Boom to Bust
How, When, and Why?
When the Asian financial flu first broke out with a vengeance in Thailand in the summer of 1997, after years of unrestrained lending on speculative real estate projects, the local banks started to look kind of shaky, at least to impartial outside observers.
Three Warning Signs of a Bust
Here are three of the warning signs, by which you can sometimes tell if a boom—any boom—is about to go bust:
1. The nation’s current account is perilously low. A current account takes the payments a country must make to outsiders, and compares them to all the revenues it’s taking in. If the account is out of balance, that’s a bad sign. And if the balance skews way toward the net outflow column, that’s when global investors start getting nervous.
2. Inflation is rising. If the inflation rate starts rising far and fast in any country, take it as a major red flag because the usual central bank response is to raise interest rates, which could create an economic downturn.
3. Companies are taking out huge loans in Dollars thinking they could easily repay them when the local currency is healthier. Companies do this because the interest rates could be lower on foreign currency loans than on loans in their own currency.
Three warning signs of a bust: perilously low current account, rapidly rising inflation, and huge foreign currency debt.
What Happened in Thailand?
In the case of Thailand, companies took on huge foreign currency debt because the interest ...