Third, the crisis eased up
after about one year, even though several fundamental conditions (e.g., corporate and bank
financial health) were not significantly improved. The most striking example is Indonesia, where
the rupiah appreciated substantially between mid-July and the end of October, starting only weeks
after the chaos surrounding the resignation of Suharto. This can hardly be interpreted as a return
of investor confidence, since most investors are even more uncertain about Indonesia=s future in
the wake of Suharto=s downfall, and the ensuing political and social instability. The easing of the
crisis reflects, in our interpretation, the end of the short-term outflows of capital. As debts were
repaid, rescheduled, or defaulted upon, there was little foreign capital left to flee. As the net
capital outflows subsided, the intense pressure on the exchange rate ended, and the overshooting
caused by financial panic was reversed.
Third, the crisis eased up after about one year, even though several fundamental conditions (e.g., corporate and bank financial health) were not significantly improved. The most striking example is Indonesia, where the rupiah appreciated substantially between mid-July and the end of October, starting only weeks after the chaos surrounding the resignation of Suharto. This can hardly be interpreted as a return of investor confidence, since most investors are even more uncertain about Indonesia=s future in the wake of Suharto=s downfall, and the ensuing political and social instability. The easing of the crisis reflects, in our interpretation, the end of the short-term outflows of capital. As debts were repaid, rescheduled, or defaulted upon, there was little foreign capital left to flee. As the net capital outflows subsided, the intense pressure on the exchange rate ended, and the overshooting caused by financial panic was reversed.
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