The Korean Financial Crisis of 1997

The rapidity with which the crisis happened has prompted Sachs and others to compare it to a classic bank run prompted by a sudden risk shock. Sachs pointed to strict monetary and contractionary fiscal policies implemented by the governments on the advice of the IMF in the wake of the crisis, while Frederic Mishkin points to the role of asymmetric information in the financial markets that led to a " herd mentality " among investors that magnified a small risk in the real economy.

The crisis has thus attracted interest from behavioral economists interested in market psychology. Another possible cause of the sudden risk shock may also be attributable to the handover of Hong Kong sovereignty on 1 July During the s, hot money flew into the Southeast Asia region through financial hubs , especially Hong Kong. The investors were often ignorant of the actual fundamentals or risk profiles of the respective economies, and once the crisis gripped the region, coupled with the political uncertainty regarding the future of Hong Kong as an Asian financial centre led some investors to withdraw from Asia altogether.

1997 Asian financial crisis

This shrink in investments only worsened the financial conditions in Asia [14] subsequently leading to the depreciation of the Thai baht on 2 July Several case studies on the topic of the application of network analysis of a financial system help to explain the interconnectivity of financial markets , as well as the significance of the robustness of hubs or main nodes. Soros claims to have been a buyer of the ringgit during its fall, having sold it short in A year earlier, the finance ministers of these same countries had attended the 3rd APEC finance ministers meeting in Kyoto , Japan, on 17 March , and according to that joint declaration, they had been unable to double the amounts available under the "General Agreement to Borrow" and the "Emergency Finance Mechanism".

As such, the crisis could be seen as the failure to adequately build capacity in time to prevent currency manipulation. This hypothesis enjoyed little support among economists, however, who argue that no single investor could have had enough impact on the market to successfully manipulate the currencies' values.

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In addition, the level of organization necessary to coordinate a massive exodus of investors from Southeast Asian currencies in order to manipulate their values rendered this possibility remote. Such was the scope and the severity of the collapses involved that outside intervention, considered by many who redefine colonialism as a new kind of colonialism, [23] became urgently needed.

Since the countries melting down were among not only the richest in their region, but in the world, and since hundreds of billions of dollars were at stake, any response to the crisis was likely to be cooperative and international, in this case through the International Monetary Fund IMF. The IMF created a series of bailouts "rescue packages" for the most-affected economies to enable affected nations to avoid default , tying the packages to currency, banking and financial system reforms.

The SAPs called on crisis-struck nations to reduce government spending and deficits, allow insolvent banks and financial institutions to fail, and aggressively raise interest rates. The reasoning was that these steps would restore confidence in the nations' fiscal solvency , penalize insolvent companies, and protect currency values. Above all, it was stipulated that IMF-funded capital had to be administered rationally in the future, with no favored parties receiving funds by preference.

In at least one of the affected countries the restrictions on foreign ownership were greatly reduced. There were to be adequate government controls set up to supervise all financial activities, ones that were to be independent, in theory, of private interest. Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. In addition, financial systems were to become "transparent", that is, provide the kind of reliable financial information used in the West to make sound financial decisions.

As countries fell into crisis, many local businesses and governments that had taken out loans in US dollars, which suddenly became much more expensive relative to the local currency which formed their earned income, found themselves unable to pay their creditors.

The dynamics of the situation were similar to that of the Latin American debt crisis. The effects of the SAPs were mixed and their impact controversial. Critics, however, noted the contractionary nature of these policies, arguing that in a recession , the traditional Keynesian response was to increase government spending, prop up major companies, and lower interest rates.

The reasoning was that by stimulating the economy and staving off recession, governments could restore confidence while preventing economic loss. They pointed out that the U. Many commentators in retrospect criticized the IMF for encouraging the developing economies of Asia down the path of "fast-track capitalism", meaning liberalization of the financial sector elimination of restrictions on capital flows , maintenance of high domestic interest rates to attract portfolio investment and bank capital, and pegging of the national currency to the dollar to reassure foreign investors against currency risk.

The conventional high-interest-rate economic wisdom is normally employed by monetary authorities to attain the chain objectives of tightened money supply , discouraged currency speculation , stabilized exchange rate, curbed currency depreciation, and ultimately contained inflation. In the Asian meltdown, highest IMF officials rationalized their prescribed high interest rates as follows:.

When their governments "approached the IMF, the reserves of Thailand and South Korea were perilously low, and the Indonesian Rupiah was excessively depreciated. Thus, the first order of business was To achieve this, countries have to make it more attractive to hold domestic currency, which in turn, requires increasing interest rates temporarily, even if higher interest costs complicate the situation of weak banks and corporations Why not operate with lower interest rates and a greater devaluation?

This is a relevant tradeoff, but there can be no question that the degree of devaluation in the Asian countries is excessive, both from the viewpoint of the individual countries, and from the viewpoint of the international system. Looking first to the individual country, companies with substantial foreign currency debts, as so many companies in these countries have, stood to suffer far more from… currency depreciation than from a temporary rise in domestic interest rates…. Thus, on macroeconomics… monetary policy has to be kept tight to restore confidence in the currency To reverse currency depreciation , countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this hurts weak banks and corporations.

Inflation was kept reasonably low within a range of 3. On 14 May and 15 May , the Thai baht was hit by massive speculative attacks. However, Thailand lacked the foreign reserves to support the USD—Baht currency peg, and the Thai government was eventually forced to float the Baht, on 2 July , allowing the value of the Baht to be set by the currency market.

This caused a chain reaction of events, eventually culminating into a region-wide crisis. Thailand's booming economy came to a halt amid massive layoffs in finance, real estate, and construction that resulted in huge numbers of workers returning to their villages in the countryside and , foreign workers being sent back to their home countries. The baht reached its lowest point of 56 units to the U. Finance One, the largest Thai finance company until then, collapsed. By , Thailand's economy had recovered.

The increasing tax revenues allowed the country to balance its budget and repay its debts to the IMF in , four years ahead of schedule. The Thai baht continued to appreciate to 29 Baht to the U. In June , Indonesia seemed far from crisis. But a large number of Indonesian corporations had been borrowing in U. During the preceding years, as the rupiah had strengthened respective to the dollar, this practice had worked well for these corporations; their effective levels of debt and financing costs had decreased as the local currency's value rose.

The rupiah suddenly came under severe attack in August. On 14 August , the managed floating exchange regime was replaced by a free-floating exchange rate arrangement. The rupiah dropped further. The rupiah and the Jakarta Stock Exchange touched a historic low in September. Moody's eventually downgraded Indonesia's long-term debt to " junk bond ". Although the rupiah crisis began in July and August , it intensified in November when the effects of that summer devaluation showed up on corporate balance sheets. Companies that had borrowed in dollars had to face the higher costs imposed upon them by the rupiah's decline, and many reacted by buying dollars through selling rupiah, undermining the value of the latter further.

Before the crisis, the exchange rate between the rupiah and the dollar was roughly 2, rupiah to 1 U. On 31 December , the rate was almost exactly 8, to 1 U.

The Asian Financial Crisis in 1997 - Explanation

Soedradjad Djiwandono , but this proved insufficient. Habibie was elevated in his place. The crisis also led to the end of the Indonesian occupation of East Timor. The banking sector was burdened with non-performing loans as its large corporations were funding aggressive expansions. During that time, there was a haste to build great conglomerates to compete on the world stage.

Many businesses ultimately failed to ensure returns and profitability. The chaebol , South Korean conglomerates, simply absorbed more and more capital investment. Eventually, excess debt led to major failures and takeovers. Hanbo scandal of early exposed South Korean's economy weaknesses and corruption problems to the international financial community. In the wake of the Asian market downturn, Moody's lowered the credit rating of South Korea from A1 to A3, on 28 November , and downgraded again to B2 on 11 December.

That contributed to a further decline in South Korean shares since stock markets were already bearish in November. And on 24 November, stocks fell a further 7. In return, Korea was required to take restructuring measures. Under the program, insolvent financial institutions were closed or merged by June The South Korean won , meanwhile, weakened to more than 1, per U. However, like the chaebol, South Korea's government did not escape unscathed. In May , the Bangko Sentral ng Pilipinas literally "Central Bank of the Philippines" , the country's central bank, raised interest rates by 1.

The peso dropped from 26 pesos per dollar at the start of the crisis to The Philippine GDP contracted by 0. The peso's value declined to around Later that year, Estrada was on the verge of impeachment but his allies in the senate voted against continuing the proceedings. Arroyo lessened the crisis in the country. The Philippine peso rose to about 50 pesos by the year's end and traded at around 41 pesos to a dollar in late The stock market also reached an all-time high in and the economy was growing by more than 7 percent, its highest in nearly two decades.

In October , the Hong Kong dollar , which had been pegged at 7. The Hong Kong Monetary Authority then promised to protect the currency. The HKMA had recognized that speculators were taking advantage of the city's unique currency-board system, in which overnight rates automatically increase in proportion to large net sales of the local currency.

The rate hike, however, increased downward pressure on the stock market, allowing speculators to profit by short selling shares. In July , within days of the Thai baht devaluation, the Malaysian ringgit was heavily traded by speculators. This led to rating downgrades and a general sell off on the stock and currency markets. The then prime minister, Mahathir Mohamad imposed strict capital controls and introduced a 3.

Malaysian moves involved fixing the local currency to the U. The decision to make ringgit held abroad invalid has also dried up sources of ringgit held abroad that speculators borrow from to manipulate the ringgit, for example by " selling short ". Those who did, had to repurchase the limited ringgit at higher prices, making it unattractive to them. In , the output of the real economy declined plunging the country into its first recession for many years. The construction sector contracted Overall, the country's gross domestic product plunged 6.

During that year, the ringgit plunged below 4. In September that year, various defensive measures were announced to overcome the crisis. The principal measure taken were to move the ringgit from a free float to a fixed exchange rate regime. Bank Negara fixed the ringgit at 3. Capital controls were imposed while aid offered from the IMF was refused.

Various task force agencies were formed. The Corporate Debt Restructuring Committee dealt with corporate loans. Danaharta discounted and bought bad loans from banks to facilitate orderly asset realization. Growth then settled at a slower but more sustainable pace. The massive current account deficit became a fairly substantial surplus.

Banks were better capitalized and NPLs were realised in an orderly way. Small banks were bought out by strong ones. A large number of PLCs were unable to regulate their financial affairs and were delisted. Foreign investor confidence was still low, partially due to the lack of transparency shown in how the CLOB counters had been dealt with. In the last of the crisis measures were removed as taken off the fixed exchange system. But unlike the pre-crisis days, it did not appear to be a free float, but a managed float, like the Singapore dollar.

Mongolia was adversely affected by the Asian financial crisis of and suffered a further loss of income as a result of the Russian crisis in Economic growth picked up in —99 after stalling in due to a series of natural disasters and increases in world prices of copper and cashmere.

Public revenues and exports collapsed in and due to the repercussions of the Asian financial crisis. In August and September , the economy suffered from a temporary Russian ban on exports of oil and oil products. As the financial crisis spread the economy of Singapore dipped into a short recession. The short duration and milder effect on its economy was credited to the active management by the government. The timing of government programs such as the Interim Upgrading Program and other construction related projects were brought forward.

Instead of allowing the labor markets to work, the National Wage Council pre-emptively agreed to Central Provident Fund cuts to lower labor costs, with limited impact on disposable income and local demand. In less than a year, the Singaporean economy fully recovered and continued on its growth trajectory. Having largely kept itself above the fray throughout —, there was heavy speculation in the Western press that China would soon be forced to devalue its currency to protect the competitiveness of its exports vis-a-vis those of the ASEAN nations, whose exports became cheaper relative to China's.

However, the RMB's non- convertibility protected its value from currency speculators, and the decision was made to maintain the peg of the currency, thereby improving the country's standing within Asia. The currency peg was partly scrapped in July , rising 2. Unlike investments of many of the Southeast Asian nations, almost all of China's foreign investment took the form of factories on the ground rather than securities, which insulated the country from rapid capital flight. While China was unaffected by the crisis compared to Southeast Asia and South Korea, GDP growth slowed sharply in and , calling attention to structural problems within its economy.

In particular, the Asian financial crisis convinced the Chinese government of the need to resolve the issues of its enormous financial weaknesses, such as having too many non-performing loans within its banking system, and relying heavily on trade with the United States. The "Asian flu" had also put pressure on the United States and Japan.

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Their markets did not collapse, but they were severely hit. On 27 October , the Dow Jones industrial plunged points or 7. The New York Stock Exchange briefly suspended trading. The crisis led to a drop in consumer and spending confidence see 27 October mini-crash. Indirect effects included the dot-com bubble , and years later the housing bubble and the subprime mortgage crisis. Japan was affected because its economy is prominent in the region.

The Japanese yen fell to as mass selling began, but Japan was the world's largest holder of currency reserves at the time, so it was easily defended, and quickly bounced back. The Asian financial crisis also led to more bankruptcies in Japan. In addition, with South Korea's devalued currency, and China's steady gains, many companies complained outright that they could not compete.

Kim Dae Jung was able to convince unions, companies and government to cooperate to get the economy going again. He passed laws that required South Korea companies to be audited and required to them to obtain loans publically rather than secretly. He made it easier for foreign inventors to enter South Korea by getting rid of laws that limited foreign investment and allowing foreigners to take over whole companies if they wanted. It also meant allowing interest rates to rise, encouraging foreign investment and improving the structure and governance of Korean corporations.

The government recapitalized banks, set up a public asset-management company to get rid of bad loans. Kim walked a fine line with the chaebols as he restructured and reformed them without letting them fail. He also lifted foreign investment limits in banking, real estate and stocks. Most foreign exchange controls were lifted in the early s. The top five chaebols were banned from borrowing from the fund. Plans to privatize the railway and power industries were slowed by strikes. After the Economic Crisis of , the chaebols went through profound changes, many of them mandated by the government.

They slimmed down, sold off divisions and concentrated on their core businesses. They were broken into pieces and each unit had to stand on its own. Half the chaebols were allowed to fail, break up, or come under foreign ownership. Companies began operating under the principal of increasing shareholder value. Emperor-like chairmans lost their power. The units that were left were downsized and restructured in part to lure back foreign investors.

And although the chaebol families own only an average of 5 percent of their companies they still managed to run them like fiefdoms. The chaebols ended becoming more powerful than less. In , top five chaebols accounted for 37 percent of gross output and 44 percent of exports as sub-contractors and small business went bankrupt. Investors and reformers saw this as a bad sign.

South Korea, like Thailand, followed the IMF advise and rebounded much quicker after the Asian financial crisis than countries like Indonesia that did not follow the advice.

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The currency was allowed to floats freely, reserves of foreign currency increased, mostly by exporting to the United States, and the practice of borrowing from abroad on the short term was curtailed. Foreign capital began pouring in after the government removed barriers on foreign investment deregulate markets and force companies to disclose more about their financial conditions.

By some estimates over 2 million workers lost their jobs in and more than , people were laid off in and Unemployment hit 9 percent. Some unemployed men started up new business and took jobs with small companies, where they conditions were often better than at the the chaebols.

Some returned to the countryside to work as farmers. Others took jobs in faraway towns and moved away from their families. In addition, people were put to work in low- paying public works program and some job training programs were set up. The government scrambled to create a safety net. In the past people were kept on the payroll instead of laid off. That was the welfare system. There were increases in alcoholism, divorce and crimes such as burglary and assaults of debtors.

Visits to counselors and psychiatrist increased. At one point one businessman a day committed suicide after their business failed and their life savings were lost. There were also reports of increase number of orphans as parents abandoned their children and even parents killing themselves and their children because things were so bad,. Children were pulled out of school. People were unable to heat their homes. Some lost their homes. Shoe repair shops had increases in business as people chose to repair their old shoes rather than by new ones.

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There was less traffic in the streets as people had no jobs to go to and increases in gas prices encouraged people to take the bus and subway. People hoarded their hard currency and began being more careful about what they ate, avoiding higher priced imported foods. Swamp meets and flea markets were set up so people could sell heir personal belongings. Shelters were set up for out of work white collar workers. Some ne were so humiliated they dressed up the morning as they were going to work, left the house, killed time in park or library, and returned home, talking about what a tough day they had.

Young people had hard times getting work. One university graduate said that "finding a job is harder than pulling a star out of the sky. The crisis in Indonesia was brought about by a sudden lack of confidence by foreign investors who suddenly began pulling their money out of Indonesia as they had elsewhere in Asia. The attack on the Indonesian currency seemed somewhat unfounded.

For years, Indonesia had low inflation, high steady growth, balanced budgets and a healthy trade balance of payments. Only weeks before the crash the World Bank reported that Indonesia was performing well and the high growth rates in had posted in the past should continue. The capital flight caused the currency to drop dramatically, causing businesses with foreign loans to have to pay pack more money.

This caused further lack of confidence in the Indonesian economy, sending it spiraling downward. The rupiah lost 80 percent of its value. Between July and January it dropped from 2, rupiah to the dollar to 10, rupiah per dollar. During the first week of January the rupiah lost 10 percent its value every day and reached levels of 14, rupiah to the dollar before Suharto's resignation in May Later it climbed to 16, per dollar before stabilizing around 10, per dollar.

At end of December , the stock market had declined by 49 percent. In , unemployment rose to During the Asian financial crisis, investors took a closer look at the Indonesian economy and found it burdened with wasteful investment in thing things like automobiles and jet industries resulting from crony capitalism. Confidence was shattered some more when Suharto, rather than bolding addressing the problems, appointed his golfing buddy Mohammed "Bob" Hasan and his daughter Siti "Tutut" Hardijanti Rukmana to his cabinet.

Suharto blamed the economic problems on "plots" by unnamed enemies and told friends he thought the economic crisis was part of a Zionist ploy intended to keep Indonesia from leading the Islamic world to prosperity. He refused to enact economic reforms that the threatened the interests of his cronies and family members. In the midst of the crisis he allowed a bank owned by one son to reopen under a new name and approved an expensive, unnecessary power-generating project for his daughter Tutut.

In his speeches, Suharto seemed misinformed, out of touch and unwilling the face the reality of Indonesia's economic problems and incapable of rising to the occasion and making necessary reforms. Instead he lived in a kind a fantasy land.

Asian financial crisis - Wikipedia

In a policy speech given in the midst of the rupiah's collapse and soaring inflation he unrealistically promised that inflation would remain under 10 percent for the year and the rupiah would stabilize at around 4, to the dollar at the time when it was already around 10, to the dollar. In the meantime he encouraged Indonesians to covert their dollars to rupiah out of patriotic duty. During the Asian financial crisis in Indonesia, people lost their savings and stores emptied as people hoarded and looted goods.

Companies went bankrupt, the property market and banks teetered on the edge of collapse and prices of basic food skyrocketed. Banks ran out of money as people panicked and withdrew all their saving, poor people shouting "We Are Hungry! Fistfights broke out in supermarkets as customers pushed and shoved to snatch up and hoard cooking oil, noodles, flour.


The demand for cooking oil was so intense in some places it was distributed at police stations. During the crisis many mothers could no longer afford milk, which tripled in price. They feed their babies tea instead. People couldn't afford to go the hospital and died because the couldn't afford foreign drugs.

People who needed medical treatments like kidney dialysis went without it because they couldn't afford it. Hospitals could no longer afford plastic bags to hold blood for transfusions and so hospital employees were asked to collect milk bottles to store blood. The economic crisis resulted in a reduction of pollution as people drove less, car sales plummeted, factories reduced their output or were closed, construction ceased and development projects were scrapped. Spending on the environment fell from 36 cents per person to less than 1 cent.

Suharto's family members and cronies had taken out huge loans from banks that in turn had borrowed heavily from foreign banks and could not pay pack their debts. Many Indonesian Chinese tycoons moved their capital offshore. Banks closed as depositors formed long lines to get at their savings. Businesses that relied on things like imported wheat or fabric had to shut down because the prices of these items tripled or quadrupled. Car dealerships changed the prices of their cars on a minute by minuet basis to keep with fluctuations in the value of the rupiah. The Jakarta Post, Indonesia's largest English-language paper, had to figure out a way to survive with paper prices tripling and advertising revenues dropping to practically nothing.

For a while there was a sense of panic and many foreigners left. Companies made contingency plans to evacuate their employees and one international school stockpiled food in the event of serious social unrest. You keep open return tickets out of Jakarta. You keep provisions of one or two weeks for your house, and you keep a bag packed. Wall Street investors pulled their money out of Indonesia, throwing the economy in turmoil, but were quick to return to snatch up under-valued enterprises, particularly gold-, nickel- and tin-mining companies.

During the Asian Financial Crisis in , the number of people under the poverty line in Indonesia by some estimates expanded from 20 million to million, or around half of the population other said it increased to 40 million or 20 percent of the population. Explaining what the crisis meant to him one unemployed factory worker said, "It's a matter of the stomach. Stomachs are very sensitive. In most cases there were adequate food supplies but people didn't have the money to buy anything. People waited for hours in lines to buy rice and cooking oil sold at cheap price by the government and by Chinese merchant aiming to win good wil from the Muslim public.

Cooking oil and baby-milk powder was especially expensive and scarce. Instead of eating steamed rice, families stretched their supplies by making watery rice gruel. When meat or more substantial food was found it was fed to men because they needed the energy to work. Some poor people who could not afford the basic goods were forced to eat tree bark and planted crops on golf courses.

They stole shrimp from shrimp ponds and looted stores. Pregnant women were forced to eat bark and roots they foraged in the woods. In West Timor, people ate putak, a porridge made from the boiled splinters of the wood of a palm tree reportedly pigs usually won't even eat it but it provided enough nutrients to keep people from starving. People also ate grasshoppers, wild potatoes, wild pumpkins, leaves a root called wee-ah which has to be repeatedly boiled and soaked or else it produces a skin rash.

New York Times, June 8, ]. Other workers became homeless. They had no money for rent and were too ashamed to return to their home towns. Even those who kept their jobs could not make ends meet. A university lecturer told Time, "Every time I go shopping I feel sad and angry.