Question

Question

The Asian financial crisis began in mid-1997 when Thailand devaluated its currency. This caused a widespread turbulence in international financial markets. How did international banks play a role in this crisis? What are the lessons can we learn from these banks’ involvement in the crisis?

Answer 1

Answer:

The ASIAN FINANCIAL CRISIS happened in the summer 1997, it is also called Asian Contagion, it began due to currency devaluation, currency market failed in Thailand first then it spread through many Asian markets. Thailand currency devaluated because Government decided not to peg the local currency (Bhat) to the U.S dollar. This resulted failure of currency markets and stock markets also. It reduced import revenues. Thailand was forced to float its currency (Thai Bhat). This was also due to speculative attacks, Thailand currency devaluated and it led to loss in Asian economies, investors including FIIs sold their positions and they wanted to exit from the Asian countries. Stock market crashed due to this.

Due to this crisis, East Asian currencies fell by 30%-38%. In the early 1990, there was an increase of short term lending by commercial banks. Most of the banks' lending was non-syndicated, this resulted more capital flowed into these economies that were profitable. There was not a proper adjustment in risk and return. In the Asian economy, there was liquidity expansion so interest rates came down and it increased the lending, investors invested in these economies because of high returns and yields. It was the beginning of the crisis.

This crisis recovered due to intervention of the International Monetary fund and World Bank. Banks throw some liquidity in the Asian economy. Asian economy got the bailout package in August 1997. Many countries recovered in 1999.

Lesson that we can learn from this crisis is that Investors should be aware and beware of the asset bubbles, Banks should lend loan with proper documentation and collateral. Government should always keep an eye on the spending part, any thing can lead to asset bubble and may cause the financial crisis.