• Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

What caused the currency and financial crisis in Asian economies ?

Extracts from this document...

Introduction

What caused the currency and financial crisis in Asian economies ? The 1997-1998 financial crisis in Asia is the sharpest to hit the developing world since the debt crisis in 1982.This period highlights the main weaknesses in international capital markets and shows how vulnerable they can be to sudden reversals in market confidence. Many point to the change in market expectations and confidence as the source of the problem while others blame the fundamental imbalances in these Asian economies. Whichever view, it is no doubt that the panic and overreaction of investors, the questionable policy response of the International Monetary Fund {IMF} and policy mistakes made by Asian governments are all factors which only deepened the crisis. In this essay we examine the Asian meltdown and provide reasons for why stricter controls on international capital flows were needed. The countries hit hardest by the Asian crisis were Indonesia, Korea, Thailand, Philippines and Malaysia, known as the Asian five. Our discussion centers mainly on these countries. Our examination of this crisis begins with the liberalisation of financial markets in the early 1990's. Amid political pressure to maintain high levels of economic growth, the banking and financial systems became deregulated. ...read more.

Middle

Investments were not providing large enough rates of return and the threat of default on payment on the principle debt amount plus service charges resulted in lenders no longer willing to roll over short term loans. Capital flight struck when investors tried to get their money out of these countries as quick as possible. The withdrawal of foreign capital caused exchange rates to depreciate and interest rates to soar causing a rapid rise in Non Performing Loans {NPLs}. Many real estate projects, financed on unhedged dollar denominated loans, went bankrupt, under the weight of currency depreciation. Even domestic investors grabbed their money in a rush to buy dollars as the value of the currency plummeted. This created a huge contractionary shock in several Asian countries. The closure of banks severely restricted bank lending because, {1} they were illiquid and {2} because they were forced to maintain capital adequacy ratios required by bank supervisors. In Indonesia, Korea and Thailand, this rush to improve capital adequacy ratios under threat of closure of under-capitalised banks by the IMF was particularly evident. Yet this only added to panic and contractionary force. The introduction of IMF programs in this period threatened bank closures as required restoration of adequacy minimum capital standards, tightened domestic credit and enduced fiscal policy contractions all added to the banking panics already underway. ...read more.

Conclusion

Closure was not the only option for problem banks. They could have been put under receivership, protecting depositors and allowing good borrowers continued access to credit. The time scale problem re-appears on the issue of how quickly should banks have been to re-capitalise during such a period of economic turmoil. Immediate request of re-capitalisation increases distress for private firms and leads to a rise in non-performing loans {NPLs}, this problem being particularly evident near the end of 1997. A lesson learnt by the IMF is that in order for policies to operate without causing further economic distress is that an appropriate time scale must be applied so that panic is kept to a minimum. The events that took place in the Asian five over the period we have discussed certainly, in my opinion, provide a very strong argument for the introduction of controls on international capital movements. Protecting countries from such economic chaos that was evident in Asia is of paramount importance to the world wide economy. Yet, when considering the construction of mechanisms to control international capital flows, it is of vital importance that such controls do not hinder trade finance or production. Economic growth is a top priority for all developing countries, so to introduce restrictive controls over their interaction with foreign economies is a delicate issue, and must be given serious consideration. ...read more.

The above preview is unformatted text

This student written piece of work is one of many that can be found in our University Degree Accounting section.

Found what you're looking for?

  • Start learning 29% faster today
  • 150,000+ documents available
  • Just £6.99 a month

Not the one? Search for your essay title...
  • Join over 1.2 million students every month
  • Accelerate your learning by 29%
  • Unlimited access from just £6.99 per month

See related essaysSee related essays

Related University Degree Accounting essays

  1. Businesses operating in developing countries and emerging economies face a number of political, economic ...

    However, exposing the nature of political, economic and social risk is not enough for international managers who are looking to operate in emerging economies. What is also important is to expose the methods used to assess those risks so that decisions for locations and entry modes can be made as confidently as possible.

  2. Issues in International Accounting

    In April 2006, Prime Minister Abdullah Ahmad Badawi announced the government's Ninth Malaysia Plan, signaling an 18 percent rise in development spending to US$54 billion between 2006 and 2010. Fifteen years ago Dr. Mahathir Mohamad, then Prime Minister, outlined a blueprint he called The Way Forward: Vision 2020 for the

  1. Auditors(TM) Perceptions of Responsibilities to Detect and Report Fraud Meeting Societal Expectation

    HKSAs was set by Hong Kong Institute of Certified Public Accountant (HKICPA) converge towards International Auditing and Assurance Standards Board (IAASB) of the International Federation of Accountants (IFA). Information contained in HKSAs extents the consistency with the correspondent International Standard on Auditing (ISAs).

  2. Real Estate Germany

    Open perils cover all the causes of loss not specifically excluded in the policy. Common exclusions on open peril policies include damage resulting from earthquakes, floods, nuclear incidents, acts of terrorism and war. Named perils require the actual cause of loss to be listed in the policy for insurance to be provided.

  1. An analysis of the financial situation of Abbott Laboratories (Pakistan) Limited

    After the attack on World Trade Centre and attack on Afghanistan starts which mostly affects Pakistani Business. Technology: Management information system needs to be up to date, because old systems might weaken the timely reporting. In the light of this ALPL has implemented J.D.

  2. Analysis of the market and financial basis for a pizza franchise chain in Arizona.

    Pizza -7.90% Hungry Howie's 2.80% Average Growth % 2.39% Annual Growth Rate High Growth Rate = 4 new openings per year Low Growth Rate = 2 new openings per year Based on current projections, aggregate sales of pizza chains are to increase this year. The value is of the U.S.

  1. An Analysis Of harmonization issues of accounting standards

    The table below shows the comparison of items and effective date between CAS and IFRS. Table 2-3 Items and Effective Date between CAS and IFRS CAS Items Effective Date Basic standard 01/07/1993 Basic standard* 02/06/2005 CAS 30 Presentation of Financial Statement 01/01/2007 CAS 1 Inventories 01/01/2002 CAS 31 Statement of

  2. Working Capital Management

    13.5 Changes in working capital The changes in the level of working capital occur for the following three basic reasons: 1. Changes in Sales and Operating Expenses The first factor causing a change in the working capital requirement is a change in the sales and operating expenses.

  • Over 160,000 pieces
    of student written work
  • Annotated by
    experienced teachers
  • Ideas and feedback to
    improve your own work