Yet Another Key Warning Sign, Piece Of Strong Evidence: TIC & The Long Misunderstood History Of Selling Treasuries

Like so many other monetary things, the name itself is misleading though it’s not immediately clear why. The Asian Financial Crisis (or Asian flu, as many called it back in the day) began in Thailand and spread throughout, well, Asia. How else would anyone label it?

This name, however, radiates an impression that this was a lot of fuss and bother for overseas concerns and only overseas. Not so. The disruption may have begun seemingly innocuously in far-flung locales divorced and disconnected from everything but their own idiosyncratic problems, the real truth of the episode was that what started in mid-1997 before its ultimate climax in later 1998 had actually been a regional dollar shortage.

In many respects, a dress rehearsal for what began in August 2007; including the Federal Reserve’s initial farcical indifference.

The contagion which spread between various (and suddenly former) indestructible Asian Tigers essentially took down its greatest prey in the lumbering weakness that was Japan. And it is in Japan where the serious proportions of the dollar shortage truly came into view. I wrote my usual essay-length summary of the whole thing back in 2016.

For our purposes today:

One of the ways in which dollar problems were analyzed was in various decompositions of money market rates. The reported LIBOR rate of Bank of Tokyo-Mistubishi (BOTM) was compared to that of Barclays to get a sense of at least a baseline dollar difference; BOTM as one of the premium Japanese banks with implicit government guarantees representing therefore the best of what Japan could pay for dollars; what the rest of Japanese banks might be paying was anybody’s guess. In late November 1997, as the failures of Hokkaido Takushoku, Sanyo, and then Yamaichi roiled global markets, the spread between just BOTM and Barclays was an enormous 110 bps, so what was it for the any number of anonymous minor Japan institutions that had been lending heavily in Indonesia?

No trivial blindspot. Indeed, the growing yet unobservable dollar problems of Japanese institutions had already pushed the Fed to its own dollar interventions of still, to this very day, unknown proportions (the amounts for those were simply redacted from the transcripts in an extremely rare instance of FOMC censorship).

US money dealers, in particular, had apparently taken much out of the “Japan premium” in exactly the way they should in any time period. Higher risk, charge higher rates and when the lending rate goes high enough then lend, lend, lend. That’s what eurodollar banks had done – until around April and May 1998.

What came next, I’ll hand it over to Peter Fisher, the Fed’s System Open Market Account Manager (FOMC transcript May 1998):

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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