1997 Asian Financial Crisis
1997 Asian Financial Crisis
1997 Asian Financial Crisis
added complication of what was called "crony capital- 2 Panic amongst lenders and withism".[7] The short-term capital ow was expensive and
drawal of credit
often highly conditioned for quick prot. Development
money went in a largely uncontrolled manner to certain
people only, not particularly the best suited or most e- The resulting panic among lenders led to a large withcient, but those closest to the centers of power.[8]
drawal of credit from the crisis countries, causing a credit
At the time of the mid-1990s, Thailand, Indonesia and crunch and further bankruptcies. In addition, as forSouth Korea had large private current account decits and eign investors attempted to withdraw their money, the
the maintenance of xed exchange rates encouraged ex- exchange market was ooded with the currencies of the
ternal borrowing and led to excessive exposure to foreign crisis countries, putting depreciative pressure on their
exchange risk in both the nancial and corporate sectors. exchange rates. To prevent currency values collapsing, these countries governments raised domestic interest
In the mid-1990s, a series of external shocks began to
rates to exceedingly high levels (to help diminish ight of
change the economic environment the devaluation of
capital by making lending more attractive to investors)
the Chinese renminbi, and the Japanese yen due to the
and to intervene in the exchange market, buying up any
Plaza Accord of 1985, raising of U.S. interest rates which
excess domestic currency at the xed exchange rate with
led to a strong U.S. dollar, the sharp decline in semiforeign reserves. Neither of these policy responses could
[9]
conductor prices; adversely aected their growth. As
be sustained for long.
the U.S. economy recovered from a recession in the
early 1990s, the U.S. Federal Reserve Bank under Alan Very high interest rates, which can be extremely damagGreenspan began to raise U.S. interest rates to head o ing to an economy that is healthy, wreaked further havoc
on economies in an already fragile state, while the central
ination.
banks were hemorrhaging foreign reserves, of which they
This made the United States a more attractive investment
had nite amounts. When it became clear that the tide of
destination relative to Southeast Asia, which had been atcapital eeing these countries was not to be stopped, the
tracting hot money ows through high short-term interest
authorities ceased defending their xed exchange rates
rates, and raised the value of the U.S. dollar. For the
and allowed their currencies to oat. The resulting deSoutheast Asian nations which had currencies pegged to
preciated value of those currencies meant that foreign
the U.S. dollar, the higher U.S. dollar caused their own
currency-denominated liabilities grew substantially in doexports to become more expensive and less competitive
mestic currency terms, causing more bankruptcies and
in the global markets. At the same time, Southeast Asias
further deepening the crisis.
export growth slowed dramatically in the spring of 1996,
Other economists, including Joseph Stiglitz and Jerey
deteriorating their current account position.
Sachs, have downplayed the role of the real economy in
Some economists have advanced the growing exports of
the crisis compared to the nancial markets. The rapidChina as a contributing factor to ASEAN nations exity with which the crisis happened has prompted Sachs
port growth slowdown, though these economists mainand others to compare it to a classic bank run prompted
tain the main cause of the crises was excessive real estate
by a sudden risk shock. Sachs pointed to strict monespeculation.[10] China had begun to compete eectively
tary and contractory scal policies implemented by the
with other Asian exporters particularly in the 1990s after
governments on the advice of the IMF in the wake of
the implementation of a number of export-oriented rethe crisis, while Frederic Mishkin points to the role of
forms. Other economists dispute Chinas impact, noting
asymmetric information in the nancial markets that led
that both ASEAN and China experienced simultaneous
to
a "herd mentality" among investors that magnied a
rapid export growth in the early 1990s.[11]
small risk in the real economy. The crisis has thus atMany economists believe that the Asian crisis was created tracted interest from behavioral economists interested in
not by market psychology or technology, but by policies market psychology.[13]
that distorted incentives within the lenderborrower reAnother possible cause of the sudden risk shock may also
lationship. The resulting large quantities of credit that
be attributable to the handover of Hong Kong sovereignty
became available generated a highly leveraged economic
on 1 July 1997. During the 1990s, hot money ew into
climate, and pushed up asset prices to an unsustainable
the
Southeast Asia region through nancial hubs, espelevel.[12] These asset prices eventually began to collapse,
cially Hong Kong. The investors were often ignorant of
causing individuals and companies to default on debt oblithe actual fundamentals or risk proles of the respective
gations.
economies, and once the crisis gripped the region, coupled with the political uncertainty regarding the future
of Hong Kong as an Asian nancial centre led some investors to withdraw from Asia altogether. This shrink
in investments only worsened the nancial conditions in
Asia[14] (subsequently leading to the depreciation of the
Thai baht on 2 July 1997).[15]
3.1
Economic reforms
3
tions to avoid default, tying the packages to currency,
banking and nancial system reforms.
As such, the crisis could be seen as the failure to adequately build capacity in time to prevent currency manipulation. This hypothesis enjoyed little support among
economists, however, who argue that no single investor
could have had enough impact on the market to successfully manipulate the currencies values. In addition, the
level of organization necessary to coordinate a massive
exodus of investors from Southeast Asian currencies in
order to manipulate their values rendered this possibility The reasoning was that by stimulating the economy and
staving o recession, governments could restore conremote.
dence while preventing economic loss. They pointed out
that the U.S. government had pursued expansionary policies, such as lowering interest rates, increasing government spending, and cutting taxes, when the United States
3 IMF role
itself entered a recession in 2001, and arguably the same
Such was the scope and the severity of the collapses in- in the scal and monetary policies during the 20082009
volved that outside intervention, considered by many as Global Financial Crisis.
a new kind of colonialism,[23] became urgently needed.
Since the countries melting down were among not only
the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to
the crisis was likely to be cooperative and international, in
this case through the International Monetary Fund (IMF).
The IMF created a series of bailouts (rescue packages)
for the most-aected economies to enable aected na-
3.2
INDONESIA
From 1985 to 1996, Thailand's economy grew at an average of over 9% per year, the highest economic growth rate
The conventional high-interest-rate economic wisdom is of any country at the time. Ination was kept reasonably
normally employed by monetary authorities to attain the low within a range of 3.45.7%.[27] The baht was pegged
chain objectives of tightened money supply, discouraged at 25 to the U.S. dollar.
currency speculation, stabilized exchange rate, curbed
On 14 May and 15 May 1997, the Thai baht was hit by
currency depreciation, and ultimately contained ination.
massive speculative attacks. On 30 June 1997, Prime
In the Asian meltdown, highest IMF ocials rationalized Minister Chavalit Yongchaiyudh said that he would not
their prescribed high interest rates as follows:
devalue the baht. This was the spark that ignited the
From then IMF First Deputy managing director, Stanley Asian nancial crisis as the Thai government failed to deFischer (Stanley Fischer, The IMF and the Asian Cri- fend the baht, which was pegged to the basket of curren[28]
sis, Forum Funds Lecture at UCLA, Los Angeles on 20 cies in which the U.S. dollar was the main component,
against international speculators.
March 1998):
When their governments approached the
IMF, the reserves of Thailand and South Korea
were perilously low, and the Indonesian Rupiah
was excessively depreciated. Thus, the rst order of business was... to restore condence in
the currency. To achieve this, countries have to
make it more attractive to hold domestic currency, which in turn, requires increasing interest rates temporarily, even if higher interest
costs complicate the situation of weak banks
and corporations...
Why not operate with lower interest rates and
a greater devaluation? This is a relevant tradeo, but there can be no question that the degree of devaluation in the Asian countries is
excessive, both from the viewpoint of the individual countries, and from the viewpoint of
the international system. Looking rst to the
individual country, companies with substantial foreign currency debts, as so many companies in these countries have, stood to suffer far more from currency (depreciation)
than from a temporary rise in domestic interest rates. Thus, on macroeconomics monetary policy has to be kept tight to restore condence in the currency....
From the then IMF managing director Michel Camdessus
(Doctor Knows Best?" Asiaweek, 17 July 1998, p. 46):
To reverse (currency depreciation), countries
have to make it more attractive to hold domestic currency, and that means temporarily
raising interest rates, even if this (hurts) weak
banks and corporations.
Thailand
Thailands booming economy came to a halt amid massive layos in nance, real estate, and construction that
resulted in huge numbers of workers returning to their
villages in the countryside and 600,000 foreign workers
being sent back to their home countries.[29] The baht devalued swiftly and lost more than half of its value. The
baht reached its lowest point of 56 units to the U.S. dollar
in January 1998. The Thai stock market dropped 75%.
Finance One, the largest Thai nance company until then,
collapsed.[30]
Without foreign reserves to support the U.S.-Baht currency peg, the Thai government was eventually forced to
oat the Baht, on 2 July 1997, allowing the value of the
Baht to be set by the currency market. On 11 August
1997, the IMF unveiled a rescue package for Thailand
with more than $17 billion, subject to conditions such
as passing laws relating to bankruptcy (reorganizing and
restructuring) procedures and establishing strong regulation frameworks for banks and other nancial institutions.
The IMF approved on 20 August 1997, another bailout
package of $3.9 billion.
By 2001, Thailands economy had recovered. The increasing tax revenues allowed the country to balance its
budget and repay its debts to the IMF in 2003, four years
ahead of schedule. The Thai baht continued to appreciate
to 29 Baht to the U.S. dollar in October 2010.
5 Indonesia
See also: Fall of Suharto and Economy of Indonesia
In June 1997, Indonesia seemed far from crisis. Unlike
Thailand, Indonesia had low ination, a trade surplus of
more than $900 million, huge foreign exchange reserves
of more than $20 billion, and a good banking sector. But
a large number of Indonesian corporations had been borrowing in U.S. dollars. During the preceding years, as
the rupiah had strengthened respective to the dollar, this
practice had worked well for these corporations; their effective levels of debt and nancing costs had decreased
as the local currencys value rose.
In July 1997, when Thailand oated the baht, Indonesias monetary authorities widened the rupiah currency
6 South Korea
Further information: Economy of South Korea
7 Philippines
9 MALAYSIA
to 38 pesos in mid-1999 to 54 pesos as in early August of August, when hostilities ended with the closing of the
2001.
August Hang Seng Index futures contract. In 1999, the
The Philippine GDP contracted by 0.6% during the worst Government started selling those shares by launching the
part of the crisis, but grew by 3% by 2001, despite scan- Tracker Fund of Hong Kong, making a prot of about
dals of the administration of Joseph Estrada in 2001, HK$30 billion (US$4 billion).
most notably the jueteng scandal, causing the PSE
Composite Index, the main index of the Philippine Stock
Exchange, to fall to 1,000 points from a high of 3000 9 Malaysia
points in 1997. The pesos value declined to about 55 pesos to the U.S. dollar. Later that year, Estrada was on the
Further information: Economy of Malaysia
verge of impeachment but his allies in the senate voted
against continuing the proceedings.
Before the crisis, Malaysia had a large current account
This led to popular protests culminating in the "EDSA II
decit of 5% of its GDP. At the time, Malaysia was
Revolution", which eected his resignation and elevated
a popular investment destination, and this was reected
Gloria Macapagal-Arroyo to the presidency. Arroyo lessin KLSE activity which was regularly the most active
ened the crisis in the country. The Philippine peso rose
stock exchange in the world (with turnover exceeding
to about 50 pesos by the years end and traded at around
even markets with far higher capitalization like the New
41 pesos to a dollar in late 2007. The stock market also
York Stock Exchange). Expectations at the time were
reached an all-time high in 2007 and the economy was
that the growth rate would continue, propelling Malaysia
growing by more than 7 percent, its highest in nearly two
to developed status by 2020, a government policy articudecades.
lated in Wawasan 2020. At the start of 1997, the KLSE
Composite index was above 1,200, the ringgit was trading above 2.50 to the dollar, and the overnight rate was
8 Hong Kong
below 7%.
Further information: Economy of Hong Kong
7
ing shrunk 9% and the agriculture sector 5.9%. Over- 11 China
all, the countrys gross domestic product plunged 6.2% in
1998. During that year, the ringgit plunged below 4.7 and Further information: Economy of the Peoples Republic
the KLSE fell below 270 points. In September that year, of China
various defensive measures were announced to overcome
the crisis.
The Chinese currency, the renminbi (RMB), had been
The principal measure taken were to move the ringgit pegged to the U.S. dollar at a ratio of 8.3 RMB to the
from a free oat to a xed exchange rate regime. Bank dollar, in 1994. Having largely kept itself above the fray
Negara xed the ringgit at 3.8 to the dollar. Capital throughout 19971998 there was heavy speculation in the
controls were imposed while aid oered from the IMF Western press that China would soon be forced to devalue
was refused. Various task force agencies were formed. its currency to protect the competitiveness of its exports
The Corporate Debt Restructuring Committee dealt with vis-a-vis those of the ASEAN nations, whose exports becorporate loans. Danaharta discounted and bought bad came cheaper relative to Chinas. However, the RMBs
loans from banks to facilitate orderly asset realization. non-convertibility protected its value from currency specDanamodal recapitalized banks.
ulators, and the decision was made to maintain the peg
Growth then settled at a slower but more sustainable pace. of the currency, thereby improving the countrys standThe massive current account decit became a fairly sub- ing within Asia. The currency peg was partly scrapped in
stantial surplus. Banks were better capitalized and NPLs July 2005 rising 2.3% against the dollar, reecting preswere realised in an orderly way. Small banks were bought sure from the United States.
out by strong ones. A large number of PLCs were unable Unlike investments of many of the Southeast Asian nato regulate their nancial aairs and were delisted. Com- tions, almost all of Chinas foreign investment took the
pared to the 1997 current account, by 2005, Malaysia was form of factories on the ground rather than securities,
estimated to have a $14.06 billion surplus.[39] Asset val- which insulated the country from rapid capital ight.
ues however, have not returned to their pre-crisis highs. While China was unaected by the crisis compared to
In 2005 the last of the crisis measures were removed as Southeast Asia and South Korea, GDP growth slowed
the ringgit was taken o the xed exchange system. But sharply in 1998 and 1999, calling attention to structural
unlike the pre-crisis days, it did not appear to be a free problems within its economy. In particular, the Asian oat, but a managed oat, like the Singapore dollar.
nancial crisis convinced the Chinese government of the
need to resolve the issues of its enormous nancial weaknesses, such as having too many non-performing loans
within its banking system, and relying heavily on trade
with the United States.
10
Singapore
12 United States and Japan
13 CONSEQUENCES
13
13.1
Consequences
Asia
9
The reduction in oil revenue also contributed to the 1998
Russian nancial crisis, which in turn caused Long-Term
Capital Management in the United States to collapse after losing $4.6 billion in 4 months. A wider collapse in
the nancial markets was avoided when Alan Greenspan
and the Federal Reserve Bank of New York organized a
$3.625 billion bailout. Major emerging economies Brazil
and Argentina also fell into crisis in the late 1990s (see
Argentine debt crisis).[53]
The crisis in general was part of a global backlash against
the Washington Consensus and institutions such as the
IMF and World Bank, which simultaneously became unpopular in developed countries following the rise of the
anti-globalization movement in 1999. Four major rounds
of world trade talks since the crisis, in Seattle, Doha,
Cancn, and Hong Kong, have failed to produce a signicant agreement as developing countries have become
more assertive, and nations are increasingly turning toward regional or bilateral free trade agreements (FTAs)
as an alternative to global institutions.
Many nations learned from this, and quickly built up
foreign exchange reserves as a hedge against attacks, including Japan, China, South Korea. Pan Asian currency
swaps were introduced in the event of another crisis.
However, interestingly enough, such nations as Brazil,
Russia, and India as well as most of East Asia began
copying the Japanese model of weakening their currencies, restructuring their economies so as to create a
current account surplus to build large foreign currency
reserves. This has led to an ever-increasing funding for
U.S. treasury bonds, allowing or aiding housing (in 2001
2005) and stock asset bubbles (in 19962000) to develop
in the United States.
14
See also
15
References
Books
Delhaise Philippe F. (1998) Asia in Crisis : The Implosion of the Banking and Finance Systems. John
Wiley & Sons. ISBN 0-471-83193-X
10
Stiglitz, Joseph (1996). Some Lessons From The East
Asian Miracle. The World Bank Research Observer.
15
REFERENCES
Tecson, Marcelo L. (2009), IMF Must Renounce Its [16] Albert-Laszlo Barabasi explaining (at 26:02) Network
Weapon of Mass Destruction: High Interest Rates
Theory and Hubs in the BBC Documentary. BBC. Retrieved 11 June 2012. Unfolding the science behind the
(4-part paper on high-interest-rate fallacies and alidea of six degrees of separation
ternatives, emailed to IMF and others on 27 January
2009)
Other
Is Thailand on the road to recovery, article by Australian photo-journalist John Le Fevre that looks at
the eects of the Asian Economic Crisis on Thailands construction industry
Women bear brunt of crisis, article by Australian
photo-journalist John Le Fevre examining the effects of the Asian Economic Crisis on Asias female
workforce
The Crash (transcript only), from the PBS series
Frontline
Specic
[1] When the world started to melt http://www.euromoney.
com/Article/1005746/When-the-world-started-to-melt.
html
[2] http://www.ide.go.jp/English/Publish/Periodicals/De/
pdf/98_03_05.pdf
[3] Kaufman: pp. 1956
[4] http://www.adb.org/sites/default/files/KI/2003/rt29.pdf
[5] Pempel: pp 118143
[6] http://www.adbi.org/files/2012.08.28.wp377.central.
banking.financial.stability.asia.pdf
[7] Hughes, Helen. Crony Capitalism and the East Asian Currency Financial 'Crises. Policy. Spring 1999.
[8] Blustein: p. 73
[9] FRBSF Economic Letter : What Caused East Asias Financial Crisis? 7 August 1998
[11] Bernard Eccleston, Michael Dawson, Deborah J. McNamara (1998). The Asia-Pacic Prole. Routledge (UK).
ISBN 0-415-17279-9.
[12] FIRE-SALE FDI by Paul Krugman.
[30] Liebhold, David. Thailands Scapegoat? Battling extradition over charges of embezzlement, a nancier says hes
the fall guy for the 1997 nancial crash. Time.com. 27
December 1999.
11
16 External links
Impact on Indonesia from the Dean Peter Krogh
Foreign Aairs Digital Archives
Congressional Research Service report for US
Congress
Asias Financial Sector: 12 Things to Know Asian
Development Bank
12
17
17
17.1
17.2
Images
Public
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17.3
17.3
Content license
Content license
13