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Sudden Stops and Liability Dollarization: Evidence from East Asian Financial Intermediaries

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Author Info
Timothy Chue
David Cook

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Abstract

Before the currency crisis of 1997-1998, East Asian financial intermediaries borrowed heavily in international markets. During the crisis, the intermediaries’ stock market value declined sharply, and a sizable fraction of the institutions were closed or nationalized. We find that 1) the stocks of intermediaries with large international debt exposure performed poorly during the crisis; 2) more short-term international debt outstanding was associated with a higher probability of bankruptcy; 3) among those intermediaries that survived, more long-term international debt was associated with a lower equity return; and 4) higher international debt, especially short-term international debt, was associated with a more severe contraction in the assets and liabilities of the intermediaries. This evidence supports the “sudden stop†and “liability dollarization†theories of emerging market financial crises. It indicates that both the sudden withdrawal of funds by international creditors and the foreign currency nature of international debt damage the financial system, and exacerbate the decline in the financing of investment.

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Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 646.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:646

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Related research
Keywords: Stops; Liability Dollarization; Financial Intermediaries; Asian Financial Crisis.;

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Find related papers by JEL classification:
F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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