Case Name: South East Asian Economic Crisis An economic crisis, which erupted in Thailand in mid-1997 and which soon spread to neighbouring countries—Malaysia, Indonesia, Philippines and South Korea— came to be popularly referred to as South-East Asian economic crisis (although South Korea is in East Asia and only the other countries are in South East Asia). A currency Crisis shows up when there is a speculative attack on the exchange rate, resulting in a devaluation of a pegged currency or sharp depreciation of floating currency. When currency crisis occurs the domestic monetary authorities usually lose large amounts of their international reserves and/or raise interest rates vary sharply in order to tray to discourage capital outflows. A banking Crisis occurs because depositors lose confidence in the solvency of banks and attempt to withdraw their deposits, thereby causing r run on the banks. Alternatively, it may occur because banks make so many bad loans and investments that they become insolvent without any depositors’ panic. In either case, banks are forced to close or seek financial support from their governments. Failure of one small bank might not produce a crisis, but failure of a bank that has large share of deposits would, as would failure of a number of banks at the same time. Systemic Financial Crisis: The third type if financial crisis involves severe disruption in domestic financial markets that hampers the working of the real economy. Such a crisis is harmful to real activity because it disrupts the payment system and leads to a breakdown of all those markets that channel funds from savers to borrowers. Banking and currency crisis may be components of a systemic financial crisis, but this is something bigger the earlier of these two, involving equity and bond markets as well as money market institutions. Foreign Debt Crisis: The final type of crisis arises when one or more countries find that they are unable to keep up the interest payments on their foreign debt. This situation may trigger loss of confidence in the economy or the government, and so could bring about a currency and banking crisis. It also frequently involves application to the IMF for financial assistance. When granting a loan, the IMF
typically imposes some conditionality, or special terms, which often involve monetary and fiscal tightening. There will also usually be some negotiation between debtors and creditors in order to reschedule the debt, that is turn unpaid interest into a further loan. The Asian Crisis that broke out in Summer 1997 had elements of Currency Crisis and Banking Crisis, and foreign debt Crisis. The worst effects of the crisis were felt by five countries: Korea, Thailand, Malaysia and the Philippines and Indonesia. Indonesia was affected worst of all, as the economic effects led to political turbulence that brought down President Suharto in May 1998, and the new government had trouble in restoring the confidence. Although experts do not fully agree on the reasons behind the crisis, it is generally held that the crisis was caused mainly by the following factors. 1. Persistence of large current account deficit. 2. Large foreign debt and particularly, a high proportion of short-term debt. 3. Large inflow of foreign capital, particularly the sensitive short-term capital. 4. Indiscriminate lending by banks and other financial institutions, arising from lack of adherence of financial intermediaries to prudent norms concerning capital adequacy, asset classification, provisioning, and absence of disclosure requirements. 5. Lack of transparency in the economic system that made proper judgment by investors and others, for decision-making difficult. 6. Over-investment in several sectors. 7. Imprudent lending by international lenders. 8. Large real effective exchange rate appreciation. As the crisis first occurred in Thailand, a look at the factors which led to the Thai crisis would help understand reasons...
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