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Sachs pointed to strict monetary and contractory fiscal policies implemented by the governments on the advice of the IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a " herd mentality " among investors that magnified a relatively small risk in the real economy. The crisis had thus attracted interest from behavioral economists interested in market psychology.
Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on July 1, During the s, hot money flew into the Southeast Asia region but investors were often ignorant of the actual fundamentals or risk profiles of the respective economies. The uncertainty regarding the future of Hong Kong led investors to shrink even further away from Asia, exacerbating economic conditions in the area subsequently leading to the devaluation of the Thai baht on July 2, A year earlier, the finance ministers of these same countries had attended the 3rd APEC finance ministers meeting in Kyoto , Japan on 17 March , and according to that joint declaration, they had been unable to double the amounts available under the 'General Agreement to Borrow' and the 'Emergency Finance Mechanism'.
As such, the crisis could be seen as the failure to adequately build capacity in time to prevent currency manipulation. This hypothesis enjoyed little support among economists, however, who argue that no single investor could have had enough impact on the market to successfully manipulate the currencies' values. In addition, the level of organization necessary to coordinate a massive exodus of investors from Southeast Asian currencies in order to manipulate their values rendered this possibility remote.
IMF role Such was the scope and the severity of the collapses involved that outside intervention, considered by many as a new kind of colonialism , [ Halloran, Richard. Global Beat Issue Brief No. January 27, Since the countries melting down were among not only the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to the crisis had to be cooperative and international, in this case through the International Monetary Fund IMF.
The IMF created a series of bailouts "rescue" packages for the most affected economies to enable affected nations to avoid default , tying the packages to reforms that were intended to make the restored Asian currency, banking, and financial systems as much like those of the United States and Europe as possible. In other words, the IMF's support was conditional on a series of drastic economic reforms influenced by neoliberal economic principles called a " structural adjustment package" SAP.
The SAPs called on crisis-struck nations to cut back on government spending to reduce deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rate s. The reasoning was that these steps would restore confidence in the nations' fiscal solvency , penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favored parties receiving funds by preference.
There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. In short, exactly the same kinds of financial institutions found in the United States and Europe had to be created in Asia, as a condition for IMF support. In addition, financial systems had to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions.
As country after country fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditor s. The dynamics of the situation were closely similar to that of the Latin American debt crisis. The effects of the SAPs were mixed and their impact controversial.
Critics, however, noted the contractionary nature of these policies, arguing that in a recession , the traditional Keynesian response was to increase government spending, prop up major companies, and lower interest rates. The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic pain.
They pointed out that the U. Although such reforms were, in most cases, long needed, the countries most involved ended up undergoing an almost complete political and financial restructuring. They suffered permanent currency devaluations, massive numbers of bankruptcies, collapses of whole sectors of once-booming economies, real estate bust s, high unemployment , and social unrest. For most of the countries involved, IMF intervention has been roundly criticized.
The role of the International Monetary Fund was so controversial during the crisis that many locals called the financial crisis the "IMF crisis". Wall Street Journal. From until 2 July , the baht was pegged at 25 to the dollar. On 14 May and 15 May , the Thai baht was hit by massive speculative attacks. This was the spark that ignited the Asian financial crisis as the Thai government failed to defend the baht, which was pegged to the U.
Thailand's booming economy came to a halt amid massive layoff s in finance , real estate , and construction that resulted in huge numbers of workers returning to their villages in the countryside and ' foreign workers being sent back to their home countries. The baht reached its lowest point of 56 units to the US dollar in January Finance One , the largest Thai finance company until then, collapsed.
December 27, The increasing tax revenue s allowed the country to balance its budget and repay its debts to the IMF in , four years ahead of schedule. The Thai baht continued to appreciate to 34 Baht to the Dollar in July Indonesia In June , Indonesia seemed far from crisis. But a large number of Indonesian corporations had been borrowing in U. During the preceding years, as the rupiah 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.
The rupiah suddenly came under severe attack in August. On 14 August , the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The rupiah and the Jakarta Stock Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's long-term debt to ' junk bond '.
Although the rupiah crisis began in July and August , it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars through selling rupiah, undermining the value of the latter further. The inflation of the rupiah and the resulting steep hikes in the prices of food staples led to rioting throughout the country in which more than people died in Jakarta alone.
In February , President Suharto sacked the governor of Bank Indonesia , but this had proved insufficient. Suharto was forced to resign in mid and B. Habibie became President. Before the crisis, the exchange rate between the rupiah and the dollar was roughly rupiah to 1 USD.
The rate had plunged to over rupiah to 1 USD at various points during the crisis. Indonesia lost 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 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. For example, in July , South Korea's third-largest car maker, Kia Motors , asked for emergency loans. In the wake of the Asian market downturn, Moody's lowered the credit rating of South Korea from A1 to A3, on November 28 , , and downgraded again to B2 on December That contributed to a further decline in Korean shares since stock markets were already bearish in November.
And on November 24 , stocks fell a further 7. In , Hyundai Motor took over Kia Motors. The Korean won , meanwhile, weakened to more than 1, per dollar from around Despite an initial sharp economic slowdown and numerous corporate bankruptcies, Korea has managed to triple its per capita GDP in dollar terms since However, like the chaebol , South Korea's government did not escape unscathed.
Its national debt -to- GDP ratio more than doubled app. Philippines The Philippine central bank raised interest rate s by 1. The peso fell significantly, from 26 pesos per dollar at the start of the crisis, to 38 pesos in , and to 40 pesos by the end of the crisis. The Philippine economy recovered from a contraction of 0. The peso fell even further, trading at levels of about 55 pesos to the US dollar.
Later that year, Estrada was on the verge of impeachment but his allies in the senate voted against the proceedings to continue further. Arroyo managed to lessen the crisis in the country, which led to the recovery of the Philippine peso to about 50 pesos by the year's end and is now trading at around 41 pesos to a dollar by end The stock market also reached an all time high in and the economy is growing by at least more than 7 percent, its highest in nearly 2 decades.
Hong Kong Although the two events were unrelated, the collapse of the Thai baht on July 2 , , came only 24 hours after the United Kingdom handed over sovereignty of Hong Kong to the People's Republic of China. In October , the Hong Kong dollar , which had been pegged at 7. The Hong Kong Monetary Authority then promised to protect the currency. The HKMA had recognized that speculators were taking advantage of the city's unique currency-board system, in which overnight rates automatically increase in proportion to large net sales of the local currency.
The rate hike, however, increased downward pressure on the stock market, allowing speculators to profit by short selling shares. At the time, Malaysia was a popular investment destination, and this was reflected in KLSE activity which was regularly the most active stock exchange in the world with turnover exceeding even markets with far higher capitalization like the NYSE.
Expectations at the time were that the growth rate would continue, propelling Malaysia to developed status by , a government policy articulated in Wawasan In July , within days of the Thai baht devaluation, the Malaysian ringgit was "attacked" by speculators.
This led to rating downgrades and a general sell off on the stock and currency markets. In , the output of the real economy declined plunging the country into its first recession for many years. The construction sector contracted Overall, the country's gross domestic product plunged 6. During that year, the ringgit plunged below 4. In September that year, various defensive measures were announced in order to overcome the crisis. The principal measure taken were to move the ringgit from a free float to a fixed exchange rate regime.
Bank Negara fixed the ringgit at 3. Capital controls were imposed while aid offered from the IMF was refused. Various task force agencies were formed. The Corporate Debt Restructuring Committee dealt with corporate loans. Danaharta discounted and bought bad loans from banks to facilitate orderly asset realization.
Danamodal recapitalized banks. Growth then settled at a slower but more sustainable pace. The massive current account deficit became a fairly substantial surplus. Banks were better capitalized and NPLs were realised in an orderly way. Small banks were bought out by strong ones. Unfortunately, this was an excuse for the government-linked banks, which were actually in a weak financial position to force the smaller banks out of the market.
Ironically, it was the smaller banks, managed in a sound financial manner, that were dissolved, instead of the larger politically-favored banks. A large number of PLCs were unable to regulate their financial affairs and were delisted. In the last of the crisis measures were removed as the ringgit was taken off the fixed exchange system. The mix of policies varied by country, but generally included measures to deleverage, clean up and strengthen weak financial systems, and to improve the competitiveness and flexibility of their economies.
On the macro side, countries hiked interest rates to help stabilize currencies and tightened fiscal policy to speed external adjustment and cover the cost of bank clean-ups. However, over time, as markets began to stabilize, the macro policy mix evolved to include some loosening of fiscal and interest rate policy to support growth. The Federal Reserve played an active role in informing and supporting the U.
Behind the scenes, the Federal Reserve provided timely analysis of the underlying adjustment challenges and closely monitored the risks the crisis posed to U. The Fed also acted as an agent for the U. Treasury, including by helping arrange a bridge loan for Thailand in the early stages of the crisis.
Perhaps most visibly, the Federal Reserve played a catalytic role in an official sector effort to encourage banks to act in their collective self interest in helping South Korea avoid a disorderly default. Similar meetings and other forms of outreach took place in other G countries. The combination of strong policy measures by the affected countries and external support from the international community ultimately contained the crisis and set the stage for a subsequent strong recovery.
For the United States, the adverse direct trade impact resulting from the Asian crisis proved manageable, and was partly offset by some other more positive spillovers, including reduced inflation pressures from cheaper Asian imports and weaker global commodity prices and lower bond yields from a flight to dollar assets. The adverse fallout for some other countries was more substantial. Board of Governors of the Federal Reserve System.
Boughton, James. Blustein, Paul. New York: PublicAffairs, Fischer, Stanley. Cambridge: MIT Press, Rhodes, William. New York: McGraw—Hill, Rubin, Robert, and Jacob Weisberg. New York: Random House, Current Fed leaders.
The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July and raised fears of a. The Asian financial crisis was a period of financial crisis that gripped much of East Asia and Southeast Asia beginning in July and raised fears of a worldwide economic meltdown due to financial contagion. However, the recovery in – The –98 Asian financial crisis began in Thailand and then quickly spread to neighbouring economies. It began as a currency crisis when Bangkok unpegged.