1997 Asian Financial Crisis

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1997 Asian Financial Crisis Angelica M. Montefalcon 4FM2 I. Introduction For about twenty years, East-Asian countries were held up as economic idols. They were hailed as the ideal models for strong economic growth of developing countries because of their high savings and investment rates, autocratic political systems, export-oriented business, restricted domestic markets, government capital allocation, and controlled financial systems. They were even stories about “The East Asian Miracle" because of the extraordinary growth rates they achieved and the speed with which they have transformed themselves from poor countries into industrial powerhouses. Western leaders were impressed by their ability to continue to achieve growth rates…show more content…
If investors suspect that the government will not or cannot maintain the peg, they may flee the currency; this capital flight, in turn, deletes hard currency reserves and forces the devaluation they fear. The Thai Baht was one of the Asian currencies that was pegged to the US dollars that’s why when they were no longer able to maintain their peg, Thai Baht was forced to devalue. In the previous years, they had probably kept their values low as part of their export push strategy. Almost all of the Asian economies that have been cited in the context of the Asian financial crisis have based their economic strategies on export promotion. The appreciation of the US dollars against the Asian country currencies meant a decline in the competitiveness of these East Asian countries so long as they continued to fix their currencies against the US dollars. Although at first, they kept their currency value low, they didn’t intend it to be super undervalued against the US dollars that happened during the crisis. The very large devaluation in the currencies in East Asia became a problem because of their foreign denominated debts. Domestic interest rates needed to maintain those pegs attracted short term capital and encouraged domestic firms to borrow in foreign currencies. Thai financial firms assumed it was absolutely safe to make foreign loans for their business clients. The result was a flood of cheap foreign money
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