Asian Crisis

Asian Crisis

1.1 Introduction 1
1.2 History 1
1.3 How it happened – its eruption in 1997 2
1.3.1 Thailand 2
1.3.2 Indonesia 2
1.3.3 South Korea 3
1.3.4 Other countries 3
1.4 What went wrong 3
1.4.1 Over-leveraging with “hot money” 4
1.4.2 Crony capitalism 4
1.4.3 Role of the financial system 5
1.4.4 Moral hazard problem 5
1.4.5 Growth through capital infusion without increase in productivity 6
1.4.6 Pegged exchange rates 7
1.4.7 Current account deficits 7
1.4.8 Huge foreign debt and the role of short-term external debt 8
1.4.9 Small foreign reserves 8
1.5 Conclusion 9
1.6 Sources 9


1 Introduction

The Asian Financial Crisis struck many Asian countries beginning in July 1997 with an unexpected severity. It raised fears of a worldwide economic meltdown due to financial contagion. 

Why it happened…

2 History

The East Asian countries at the center of the crisis were for years admired as some of the most successful emerging market economies, owing to their rapid growth and the striking gains in their populations' living standards.

Until 1997, Asia attracted almost half of the total capital inflow to developing countries. The economies of Southeast Asia in particular maintained high interest rates attractive to foreign investors looking for a high rate of return. As a result the region's economies received a large inflow of money and experienced a dramatic run-up in asset prices. At the same time, the regional economies of Thailand, Malaysia, Indonesia, Singapore, and South Korea experienced high growth rates, 8–12% GDP, in the late 1980s and early 1990s. This achievement was widely acclaimed by financial institutions including the IMF and World Bank, and was known as part of the "Asian economic miracle".

No one could have foreseen that these countries could suddenly become embroiled in one of the worst financial crises of the postwar period.

3 How it happened – its eruption in 1997

1 Thailand...

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