1997 Asian Financial Crisis
The 1997 Asian Financial Crisis was a period of severe economic downturn that affected many Asian countries, including Thailand, South Korea, and Indonesia. It was triggered by a combination of factors such as currency devaluations, excessive foreign borrowing, and financial sector weaknesses. The crisis led to widespread economic and social turmoil, and its effects were felt globally.
7 Key excerpts on "1997 Asian Financial Crisis"
eBook - ePub- Amalendu Ghosh(Author)
- 2012(Publication Date)
- Wiley(Publisher)
...The sudden increase in demand for the U.S. dollar to repay foreign currency loans, coupled with speculative trading in it in anticipation of devaluation of the domestic currency exerted tremendous pressure on the exchange rate. The significant depreciation in the value of domestic currency in relation to the U.S. dollar proportionately increased the repayment obligations of borrowers, which led to large-scale defaults. The devaluation of the Thai baht had domino effects on the local currencies in other countries of the region. In the first phase, the Malaysian ringgit, Philippine peso, and Indonesian rupiah depreciated appreciably, and in the second, the South Korean won, Singaporean dollar, and Hong Kong dollar experienced downward pressure in their currency values. The foreign currency crises in these countries led to the financial and economic crisis. The countries experienced sharp reduction in currency values, substantial fall in stock and other asset prices, economic slowdown, and fall in gross domestic product. The risk proliferation sequence of the Asian financial crisis is shown in Figure 27.1. 27.2 RISKS EMERGING FROM THE ASIAN FINANCIAL CRISIS The Asian financial crisis revealed that large foreign currency inflows to finance economic growth create additional risks for financial institutions due to the linkage between the regional and global financial markets. Banks and other lending institutions faced the following additional risks. Contagion Risk The financial crisis revealed that the shortage of foreign exchange in one financial market affects the exchange values of foreign currencies in other financial markets in the region, which in turn compels the countries to depreciate their currencies, which significantly impairs the repaying capacity of borrowers and induces them to default on their debt obligations to foreign investors and institutional lenders...
eBook - ePub- John A. Turner(Author)
- 2017(Publication Date)
- Routledge(Publisher)
...Then we look at the aftermath of the crisis and attempt to discern how Asian countries will respond. Explanations and Controversies The onset of the crisis The Asian financial crisis broke out in Thailand, apparently precipitated by persistent, large current account deficits 1 and a currency pegged to the appreciating US dollar. The current account measures the net of all short-term international transactions including trade in products and services, and interest. It appears from the Mexican debt crisis of December 1994 that current account deficits in excess of 4 percent of GDP may signal trouble ahead. (Frankel, 1998) Many countries in Asia evoked speculative interest on that criterion (see Table 4-1). Foreign capital began a mass exodus in the summer of 1997. On July 2nd 1997, after weeks of selling pressure from speculators exchanging the baht for US dollars, Thailand announced it was abandoning a 13-year old peg to a basket of currencies dominated by the US$. The Thai currency crisis spread to Indonesia, Malaysia, and the Philippines which also linked their currencies to the US$ and had large current account deficits (see Table 4-1). All of these countries, later followed by Korea, had to allow their currencies to depreciate precipitously. Thailand, Indonesia and Korea had high ratios of foreign debt to local GDP and lacked sufficient reserves to meet short-term foreign exchange obligations. All required assistance from the IMF. The Philippines was already under an IMF programme; Malaysia strenuously avoided appealing to the IMF. All countries, even Malaysia, were ultimately compelled to follow the standard IMF remedy: tight fiscal and monetary policies. In exchange for a US$17 billion bailout agreed for Thailand in August 1997, US$43 billion for Indonesia in October, and then $57 billion for Korea in December, the IMF required a long list of reforms...
eBook - ePubGlobal Political Economy
Theory and Practice
- Theodore H. Cohn, Anil Hira(Authors)
- 2020(Publication Date)
- Routledge(Publisher)
...The financial contagion was manifested in several ways. All of these countries experienced rapid outflows of capital, depreciation of their currencies, and dramatic declines in their stock markets. Most of these countries also had recessions, banking crises, and lower economic growth rates. Thus, Thailand, Indonesia, and South Korea had to seek IMF and World Bank loans. The economic problems also led to political unrest, with major demonstrations resulting in the resignation of Indonesia’s president Suharto, and transfers of power in Thailand, South Korea, and the Philippines. As we discuss below, financial contagion was also a factor explaining how the U.S. subprime mortgage crisis spilled over into other economies and led to the 2008 global financial crisis. Second, there are common shocks. In both the Asian financial crisis and the 2008 global financial crisis, a number of countries were vulnerable because of real estate bubbles, current account deficits, and dependence on large capital inflows. Third, there is guilt by association. When Thailand devalued its currency in July 1997, investors feared that Indonesia, South Korea, Malaysia, and the Philippines would do the same because they had similar economic circumstances. Investors rushed to sell these currencies, causing more devaluation. In this way, fears of a crisis spreading can become a “self-fulfilling prophecy.” 68 Causes of the Asian Financial Crisis and Strategies to Deal with It As was the case for the 1980s foreign debt crisis, IPE theorists from different perspectives did not agree on the causes of the Asian financial crisis. Many liberals—especially orthodox liberals—argued that Asian countries benefited from greater economic interdependence and the freeing of capital flows. The main cause of the Asian crisis according to liberals was the pervasive role of governments and government–business linkages in the region...
eBook - ePubIntermarket Analysis
Profiting from Global Market Relationships
- John J. Murphy(Author)
- 2011(Publication Date)
- Wiley(Publisher)
...CHAPTER 4 The 1997 Asian Currency Crisis and Deflation ASIAN CURRENCY CRISIS STARTS IN 1997 The intermarket principles that I have described are based on market trends since 1970. The 1970s saw runaway inflation, which favored commodity assets. The 1980s and 1990s were characterized by falling commodities (disinflation) and strong bull markets in bonds and stocks. Starting in 1997, however, some changes started showing up in the traditional intermarket model. The problems started with a currency crisis in Thailand during 1997 and climaxed with another one in Russia during 1998. The events of 1997 and 1998 provided a dramatic example of how closely linked global markets really are, and how a crisis in one part of the world can quickly spread to other parts. During the summer of 1997, the currency of Thailand started to tumble. It was a trend that soon spread to other currencies in that region. The collapse in Asian currency markets caused a corresponding collapse in Asian stock prices, which had a ripple effect around the globe. Fears of global deflation pushed commodity prices into a free fall and contributed to a worldwide rotation out of stocks into bonds. Over the following year and a half, the CRB fell to the lowest level in 20 years. The reaction of Asian central bankers to the crisis provided a lesson in intermarket relationships. In an attempt to stabilize their falling currencies, they raised interest rates. This jump in interest rates pushed Asian stocks into a sharp decline that lasted for at least a year and had a pronounced effect on all global financial markets. Throughout these hectic two years, all traditional intermarket relationships held up quite well—except for one. BONDS AND STOCKS START TO DECOUPLE The most important result of the events of 1997 and 1998 was the decoupling of bonds and stocks. Decoupling means that bond and stock prices trend in opposite directions, rather than adhere to their traditional tendency to trend in the same direction...
eBook - ePubBuilding a Prosperous Southeast Asia
Moving from Ersatz to Echt Capitalism
- Kunio Yoshihara(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...The Malaysian ringgit was stable like the Thai baht. On the other hand, the Philippine peso had a more volatile history, similar to that of the Indonesian rupiah, but there was stability from the early 1990s. Either way, the foreign exchange risk was manageable; at least, the companies which could borrow in dollars thought so. Suddenly in July 1997, a foreign exchange crisis began. It started first in Thailand, and then spread to the other three countries. The result was a big depreciation of their currencies. So, the banks which borrowed in dollars and lent in local currencies could not pay back to their foreign lenders, even if they managed to get back their local currency loans. The companies which borrowed directly from foreign lending institutions could not pay back, either, TABLE 2 Economic Downturn in the ASEAN 4 May 1997 August 1998 Stock Prices Indonesia 100 59 Malaysia 100 34 Philippines 100 50 Thailand 100 49 Exchange Rates Indonesia 100 20 Malaysia 100 60 Philippines 100 61 Thailand 100 62 Source : Far Eastern Economic Review because their revenues in local currencies were not enough. In Indonesia, for example, the companies needed five times as much revenues in rupiah as they did before in order to pay back the same amount of money they borrowed in dollars. In the other three countries, the situation was not so bad, but the companies needed 70 percent more revenues in local currencies. This was not possible for many companies in view of the depressed condition of their economies after the currency crisis. This set off a vicious circle. Many of the companies which could not pay back the debts laid off their workers. The depositors with bankrupt financial institutions may not have lost their deposits, but cannot withdraw them to the full amount right away. The middle class people who invested in the stock market lost money with the crash of stock prices...
- Sanjaya Baru(Author)
- 2013(Publication Date)
- Routledge(Publisher)
...30 ESSAY The Asian economic crisis and India’s external economic relations THE economic and financial crisis in East and South-East Asia has raised two kinds of questions. First, especially in India, it has brought into question, a range of policies with respect to economic globalisation, particularly in the financial sector and more specifically the movement of short-term private capital flows. Second, and equally interestingly, it has raised questions about the economic and political clout of the ‘newly industrialising economies’ of Asia and the likely change in the balance of power in the region. The role of the United States in ‘bailing’ out troubled economies, the growing economic and financial clout of China, the contradictions between US, Chinese and Japanese economic interests, the increasing interaction between the two Koreas, the political crisis in Indonesia and, to a lesser extent in Malaysia, and so on. It is useful to remember that what began essentially as an external payments crisis in South-East Asia soon became a financial and economic crisis in the entire region and, in some cases, even turned into a political and security crisis. The diplomatic fallout of the crisis was all too evident at the recent summit of the Asia Pacific Economic Cooperation (APEC) in Kuala Lumpur in November, where tension between the US and its Asian ‘friends’ like Japan was all too evident. That the Clinton administration has decided to use the weakening of the regimes in these countries, especially Indonesia and Malaysia, to push through its own diplomatic objectives is also quite evident. The democratic transition in South Korea and Thailand, the collapse of the Suharto regime in Indonesia and the problems that have enveloped President Mahathir Mohammed in Malaysia all have a common genesis...
eBook - ePub- Shirin Rai, Georgina Waylen, Shirin M. Rai, Georgina Waylen(Authors)
- 2013(Publication Date)
- Routledge(Publisher)
...The systemic risks that underpinned these events were similar to those that underpinned the Latin American debt crisis. In considering the origins of the crisis (Elson 2002), I noted that international markets for money are fraught with risks for which no objective probability distribution exists. Information is necessarily imperfect and available information is unequally distributed. Periods of economic growth lead to exuberant risk-taking and the value of financial assets becomes inflated. But eventually the growing gap between financial values and real returns leads to a subjective re-evaluation of risks and holders of financial assets begin to sell them. Herd behaviour magnifies the propensity to sell and further stimulates the perception that risks have increased. The way is paved for crises in which the sudden drop in assets prices sparks panic selling; and the price of assets bought with loans drops below the value of loans outstanding, leading to the collapse of credit markets and impending bankruptcy of banks and other private sector financial intermediaries. In contrast to the feminist analysis of the Latin American debt crisis, in the case of the Asian financial crisis, feminists did consider the gender dimensions of the processes leading to the crisis, as well as the response to the crisis (see, for instance, van Staveren 2000). In my analysis I emphasized the ways in which the financial system had developed so that risk was off-loaded from those who took the risks (mainly high income men) to women, especially low income women, who had to absorb the risks, because they could not liquidate their responsibility for their children (Elson 2002). The IMF became, once again, a key player, a source of emergency finance and a gate-keeper to debt re-scheduling. The IMF response was the same as to the Latin American debt crisis of the early 1980s...
