Asian Financial Crisis

Overview

• Start: July 1997 in Thailand, spread across East Asia.
• Impact: Severe economic damage in East Asia with spillover to Latin America and Eastern Europe by 1998.

Key Events

• Thailand:
  • Devalued currency relative to the U.S. dollar on July 2, 1997.
  • Resulted in balance-of-payments and banking crisis.
• Other Countries Affected:
  • Malaysia, Philippines, Indonesia faced currency weakening.
  • Indonesia plunged into a deeper financial and political crisis.
  • Hong Kong experienced speculative attacks on its currency peg.
  • South Korea was on the brink of default.

Economic Consequences

• Regional Effects:
  • Capital inflows slowed or reversed, sharp growth decline.
  • Banks faced pressures, investment rates plunged, leading to recessions.
• Global Spillovers:
  • Trading partners impacted globally.

Underlying Vulnerabilities

• Seen as strong economies prior to the crisis with high GDP growth.
• Rapid domestic credit growth, inadequate oversight led to financial leverage.
• Overheating economies and real estate markets increased risks.
• Heavy foreign borrowing exposed economies to exchange rate and funding risks.
  • Currency pegs failed, debts increased sharply in local currency terms.

Spread and Contagion

• Thailand's Banking Sector:
  • Banking problems triggered foreign investor withdrawal.
  • Caused depreciation, recession, and further banking issues.
• Role of Japan:
  • Japanese banks reduced lending, worsening the situation.

International Response

• Financial Support:
  • $118 billion in loans from international organizations and governments.
• Aid Conditions:
  • Required domestic policy reforms to address structural weaknesses.
  • Included deleveraging, financial system strengthening, and market competitiveness.

Policy Measures

• Monetary and Fiscal:
  • Interest rate hikes and fiscal tightening initially.
  • Subsequent loosening to support growth.
• International Coordination:
  • Federal Reserve's role in policy responses and risk monitoring.
  • U.S. banks supported South Korea's debt restructuring.

Outcomes

• Containment of crisis and strong recovery set the stage.
• U.S. Impact:
  • Manageable trade impact, with some positive spillovers like reduced inflation and lower bond yields.
• Global Impact:
  • More severe effects in Latin America and Eastern Europe, notably Brazil and Russia.

Bibliography

• Key references to historical materials, books, and research papers on the crisis.