1997 ASIAN FINANCIAL CRISIS

1997 Asian Financial Crisis

1997 Asian Financial Crises

Introduction

The Asian crisis included the financial, monetary and economic crisis in East Asia from the years 1997 and 1998. It began in March 1997 in Thailand and spread to several Asian countries about, and in particular many of the so-called Tiger and Panther States. The most affected countries were Indonesia, South Korea and Thailand. Even in Malaysia, the Philippines and Singapore, the crisis became apparent, while the People's Republic of China and Taiwan remained largely unaffected. The simultaneous economic crisis in Japan had own causes, but was aggravated by the Asian crisis (Timothy, 1999).

Causes

For the crisis in 1997/98 in Asia several explanations were subsequently given by experts. Economic policy failures occurred such as excessive investment and trade deficits and fiscal excesses of excessive borrowing, in foreign currency, and institutional shortcomings in the regional financial markets. While these explanations a self-inflicted crisis, combined with a failure of diagnose international financial markets, was of other economists of the International Monetary Fund moved to the centre of criticism (Radelet & Sachs, 2000).

Credit bubble

The liberalization of the financial sectors of Asian countries emerged in the nineties, a credit boom in Asia. The growth in loan volume during this period was on average 8 to 10 percent higher than the growth rates of GDP. It emerged not only as industrial overcapacity in South Korea, but a growing share of loans were for the purchase of shares and real estate used. The result was a rise in stock markets and a sharp rise in property prices by up to four times. With the rising real estate and stock prices believed that Asian banks have good collateral, which led to more lending. This capital in turn flowed into stocks and real estate. By the resulting price increases in some areas was a speculative bubble. This vicious circle of lending and rising value of the collateral had a strong bias in the lending policies. The end of 1997 secured the share of loans by real estate in Thailand, Indonesia and Malaysia was between 25 and 40 percent. This made the banks to price declines in the shares and property market vulnerable (Timothy, 1999)

Lack of foreign currency hedging

Other problems resulted from different maturities and currencies of loans granted and recorded. As banks sought to benefit from the low interest rate situation on the international financial markets, the debt was often in U.S. dollars or yen with short maturities. Lending to domestic borrowers was mostly long term and in local currency. Credit institutions funded long-term loans with the help of short ingested money. Due to this approach, there were serious differences in maturity and currency between the recorded and assigned loans.

At this time, a serious error was committed because the financial institutions relied on the close coupling of the domestic currency to an anchor currency, mostly the U.S. dollar, and their stability. They saw no need to liabilities in yen or dollars against exchange rate fluctuations ...