The root causes and impact of the asian crisis that began in thailand in july 1997

causes of thailand financial crisis 1997

Aghevli Until their sudden fall from grace inthe countries hit hard by Asia's financial crisis—Indonesia, Korea, Malaysia, and Thailand—had been widely admired for their economic achievements and much favored by foreign investors.

The problems in Thailand started in Real interest rates based on the consensus forecast of inflation as a measure of inflationary expectationswhich were in the range of 7—8 percent before the crisis, rose briefly to 20—25 percent before dropping sharply.

1998 financial crisis

Insolvent institutions had to be closed, and insolvency itself had to be clearly defined. Following a meeting on December 24, , hosted by the Federal Reserve Bank of New York, US banks with the largest exposures to South Korean banks voluntarily committed to roll over their short-term loans, and to work with South Korean authorities to restructure them into medium-term loans. The combination of partial liberalization and structural rigidities meant that capital was invested without due regard to risk. What happened, and is there a prescription for reducing the risk of future crises? Similar meetings and other forms of outreach took place in other G countries. These countries' limited absorptive capacity also contributed to the inefficient allocation of foreign funds. Monetary policy Given that the first manifestation of the crisis was the collapse of the currencies of the Asian countries, monetary policy was a key element of their reform programs. The sharp economic contraction in in some of these countries particularly Indonesia and Thailand has dealt a major blow to an otherwise good performance in poverty alleviation during the last quarter of the century. Second, until mid, it had appeared that Japan was finally pulling out of its prolonged recession. But few countries can maintain a fixed exchange rate when things go wrong. Declining growth rates and depreciating exchange rates may significantly alter the levels of malnutrition, nature of domestic food demand and patterns of trade in the region and throughout the developing world. Panic among lenders and withdrawal of credit[ edit ] The resulting panic among lenders led to a large withdrawal of credit from the crisis countries, causing a credit crunch and further bankruptcies.

Unfortunately, the country's economic authorities were undermined by groups and individuals who were threatened by the proposed reforms and a government that failed to take decisive action.

Thus, the first order of business was 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….

The root causes and impact of the asian crisis that began in thailand in july 1997

Third, in the countries affected by the crisis, exports were weak in the mids for a number of reasons, including the appreciation of the U. Asian Financial Crisis July —December A financial crisis started in Thailand in July and spread across East Asia, wreaking havoc on economies in the region and leading to spillover effects in Latin America and Eastern Europe in A South Korean labor union member of Seoulbank, one of South Korea's most bad-debt burdened commercial banks, looks downcast. Although the long-term effects of the crisis on income growth and real exchange-rate depreciation are unclear at this point, making it difficult to assess long-term changes in global food markets and food security, the crisis is likely to have some persistent negative effects. When the pegs proved unsustainable, firms saw sharp increases in the local currency value of their external debts, leading many into distress and even insolvency. Other economists, including Joseph Stiglitz and Jeffrey Sachs , have downplayed the role of the real economy in the crisis compared to the financial markets. If domestic prices are allowed to skyrocket, the monetary tightening required to reestablish price stability is extremely costly. Thailand's economy developed into an economic bubble fueled by hot money. It is essential that appropriate prudential and supervisory procedures be in place and that banks be in a position to assess risk.

Fischer, Stanley. But the period ahead is still likely to be very difficult. The expected growth rates of gross domestic product in the region's economies have been revised sharply downward, into negative territory in most cases. However, while many critics have pointed to the adverse impact of higher interest rates on domestic borrowers, they have neglected to take into account the impact of currency depreciation on holders of external debt.

When these countries approached the IMF for assistance, the most pressing issue initially was to provide them with adequate financing to deal with the liquidity crisis created by the sudden flight of capital and the collapse of their currencies, and to give confidence to the market.

After all, these countries' easy access to foreign capital before the crisis contributed significantly to their rapid growth. In Thailand, this was manifested through a 28 percent decline in the ratio of domestic meat prices to feed costs from the third quarter of through the first quarter of In the severe scenario, the short-term effects seen so far in Asia are assumed to worsen significantly.

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Asian financial crisis