INTRODUCTION:

The Asian crisis began on 2 July 1997 with the decision to allow the Thai baht to float after it
suffered a series of speculative attacks. The baht led to the fall of the Indonesian, Malay and
Philippine currencies, and the crisis spread to Korea, Taiwan, Singapore and Hong Kong.
Coming after several decades of exceptional economic performance in Asia, this crisis, on a
very large scale, is spreading rapidly to the rest of the world economy. In Indonesia, Malaysia
and the Philippines, high tensions in the foreign exchange market led to the adoption of a
more flexible exchange rate regime and a significant depreciation of national currencies, as
well as a sharp decline in the value of assets.

Inception of the Asian difficulties is the massive indebtedness of some countries that
overinvested in projects in the 1990s that were sometimes unprofitable or very risky,
particularly in the real estate sector. As a significant portion of the private sector's debt was
contracted in foreign currency (mainly in dollars) without hedging, the exchange rate risk was
significant, with a depreciation of the national currency against the dollar mechanically
increasing the amount of debt.

This over-indebtedness can be explained in several ways: by an over-optimism of local and

international investors, by the fixed exchange rate against the dollar which gives the illusion
of a neutralization of currency risk, and finally by the existence of a housing bubble. Thanks
to the increase in real estate prices, large loans have been taken out, with real estate often
offered as collateral. Thailand's debt thus accounted for 100% of its GDP in 1996 compared
to 64.5% in 1990, when its external debt doubled.

In 1997, following the decline in Thai exports, economic actors realized that the fixed
exchange rate with the dollar was unsustainable. Local businesses that have taken on dollar
debts, anticipating a future devaluation, are rushing to convert them into local currency and
pay them back as quickly as possible. This move amplifies the tensions in the foreign
exchange market: the more external debts are repaid, the more the dollar and its real cost
increase. Local banks, noticing the increase in their external borrowing and realizing that they
have accumulated bad debts, are massively restricting their lending - followed by
international investors, who hold the same reasoning. As banks refuse to refinance private
players, they are forced to sell their real and financial assets to obtain liquidity and repay their
debts. The massive sale of these assets lowers their prices, which in turn reduces the financial
capacity of companies, further deterring banks from lending money, and thus triggering serial
bankruptcies. Thus, a movement of deflation by internal debt amplifies the process of
deflation generated by external debt.

The Asian crisis is a near-perfect example of debt-deflation or debt deflation, theorized by

Fisher in 1933 to explain the 1929 crisis. For Fisher, any crisis is preceded by over-
indebtedness (due to excessive speculation and overly optimistic investment), and followed
by deflation. Fisher, like Keynes, places an important emphasis on mimic movements: he
considers that psychological factors generalize and accentuate the initial debt movement. The
failure of a few large borrowers is enough for the players to revise their profit expectations
downwards. Distrust is growing rapidly and the supply of financing is reduced. Economic
players are forced to sell their assets to meet their debts, which leads to lower asset prices and
triggers a deflationary spiral. In 1982, Minsky amended Fisher's theory while keeping the
idea of debt-deflation. Minsky distinguishes between three financing methods: covered
financing (expected income exceeds the debt burden), speculative financing (expected
income simply covers debt interest) and Ponzi financing. During the phases of economic
expansion and euphoria in the markets, Ponzi's share of financing increases relative to the
others. The risk to creditors becomes greater (they offer riskier loans), but as long as profit
expectations are good, expansion continues. At the slightest slowdown, however, at the
slightest bankruptcy of a relatively large player, expectations can turn downward and the
debt-deflation spiral starts. That is exactly what happened in Asia. At the time, the players
were very optimistic, with inconsiderate loans being granted thanks to the rise in real estate,
placing the whole area in a vulnerable position, which is reminiscent of the causes of the
subprime crisis.

The Asian financial crisis has put the International Monetary Fund (IMF) in the spotlight.
Despite its advice, reform programmes and financial aid, the IMF has proved incapable of
stemming the crisis and has even, according to some analysts, worsened it. Its intervention
was to advocate a restrictive monetary policy to stem the collapse of exchange rates, and to
encourage the implementation of a prudent fiscal policy. Structural reforms have sought to
restructure the banking sector by merging and closing out non-viable institutions. The social
consequences of the austerity of the programmes have been strongly denounced. The World
Bank itself has rebuked the IMF.

https://www.imf.org/external/pubs/ft/fandd/1998/06/imfstaff.htm

https://www.investopedia.com/terms/a/asian-financial-crisis.asp