Asian financial crisis

The Asian financial crisis was a financial crisis that started in July 1997 in Thailand, and affected currencies, stock markets, and other asset prices of several Asian countries, many part of the East Asian Tigers. It is also commonly referred to as the Asian currency crisis or locally, although inaccurately, as the IMF crisis.

History

Until 1996, Asia attracted almost half of total capital inflow to developing countries. However, Thailand, Indonesia and South Korea had large private current account deficits and the maintenance of pegged exchange rates encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors.

Related Topics:
Developing countries - Pegged exchange rate

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Economists have advanced the impact of Mainland China on the real economy as a contributing factor to the crisis but the main cause of the crises was excessive real estate speculation. China had begun to compete effectively with other Asian exporters particularly in the 1990s after the implementation of a number of export-oriented reforms. Most importantly, the Thai and Indonesian currencies were closely tied to the dollar, which was appreciating in the 1990s. Western importers sought cheaper manufacturers and found them, indeed, in China whose currency was depreciated relative to the dollar.

Related Topics:
Real economy - Closely tied

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

The Asian crisis started in mid-1997 and affected currencies, stock markets, and other asset prices of several South East Asian economies. Triggered by events in Latin America, Western investors lost confidence in securities in East Asia and began to pull money out, creating a snowball effect.

~ ~ ~ ~ ~ ~ ~ ~ ~ ~

Many economists, including Joseph Stiglitz and Jeffrey Sachs, have downplayed the role of the real economy in the crisis compared to the financial markets due to the speed of the crisis. The rapidity with which the crisis happened has prompted Sachs and others to compare it to a classic bank run prompted by a sudden risk shock. Sachs points to strict monetary and contractory fiscal policies implemented by the governments at the advice of IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a "herd mentality" among investors that magnified a relatively small risk in the real economy. The crisis has thus attracted interest from behavioral economists interested in market psychology.

Related Topics:
Joseph Stiglitz - Jeffrey Sachs - Bank run - Risk shock - Frederic Mishkin - Asymmetric information - Behavioral economists - Market psychology

~ ~ ~ ~ ~ ~ ~ ~ ~ ~