Asian Currency Crisis
The Asian currency crisis of 1996-97 brought to light the dangers of financing massive amounts of debt in a foreign currency which the domestic currency is pegged to. It also illustrated how developing countries are ill prepared to cope with such large scale financial issues.
The projected continued growth in the Asian markets was built heavily on exaggerated predictions. Between 1990 and 1996 the area witnessed an exponential development period. Prior to the 90’s southern Asia countries exported predominantly textile based products at cheap prices. As the technology wave began to flourish demand for the components required began to rise ...view middle of the document...
With such a level availability they caused the value of the products that were once very high to drop dramatically. The semi-conductor market for example, which fueled much of the technological market, saw its prices drop by as much as 90%. With prices falling below what was needed to support the cost of the financed production facilities companies began to default on their loans. As growth came to halt commercial and residential properties sat empty. Builders had ultimately created a five year supply of housing. With the buildings sitting empty and now no plans for further development, construction companies began to collapse one after another. This situation accelerated at such a rate that it could not be stopped primarily due to the over-extension of credit and the monetary policy of the aforementioned countries. All four countries had pegged their currencies to the dollar, and lent all the money in dollars. As the market disintegrated the governments could no longer support the pegged currency and each country went to a floating rate. Once on the open market the value of the currencies plummeted. Since all the lending was originally dispersed in dollars, consequently, it had to be repaid in dollars. The amounts that the companies had to repay increased as the currency values decreased. With massive amounts of now default debt the financial markets collapsed.
Since many of the financiers invested between counties, and the countries operated they same monetarily, the problem spread throughout the region. The main four countries all followed the same economic policy as well, in which the governments steered private investment. Japan, although removed from the same governmental and fiscal mistakes saw their financial markets erode since some of their largest banks invested in the countries experiencing the financial devastation.
As a result of the crisis, the economic development of these countries was halted. Prior to the boom, the countries were underdeveloped and very poor. The short lived expansion brought much wealth and a promise to the area. Foreign companies viewed the area as a place to invest in which created jobs and strengthened the economy. Asia was thought to be a great place to invest in. The collapse scared potential foreign investment away and set back the countries economically a decade or more. It reinforced the risk involved in investing in developing markets. Without foreign investment, the countries were forced to dig themselves out of a recession solely through their export industry. The area also lost many domestic companies due foreign acquisition when their values dropped. Most importantly the crisis affected the countries’ exchange rates.
Once Indonesia, Malaysia, Thailand and South Korea released their currencies to the market they reached real market value. Exchange rates dropped by 50% or more for the four countries. Internal wealth was wiped away and the countries were once again quite poor. Some...