THE 1997-98 ASIAN FINANCIAL CRISIS (CRS Report for Congress) The CRS Report in question basically distinguishes two key problems which led to Asian financial crisis. The first problem was shortage of foreign exchange resulting in dramatical depreciation of currencies and equities in Asian countries such as Thailand, Indonesia, South Korea and others. The second one was insufficiently developed financial sector and inadequate capital allocation mechanisms of these Asian economies. The Asian financial crisis was triggered after two rounds of currency depreciation in summer 1997, with the first one hitting Thai baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah. Shortly thereafter, the second one occured, depreciating the Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. In order to stabilize their currencies, these countries started selling foreign exchange reserves and raising interest rates, which has slowed economic growth. The Asian countries hit by crisis (also called “Asian Tigers”) just started opening towards foreign direct investments, foreign goods and services, capital flows, thereby largely relying on U.S. dollar market. Their currency exchange rates were kept close to USD in order to attract foreign investments and facilitate capital flows. Due to the fact that world’s financial markets are widely interconnected, problems and trends on one market also have certain influence on others. With such large-scale proportions, the Asian crisis has largely affected other countries especially United States, since U.S. companies and banks have been significant investors in Asian economies, which eventually led to U.S. trade deficit and changes in USD value. The Report also focuses on another key issue which, according to experts, was an actual cause of the Asian financial crisis, and that is a troubled banking sector of Asian countries at that time.
Namely, these countries have experienced quite rapid development of financial sector, but at the same time regulation and control of financial system did not keep up with that development. Prior to the crisis, in the 70s and 80s, fund raising went through the government institutions, whereas, during the process of capital markets liberalization in the 90s, banks became key participants on the market, borrowing directly from foreign banks, at very low rates, which resulted in excessive borrowing. Resolving this situation involved activities conducted by International Monetary Fund (IMF), World Bank and Asian Development Bank, in terms of stabilization packages for Asian countries, actually presenting a financial funds infusion denominated in special drawing rights (SDRs). The Asian financial crisis raises some questions concerning IMF operations, such as, whether such crises have increased in scale, whether IMF resources are sufficient to deal with them and weather they may contribute to moral hazard ( receipient country tends to behave recklessly knowing that the IMF will help them out of the emergency situation). More on this issue in: CRS Report 98-56, The International Monetary Fund 's (IMF) Proposed Quota Increase: Issues for Congress, by Patricia A. Wertman. Uchitelle, Louis. Economists Blame Short-term Loans for Asian Crisis. New York Times on the Web. January 8, 1998.