The financial crisis in East Asia a decade ago has been attributed to both internal and external causes. The internal problems were largely related to the fact that the countries, especially the worst impacted, were too dependent on their banking sector as the means for funding companies’ growth and investments. This is hardly surprising, as explained by Hawkins (2002), since historically the banking sector is usually the dominant sector in the financial system during the early stages of development.
The banking crisis in Asia eventually led to currency and debt crises. Another problem was the bad habit of borrowing in large amounts from overseas in foreign currency to finance their operations without any hedging measures. The external causes on the other hand involved the behaviour of foreign investors who suddenly reversed their investment decisions and caused the massive economic upheaval in the region. Contagion of the crisis took place very fast and brought about large casualties in the financial and eventually real sector.
What happened were currency and maturity mismatches as a result of borrowing in foreign currency and paying back with local currency, and borrowing short term for long term operations. These mismatches could be potentially remedied by sound bond markets in the region which could provide long term funding in local currencies. Hakansson (1998) and Overholt (2004) emphasized the importance of developing bond markets in avoiding crisis. We hypothesize that the existence of regional bond markets could significantly reduce the probability of financial crisis occurrence. In this paper we explore the factors affecting the sizes of both local currency and foreign currency bond markets.
The plan of this paper is as follows: section two will provide some background to the Asian Financial Crisis in 1997. Section three will describe the importance of having a sound regional bond market. Section four will discuss the variables that determine bond market size. Section five contains some concluding remarks.
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Determinants of Bond Market Size: Developed vs Emerging Markets
