The reason that was arguably true to a large extent, which I personally believe in, is thatthe economy has been fundamentally weak
, especially in its financial sector and bank loan system. Most of the countries such as Thailand, Indonesia and South Korea hasextremely lax prudential rules and were financially over sighted as the financialintermediaries have risky lending practices. Poor quality of supervision andenforcements of the regulation was considered almost non-existent. Many of the loans were made and approved based on “Relationship Lending”
, where lending decisions were not based “on sound information about the fundamental economic value of specificinvestment projects” but “on personal, business or governmental connections”.This leads us to looking at the effects of Crony Capitalism
and the unveiling to widespread corruption which was rampant in these affected countries. For example, theChaebols (Big Korean Conglomerates) usually has the financial “backing” of thegovernment, although having debt to equity ratios of 4 to 1 and total earnings at only 1.3times their debt service
. Foreign branches of Korean banks were able to build up hugeliabilities before the crisis, partly because foreign creditors correctly perceived that if their parent banks found themselves in financial difficulty—as they did after the onset of the crisis—they would receive assistance from the Korean government.Therefore when the crisis struck, and when the banks and government needed theliquidity, their inability to retrieve these debts resulted in the inability to manage theircurrencies. In addition, there was interdependence amongst the Asian Economies forexample, with the Indonesian banks borrowing heavily from Korean and Japanese banks, and these bank s were unable to retrieve these debts as Indonesia was in direstraits itself. Another weak fundamental worth mentioning would be the pegging of the countries’exchange rates against the USD, which made it vulnerable especially when investors &Fund Managers started selling short which leads to excessive suppl y of Asian Currency in
Forex Market and forces devaluation pressure. The government did not un-peg thecurrencies immediately when it started happening as they fear that this enormous rapidselling of their currency in the Forex market would result in a sharp plunge, creatingfurther panic and selling.
International Economics ReportPauline Ng