Asian Financial Crisis

The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning
in July 1997, and raised fears of a worldwide economic meltdown due to financial contagion.

The period following the devaluation of the Thai baht on July 2nd 1997 witnessed a sudden and
unprecedented collapse in asset prices, corporate and financial fragility, and a drastic economic
slowdown in East Asian markets. In just over 12 months, the region's stock markets-once among
the largest in the world-saw their market capitalisation shrink by as much as 85% in US dollar
terms. Similarly, East Asian currencies depreciated sharply beyond the levels needed to maintain
export competitiveness1, with some currencies falling by 50-80% against the US dollar by end-
July 1998. East European and Latin American currencies also experienced some speculative
pressure in the latter half of 1997, but generally fared much better.

COUNTRIES AFFECTED BY ASIAN CRISIS:

Indonesia, South Korea and Thailand were the countries most affected by the crisis. Hong Kong,
Malaysia, Laos and the Philippines were also hurt by the slump. The People's Republic of China,
India, Taiwan, Singapore, Brunei and Vietnam were less affected, although all suffered from a
loss of demand

REASONS:

In the last few years there has been considerable discussion of the causes of the 1997 Asian
Financial crisis. Two main views have emerged. The first attributes the initial financial turmoil in
some Asian countries in 1997 and its propagation over time mainly to sudden shifts in market
expectations and confidence followed by regional contagion (Radelet and Sachs 1998; Marshall
1998; and Chang and Velasco 1999). While admitting the worsening of the macroeconomic
performance of some affected countries in the mid-1990s, this view suggests that the extent and
depth of the crisis should not be attributed to deterioration in fundamentals, but rather to panic on
the part of domestic and international investors.
The second argues that the crisis occurred primarily as a result of structural and policy
distortions (Corsetti, Pesenti, and Roubini 1998; Dooley 1999). According to this view,
fundamental imbalances triggered the currency and financial crisis in 1997 even as after the
crisis started, market overreaction and herding caused the plunge in exchange rates, assets prices,
and economic activity to be more severe than warranted by the initial weak economic and
financial conditions. In the last few years there has been considerable discussion of the causes of
the 1997 Asian financial crisis.
Two main views have emerged. The first attributes the initial financial turmoil in some Asian
countries in 1997 and its propagation over time mainly to sudden shifts in market expectations
and confidence followed by regional contagion (Radelet and Sachs 1998; Marshall 1998; and
Chang and Velasco 1999). While admitting the worsening of the macroeconomic performance of
some affected countries in the mid-1990s, this view suggests that the extent and depth of the
crisis should not be attributed to deterioration in fundamentals, but rather to panic on the part of
domestic and international investors. The second argues that the crisis occurred primarily as a
result of structural and policy distortions (Corsetti, Pesenti, and Roubini 1998; Dooley 1999).
According to this view, fundamental imbalances triggered the currency and financial crisis in
1997 even as after the crisis started, market overreaction and herding caused the plunge in
exchange rates, assets prices, and economic activity to be more severe than warranted by the
initial weak economic and financial conditions.
Evolution Came after crisis:

The Asian financial crisis took place in 1997, which had an evolution that started mainly in the
90's in countries such as South Korea, Thailand, Indonesia and Malaysia. These countries
experienced a rapid international debt boost, due to shorter payments dead line. Thus, the
international debt of North Korea, for instance, increased from 31.699 million dollars in 1990 to
164.345 million at the end of 1996. Thailand increased from 28.088 million dollar debt to 90.622
million in the same period. The short-debt represented 31% of the total debt in 1990 for South
Korea, yet in 1996 it represented 67% (world bank report). Most parts of this debt was involved
in the private sector.