.

The country’s benchmark SET stock index plunged as much as 18 per cent as investors rushed to dump holdings. The SET recovered slightly to end 15 per cent down at 622.14 but the sell-off wiped Bt773.63bn ($22bn) off the index’s value.

The controls aimed to force offshore investors to keep their money in the country for at least a year or face stiff penalties for early withdrawal and are aimed at dampening speculation that has sent the currency 17 per cent higher against the dollar this year.

Mr Pridiyathorn earlier called the decision on capital controls an “historic” effort to counter speculation. The baht’s sharp rise this year - more than any other Asian currency - has caused Thai exporters to suffer in overseas markets.

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