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1997 Asian Crisis:

This is a financial crisis that devalued many of the Asian currencies, Indonesia, Thailand and South Korea
being the most affected countries. It began wreaking havoc around July 1997, even though there was a
history of excessive foreign debt during the period 1993-1996.
The main reason for this financial crisis can be stated to be the relaxation or the abundance of it in
capital controls. The more the relaxation, the more money came into the system, thus effectively
creating more debt. There was also a huge property boom that the countries saw during the period
1995-1997. Also, the Thai baht being pegged to the US dollar, suffered severe depreciation and resulted
in the Thai government spending most of its foreign reserves to save the Baht, which was in vain.
Policies were revised to increase the interest rates but this further led to the slowdown of the economy.
The baht collapsed and with it, and even before it, Thailand became bankrupt and decided to give up the
fixed exchange rate to a floating one. The same had repercussions in other South Asian countries
including Indonesia, South Korea, Hong Kong and Singapore.
The International Monetary Fund tried to intervene activating its emergency fund mechanism and
rectify the situation but to no avail. Changes in fiscal policies were sought out it insisted on lower
spending and higher taxes, which in effect worsened the situation.
The effects of this crisis were to be seen in US and japan economies too. Even though the markets were
not hit directly, this crisis resulted in a slowdown in these economies. The contagion extended to even
Russia and Brazil and the stock markets saw a huge decline in trade.
Many insolvent banks were closed down in all of these countries as part of IMFs resurrecting plan.
World bank also intervened by giving huge loans to the countries to revive their economy. Slowly and
steadily, using reforms in monetary policies and opening of domestic markets and various other
measures, this crisis was controlled to an extent, in the later period of time.
The ratio of debt (esp. foreign) to assets had risen as high as 180% during this period. The caution
induced by this crisis led to a great decrease in this ratio and the borrowing of foreign currency has been
decreased considerably; also, the inflow of capital is now controlled more effectively.
The crisis resulted in the slowdown of Asian economy by almost over a decade, the effect of which is still
evident in some of these economies, even after they have recovered from it.