1997 Asian Financial Crisis

The Asian contagion was a catastrophic event that had an adverse impact on South East Asia. Prior to 1997, Asian countries had enjoyed a period of active economic growth. Such countries included Thailand, Malaysia, Singapore, South Korea, Hong Kong and Indonesia. The success had boosted their GDPs and attracted many investors more so in real estate and the financial sector . The Asian success story however came to an end in 1997. The Asian financial crisis comprised of devaluation of currencies and a plunge in stock markets due to speculation thus necessitating the IMF to intercede.

A meltdown in Thailand was the primary cause of the financial crisis in Asia. It started off by property owners failing to pay interest on Eurobond loans. Financial institutions could also not meet their debt since they had loaned out money borrowed from the international market to property developers who were being declared bankrupt. Such led to the biggest financial institutions in Asia, like Finance One in Thailand, being declared bankrupt and further losses in the stock market.

The increase in US dollar debts and the collapse of financial institutions set a precedent for the crisis. There was a massive demand for the US dollar as compared to the Asian currencies due to the current account deficits. Short sellers took advantage of this situation and held on to dollars as they speculated the depreciation of currencies. Even though Asian central governments had fixed exchange rates, it became difficult to sustain them due to lack of foreign reserves. The Asian governments had to allow their currencies to float freely against the dollar. Immediately, their currencies lost value to the dollar. For instance, Thai’s Bhat, pegged at Bt25 per dollar depreciated to Bt55 per dollar. Indonesia’s rupiah also depreciated from Rp2400 per dollar to Rp4000 per dollar. Such depreciation in Asian currencies virtually doubled the dollar-denominated debts and further led to a decline in stock markets and bankruptcy of financial institutions.

The IMF had to get involved since the Asian financial crisis was spilling over and affecting the international market. It committed $110 billion to a short-term loan to affected countries that could assist them in settling their balance of payments deficits. In addition, they had to set stringent macroeconomic policies so as to prevent the reoccurrence of such a crisis. The crisis gave Asian countries enough incentive to improve their economic systems so as to attain sustainable economic growth.

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