Asian financial crisis, 1997-1998

Episode #9 of the course “World’s biggest financial crises”

Markets in the United States are definitely not the only markets to have world-wide effects. In 1997, the Asian financial market dropped significantly, and its effects were felt in the United States, Russia, and Europe.

The Asian Financial Crisis is also known as the Asian Contagion. Prior to the drop, these Asian countries had experienced unprecedented growth. Their exports were extremely high, and profits as well as the gross domestic product (GDP) soared. However, most of that growth was created by incurring debt, particularly in the real estate market. The crisis caused huge stock market losses, some as much as 70 percent of their value.

The crisis was triggered by a series of devaluations in currency that began in the summer of 1997. The first currency failure was in Thailand, and it was directly connected to the local government’s decision to untie the local currency from the value of the United States dollar. Currency declines continued throughout South Asia shortly thereafter. It also caused stock market declines, government pressures, and reduced import revenues. The crisis was also likely partly affected by the intervention of the International Monetary Fund (IMF) and the World Bank. The IMF loaned money to at least three Asian countries as a result of the crash, requiring them to implement very specific financial policies (which were not free of criticism from the Western countries).

Following the crisis, many countries began to buy U.S. treasury bonds, which are used as a global investment tool, to help stabilize their own currencies. The Asian Contagion also showed Asian countries like Japan, South Korea, Thailand, and Indonesia that major financial reforms were needed and helped economists around the world understand the connection between global markets.

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