what was the asian financial crisis 
the asian financial crisis also called the asian contagion was a sequence of currency devaluations and other events that began in july 1997 and spread across asia the crisis started in thailand when the government ended the local currency s de facto peg to the u s dollar after depleting much of the country s foreign exchange reserves trying to defend it against months of speculative pressure 1just weeks after thailand stopped defending its currency malaysia the philippines and indonesia were also compelled to let their currencies fall as speculative market pressure built by october the crisis spread to south korea where a balance of payments crisis brought the government to the brink of default 1other economies also came under pressure but those with solid economic fundamentals and hefty foreign exchange reserves fared much better hong kong fended off several major but unsuccessful speculative attacks on its currency which is pegged to the u s dollar via a currency board system and backed by massive u s dollar reserves 12impact of the asian financial crisisas the thai baht fell other asian currencies fell some precipitously across asia inflows of capital slowed or reversed the thai baht had been trading at about 26 to the u s dollar before the crisis but lost half its value by the end of 1997 falling to 53 to the dollar by january 1998 the south korean won fell from about 900 to the dollar to 1 695 by the end of 1997 the indonesian rupiah which had been trading at around 2 400 to the dollar in june 1997 plummeted to 14 900 by june 1998 less than one sixth its precrisis level some of the more heavily affected countries fell into severe recession indonesia s gross domestic product gdp growth fell from 4 7 in 1997 to 13 1 in 1998 3 in the philippines it slid from 5 2 to 0 5 over the same period 4 malaysia s gdp growth similarly slid from 7 3 in 1997 to 7 4 in 1998 while south korea s contracted from 6 2 to 5 1 56in indonesia the ensuing economic crisis led to the collapse of the three decade old dictatorship of president suharto 7the crisis was alleviated by intervention from the international monetary fund imf and the world bank among others which poured some 118 billion into thailand indonesia and south korea to bail out their economies 1as a result of the the crisis affected countries restructured their economies generally because the imf required reform as a condition of help the specific policy changes were different in each country but generally involved strengthening weak financial systems lowering debt levels raising interest rates to stabilize currencies and cutting government spending 1the crisis also serves as a valuable case study for economists to understand how interwoven markets affect one another especially as it relates to currency trading and national accounts management causes of the asian financial crisisthe crisis was rooted in several threads of industrial financial and monetary government policies and the investment trends that they created once the crisis began markets reacted strongly and one currency after another came under pressure some of the macroeconomic problems included current account deficits high levels of foreign debt climbing budget deficits excessive bank lending poor debt service ratios and imbalanced capital inflows and outflows many of these problems were the result of policies to promote export led economic growth in the years leading up to the crisis governments worked closely with manufacturers to support exports including providing subsidies to favored businesses more favorable financing and a currency peg to the u s dollar to ensure an exchange rate favorable to exporters while this did support exports it also created risk explicit and implicit government guarantees to bail out domestic industries and banks meant investors often did not assess the profitability of an investment but instead looked to its political support investment policies also created cozy relationships among local conglomerates financial institutions and the regulators who oversaw their industries large volumes of foreign money flowed in often with little attention to potential risks these factors all contributed to a massive moral hazard in asian economies encouraging major investment in marginal and potentially unsound projects as the crisis spread it became clear that the impressive economic growth rates in these countries were concealing serious vulnerabilities in particular domestic credit had expanded rapidly for years often poorly supervised creating significant leverage along with loans extended to dubious projects rapidly rising real estate values often fueled by easy access to credit contributed to the problem along with rising current account deficits and a buildup in external debt heavy foreign borrowing often at short maturities also exposed corporations and banks to significant exchange rate and funding risks risks that had been masked by long standing currency pegs when the pegs fell apart companies that owed money in foreign currencies suddenly owed a lot more in local currency terms forcing many into insolvency 1many asian economies had also slid into current account deficits if a country has a current account surplus that means it is essentially a net lender to the rest of the world if the current account balance is negative then the country is a net borrower from the rest of the world current account deficits had grown on the back of heavy government spending much of it directed to supporting continued export growth response to the asian financial crisisthe imf intervened to stem the crisis with loans to stabilize the affected economies the imf and others lent roughly 118 billion in short term loans to thailand indonesia and south korea 1 the bailouts came with conditions though governments had to raise taxes cut spending and eliminate many subsidies by 1999 many of the affected countries began to show signs of recovery other financial institutions also intervened for example in december 1997 the u s federal reserve bank brokered a deal under which u s banks owed money by south korean companies on short term loans voluntarily agreed to roll them over into medium term loans 1lessons from the asian financial crisismany of the lessons of the asian financial crisis remain relevant today first beware of asset bubbles as they have a habit of bursting another is that governments need to control spending and pursue prudent economic development policies 