Question

The Asian financial crisis of 1997-98 began with currency speculators dumping the overvalued Thai baht that eventually led to its devaluation. Sensing that other Asian economies were also weak, speculators targeted them as well which led to the crisis spreading to Malaysia, Indonesia, the Philippines and South Korea. Initial Post Instructions What do you think are the main causes of this crisis? Are there factors that are critical in any explanation and which may indicate that a crisis is imminent?

Answer 1

My views on the Asian Financial Crisis of 1997-98, based on the analysis of International Moneraty Fund (IMF) are as under:

Main Causes of the Crisis

IMF identified following domestic and international factors as the main causes of the crises

1] Overheated Market: Financial markets being overheated evident from large external deficits and inflated property and stock market values.

2] Pegged exchange rate: Prolonged maintainenance of pegged exchange rate as unsuitainable levels, led to excess borrowing in the foreign currency and increased foreign exchange risk.

3] Inadequate supervision of financial systems: Detoriation in the quality of bank loan portfolios.

4] Transparency : Limited availiability of data hindered the investors getting realistic view of the economic conditions

5] Political Uncertainity : Due to it, foriegn lenders refused to refinance short term loans creating liquidity problems.

6] Excess exposure of Foreign Funds : As other markets were not offering good returns, lot of foreign investors invested in East Asian Countries

It is to be noted that, it is almost impossible to predict the crises reliably, mostly because of the crises arising out of contagion effects. However, learnigs from East Asian Crisis can given us some pointers to identify the kinds of weaknesses that typically make economies vulnerable to financial crises. These may be

a) Overheated market with high inflation and asset prices growing rapidly in domestic markets

b) Widened current account deficit

c) Domestic credit growing rapidly

d) Deterioration in terms of trade

e) Pegged currecny at unsuitaniable levels

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