Asian Financial Crisis

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Definition: Asian Financial Crisis



Full Definition of Asian Financial Crisis


The Asian financial crisis was a financial crisis of 1997 that crippled the economies of most of Asia. Commonly, known as the IMF crisis, there prevailed a constant fear of worldwide financial contagion due to this crisis. It is known that the initiation of the Asian crisis took place with the financial collapse of the Thai baht. In Thailand, due to sudden fluctuations in the financial situation, the government decided to drift baht against the US dollars. This aggravated the situation to such extent that a severe financial tension emerged.

Reasons behind the crisis

There were several causes one leading to other, responsible for the ineradicable Asian crisis. Some of the reasons can be summarized as:

  • Invalid current account deficits: It is observed that some of the economies of South Asian countries had large current account deficits, rising as high as 5 per cent of GDP. In order to finance these deficits, there was capital inflow on a large scale from abroad in the form of short-term capital. The ratio of foreign debt-to-GDP increased from 100 per cent to 167 per cent in major four ASEAN economies. The worst of the crisis was then when the ratio rose to 180 per cent. Statistics say that foreign debt-to-GDP ratios at Korea were initially rose 13 per cent to 21 per cent but lastly rose as high as 40 per cent.
  • Over-dependence on short-term foreign funds: Due to current account deficits, there was a huge cash flow from abroad, which was mainly of short-term type. As a result, there was excessive leverage in foreign liabilities.
  • Poor regulation of the economy: The regulatory framework of several southeastern economies was inefficient; particularly the banking sector was unable to regulate monetary activities of economies. Since there was easy access to funds due to ineffective regulatory policies of financial institutions; some investments were made in uncertain projects.
  • Over-inflated asset prices: Asset values in most of the Southeast Asian economies were unexpectedly high. The reason was an excessive increase in the money supply and the economy could hardly absorb the money circulated. Thus there was excessive credit in the economy, which was used to feed speculative booms of the sectors like real estate, industry and the stock market.
  • Failure of macroeconomic policy: Government of the Asian economies had made fundamental errors in policies used for running economies. Fixed exchange rate policy was the major fault of the governing body. Since exchange rates could not fluctuate according to the changes in the economy, there were large deficits in trade.

Effects of the crisis

The effect of the Asian crisis was such that it almost crippled the economy of the region. Let’s discuss the effects of the crisis on various sectors of the economy.

When talking about any economy, the thought of equity market comes first. Since, stock markets indicate economy health of a country, during the Asian crisis there were quick falls in the stock markets. Another major effect was a sharp decline in the value of several regional currencies against the dollar. Interest rates increased significantly during the crisis. This resulted in diminishing availability of funds for borrowing. Another major system decreased in real economic activities as there was a rise in business bankruptcies and unemployment.

Despite the sound fiscal policies of the governments of Asia, nothing much could be done to solve the crisis. IMF gave rescue funding to the most badly affected economies. It was IMF who intervened and provided a $40 billion agenda to stabilize the currencies of South Korea, Thailand, and Indonesia, which were the most badly affected economies. Reforms were made in fiscal policies and there was tightening of policy to limit the borrowing of capital from overseas. Monetary policy was also changed and a high-interest rate policy was adopted that reduced external capital inflows while sustaining competition in export. By the end of 1999, there was a sign of recovery of the Asian economies.


Synonyms For Asian Financial Crisis


The IMF crisis

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Definition Sources


Definitions for Asian Financial Crisis are sourced/syndicated and enhanced from:

  • A Dictionary of Economics (Oxford Quick Reference)
  • Oxford Dictionary Of Accounting
  • Oxford Dictionary Of Business & Management

This glossary post was last updated: 26th March, 2020 | 2 Views.