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The Asian financial crisis, according to the UN, was perhaps

the most serious financial crisis since the breakdown of theBreton Woods system in the early 1970s, in terms of both itsscope and its effects

The effects of the crisis were farreaching, as this image (produced byBBC news) shows. The crisis startedin Thailand, but spread to much of

Asia, and indirectly hit Europe, LatinAmerica, and North America.

Ultimately, the damage was limited,but, for a time, there was fear that the

crisis would cause a globaldepression.
http://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stmhttp://news.bbc.co.uk/1/hi/special_report/1997/asian_economic_woes/34514.stm


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The Asian Financial Crisis was a period of Financial Crisis that gripped

mainly five Countries of Asia which included Thailand, Indonesia, Malaysia,Philippines and Korea in July 1997 and raised fears of a worldwide economicmeltdown due to Financial Contagion.

The Asian financial Crisis basically involved following basic problems

1. Rapid reversal of private capital inflows into Asia.

2. Bank Lending's not protected by lender-of-last-resort facilities.

3. Depreciation of pegged exchange rates and increase in Interest Rates.

4. Panic in the Domestic Markets.

5. Role of IMF that added to the Crisis.


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Economies of South East Asia Fixed exchange rate system

pegged to the USD

Liberalized economy Fully capital convertibility

Exports were attractivebecause of lower value ofDollar during early 1990s

Massive capital inflowsattracted in the region duringthe 1990s.(major exposure ofshort term debt by private

sector)


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Maintained High Interest Rates attractive to foreigninvestors looking for a high rate of Return.

Regional economies of South east Asia experienced HighGrowth Rates in the late 1980s and early 1990s(8%- 12%GDP)

Asset prices were pushed up because of availability ofeasy foreign credit

Thailand, Indonesia and Korea had large CurrentAccount Deficits.

It led to excessive exposure to foreign exchange risk in

both the financial and corporate sectors.


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As the U.S. economy recovered from a recession in the

early 1990s

This made the U.S. relative a more attractiveinvestment destination.

The higher U.S. dollar caused their own exports tobecome more expensive and less competitive in theglobal markets

Increase in current account deficit was to made up byborrowing overseas


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Decline of roll over of short term loans led to financeCurrent account deficit by its foreign reserves

Resulted in few dollars to maintain the Peg

Investors started selling their assets to redeem dollar at

fixed rate & accelerated reserve loss

Speculators started shorting the currency

Above constituted a speculative attack

Thailand let Baht float in July 1997


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The transmission of shocks to other countries or the

cross-country correlation, beyond any fundamentallink among the countries and beyond commonshocks.

This definition is usually referred to as herd behavior.


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0

20

4060

80

100

120

140

160

180

200

Indonesia Korea, Rep. Malaysia Thailand


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0

10

20

30

40

50

60

70

80

90

Indonesia South korea Philippines Thailand Taiwan

Proportion of loans with maturity of one

year or less at the end of 1996


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TotalOutstanding

Banks PublicSector

NonbankPrivate

ShortTerm

Reserves

Indonesia 58.7 12.4 6.5 39.7 34.7 20.3

Malaysia 28.8 10.5 1.9 16.5 16.3 26.6

Philippines

14.1 5.5 1.9 6.8 8.3 9.8

Thailand 69.4 26.1 2.0 41.3 45.6 31.4

Korea 103.4 67.3 4.4 31.7 70.2 34.1

International Claims Held By Foreign Banks--Distribution by maturity and sector(mid 1997)

Billions of dollar


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Openness of capital account

Short term debt by private sector

Large proportion of non performing loans

Absence of lender of last resort for that region

Non resident borrowed in local currency and boughtUS $


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Domestic Level

Contraction of Economy

Stock Market Plunged

Widespread default/NPAs

Expensive Imports Inflation

Trade Surplus


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International Level Japan Affected, Depreciation of Yen

Singapore Currency Depreciation

Hongkong Stock Market plunged

Dow Jones Industrial avg plummet by 554 pts

Big institutes failure in Japan

Russian stock market crash

Japan in Recession


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Country June 97 June 98

Thailand 11% 24%

Malaysia 7% 11%

Singapore 3% 7%

Indonesia 16% 47%

Philippines 11% 14%

Taiwan 5% 7%

S. Korea 14% 17%

China 8% 8%

Hong Kong 6% 10%


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The countries maintained good budgetary positions

Domestic savings and investment rates were very high

Interest rate were usually less in rest of the world(US andJapan)

Massive capital inflows were attracted into the regionduring the 1990s

Healthy Forex reserves Thailand reached $ 38$ billion in1996 equivalent to over 7.7 months of imports

Data on capital flows, risk premium, credit ratings, IMFreports, and other indicators


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The IMF had made some recommendations to theSouth East Asian Economies to get any financialassistance from them, but that only helped incite morepanic in these economies.


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The IMF programs had declared the followingmain objectives prevent outright default on foreign obligations;

limit the extent of currency depreciation;

preserve a fiscal balance;

limit the rise in inflation; rebuild foreign exchange reserves;

restructure and reform the banking sector;

remove monopolies and otherwise reform the

domestic non-financial economy; preserve confidence and creditworthiness;

limit the decline of output


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Fiscal Policy

Bank Closures

Enforcement of Capital Adequacy Standards

Tight Domestic Credit

Debt Repayment

Non Financial Structures


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Difference in economies and stages of growth &

liberalization

Floating Exchange rate system

Partial Capital account convertibility

Very Less Non-Performing Asset


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-0.50%

0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

3.00%

3.50%

4.00%

4.50%

1990 1991 1992 1993 1994 1995 1996India

EA Average


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Importance of central Bank

Enforce regulation policies in financial sectors

Manage External Debt Well and Short term debt

Transparency in Financial Transaction

Act against corruption

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