Asian financial crisis hit the most fast developing and successful economies in the world. The Asian financial crisis snowballed in July 1997. This led to similar crises in many countries in Asia.

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University Degree Business and Administrative studies

 Introduction

Asian financial crisis hit the most fast developing and successful economies in the world. The Asian financial crisis snowballed in July 1997. This led to similar crises in many countries in Asia. Economists, initially viewed Asia's economic fall through the lens of conventional currency-crisis theory. The first theory by “Krugman 1979, Flood and Garber 1984”, focuses mainly on the exchange rate. A government with persistent money, financed budget deficits was assumed to use a limited stock of reserves to peg its exchange rate; this policy would, of course, ultimately be unsustainable and the attempts of investors to anticipate the inevitable collapse would generate a speculative attack on the currency when reserves fell to some critical level. The second theory by “Obstfeld 1994, 1995” is less mechanical, a government chooses whether or not to defend a pegged exchange rate by making a tradeoff between short-run macroeconomic flexibility and longer-term credibility. The logic of crisis then arises from the fact that defending a parity is more expensive i.e. requires higher interest rates if the market believes that defense will ultimately fail as a result, a speculative attack on a currency can develop as a result of a predicted future deterioration in fundamentals. But the Asian crises seem to have differed from this in several fundamental ways.

The problem began with financial intermediaries, institutions whose liabilities were perceived as having an implicit government guarantee, but were essentially unregulated and therefore subject to severe moral hazard problems. The excessive risky lending of these institutions created inflation, not of goods but of asset prices. The overpricing of assets was sustained in part by a sort of circular process, in which the proliferation of risky lending drove up the prices of risky assets, making the financial condition of the intermediaries seem sounder than it was.

And then the impact was felt. Falling asset prices made the insolvency of intermediaries visible, forcing them to cease operations, leading to further asset deflation. This led Asian economies to experience severe financial crisis  

Causes For Asian Financial Crisis

  • Huge ratio of foreign investment in Asia

Several economies that were struck by the crisis had large foreign investments operating. We can see major boom in foreign investment in Asian economies in the case of Asian miracle, economies that promised healthy returns and subsequent growth. The major problem that aroused because of this massive inflow of foreign investment was of accumulation of large debt and especially debt to reserve ratios. Due to the increase in debt there is an increasing dependence on foreign currency that has far reaching implications in the economies. This increase in debt was largely in hard currency (Dollar/Yen). When hard currency appreciated it made it extremely difficult for Asian countries to pay off their debt as their debt in real terms grew exponentially.  But till now                                                      these emerging economies were so dependent on foreign currency there was an immediate need to do whatever was necessary to maintain portfolio investment.  This caused some of the corruption in the economies.  The focus on foreign investment became essential for countries as oppose the increase in real industry.  The resulting effect of this foreign dependence was experienced as the capital account controlling the current account. The nature of the foreign dependence pushed economies into speculative markets because the real industry could not keep up and was not the focus.  

  • Speculative Markets and Overvalued Currency

Several  “Asian Miracle” economies were affected by the proliferation of speculative commerce.  Real estate speculation especially comprised a large ratio of economic transactions in the Asian economies.  The stability of the economy was compromised by the high ratio of speculative arbitrage as oppose to real investment into emerging industry. Around 25-40 percent of total bank loans in Thailand, Indonesia, Malaysia, and Singapore were from the property sector.  The banking industry also was largely involved in real estate speculation causing both a liquidity problem and leaving the banking sector having most of its reserve in real estate.  After the crisis began in July 1997 property values dropped causing both the devaluation of domestic currency and an instantly large amount of non-performing loans.

  • The Asian flu    

The crisis rolled on to nearly allover Asia because each country shared similar styles of business and investment. Foreign investors realised that the “Asian miracle” countries had poor quality of investment, large short-term debt, poor debt to reserve ratios and other structural and institutional flaws that questioned their creditworthiness.  As experiencing the crisis onset in Thailand the international financial community was largely acquainted of the existing problems in the Asian countries.  This led investors into hesitation in entering and staying inn economies with similar problems as Thailand, investor’s fears were realized and there was a race to pull out of Asian markets.

  • Huge Inflow of foreign Investment

Several of the economies involved in the Asian crisis had, until the crisis, large inflows of foreign investment.  This was very prominent in the case of the “Asian Miracle” economies that promised rapid growth and subsequent returns.  Several problems arise from a massive inflow of foreign investment.  One such problem is the accumulation of large amounts of debt, and especially debt to reserve ratios.  Due to the increase in debt there is an increasing dependence on foreign currency that has far reaching implications in the economies. This increase in debt was largely hard currency (Dollar/Yen) .  When hard currency appreciated it made it extremely difficult for Asian countries to pay off their debt, as their debt in real terms grew higher.  Because these emerging economies were so dependent on foreign currency there was an immediate need to do whatever was necessary to maintain portfolio investment.  This eventually caused some of the corruption.  The need for currency caused countries to focus on the attraction of foreign investment as oppose to the increase in real industry.  The resulting effect of this foreign dependence is that the capital account controlled the current account.  Another result is that the nature of the foreign dependence pushed economies into speculative markets because the real industry could not keep up and was not the focus.  

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  • Highly Speculative Markets and Overvalued Currency

        Several of the “Asian Miracle” economies were marked with the effects of speculative commerce.  Real estate speculation especially composed a large portion of economic transactions in the Asian economies.   The stability of the economy was compromised by the high ratio of speculative arbitrage as oppose to real investment into emerging industry. Around 25-40 percent of total bank loans in Thailand, Indonesia, Malaysia, and Singapore were from the property sector.  The banking industry also was largely involved in real estate speculation causing both a liquidity problem, as banking sector had most of ...

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Asian financial crisis hit the most fast developing and successful economies in the world. The Asian financial crisis snowballed in July 1997. This led to similar crises in many countries in Asia.
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    Business and Administrative studies
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