1 THE ASIAN CRISIS 1
1.1 Introduction 1
1.2 History 1
1.3 How it happened â€“ its eruption in 1997 2
1.3.1 Thailand 2
1.3.2 Indonesia 2
1.3.3 South Korea 3
1.3.4 Other countries 3
1.4 What went wrong 3
1.4.1 Over-leveraging with â€œhot moneyâ€ 4
1.4.2 Crony capitalism 4
1.4.3 Role of the financial system 5
1.4.4 Moral hazard problem 5
1.4.5 Growth through capital infusion without increase in productivity 6
1.4.6 Pegged exchange rates 7
1.4.7 Current account deficits 7
1.4.8 Huge foreign debt and the role of short-term external debt 8
1.4.9 Small foreign reserves 8
1.5 Conclusion 9
1.6 Sources 9
THE ASIAN CRISIS
TheÂ Asian Financial ...view middle of the document...
3 How it happened â€“ its eruption in 1997
From 1985 to 1996,Â Thailand's economy grew at an average of over 9% per year, the highest economic growth rate of any country at the time. Inflation was kept reasonably low within a range of 3.4â€“5.7%. The baht was pegged at 25 to the US dollar.
On 14 May and 15 May 1997, theÂ Thai bahtÂ was hit by massive speculative attacks. On 30 June 1997, Prime MinisterÂ Chavalit YongchaiyudhÂ said that he would notÂ devalueÂ the baht. This was the spark that ignited the Asian financial crisis as theÂ Thai governmentÂ failed to defend the baht, which was pegged to the U.S. dollar, against international speculators.
Thailand's booming economy came to a halt amid massiveÂ layoffsÂ inÂ finance,Â real estate andÂ constructionÂ 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.Â The baht devalued swiftly and lost more than half of its value. The baht reached its lowest point of 56 units to the US dollar in January 1998. The Thai stock market dropped 75%.Â Finance One, the largest Thai finance company until then, collapsed.
In June 1997,Â IndonesiaÂ seemed far from crisis. Unlike Thailand, Indonesia had lowÂ inflation, aÂ trade surplusÂ of more than $900 million, 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 theÂ rupiahÂ had strengthened respective to the dollar, this practice had worked well for these corporations; their effective levels of debt and financing costs had decreased as the local currency's value rose.
In July 1997, when Thailand floated theÂ baht, the rupiah suddenly came under severe attack in August. On 14 August 1997, the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The IMF came forward with a rescue package of $23 billion, but the rupiah was sinking further amid fears over corporate debts, massive selling of rupiah, and strong demand for dollars. The rupiah and theÂ Jakarta Stock ExchangeÂ touched a historic low in September (devaluated from 2000 to 18000 for a US $).Â Moody'sÂ eventually downgraded Indonesia's long-term debt to 'junk bond'.
3 South Korea
Macroeconomic fundamentals inÂ South KoreaÂ were good but the banking sector was burdened withÂ non-performing loansÂ as its large corporations were funding aggressive expansions. During that time, there was a haste to build great conglomerates to compete on the world stage. Many businesses ultimately failed to ensure returns and profitability. The South Korean conglomerates, more or less completely controlled by the government, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers.
TheÂ Seoul stock exchangeÂ fell by 4%...