International Finance: Case: Asian Currency Crisis 1997

2008 financial crisis caused severe trauma on the world economy, although the economy of China grew moderately, China 's financial system is very fragile, the financial laws and regulations are deficient, the structure of foreign change reserve is very risky, because China has huge foreign exchange reserve of US dollar, which makes China also suffer from the financial crisis. Financial crisis is caused by the American subprime mortgage, to combat the financial crisis, the United States issued a substantial amount of U.S. dollars, which makes the U.S. dollar depreciate continuously, and this action makes many countries that have great amount of foreign exchange reserves in U.S. dollars suffer huge losses. China has the largest foreign exchange reserves in the world, in 2008, China’s foreign exchange reserves had reached $ 2 trillion, the continues devaluation of the U.S. dollar make China suffered a lot, thus the international capital system based on U.S. dollars has been questioned, China and other countries that also hold a huge amount of U.S. dollars started to build a new international capital structure. In 2011, China, Japan

The early 1990s exhibited a boom in many economies throughout the world due to factors such as globalization and other trade liberalization practices, but this boom was quickly halted in the latter half of the decade when bad investments nearly sent the entire world into economic turmoil. With the introduction of free trade practices such as the North American Free Trade Agreement, or NAFTA, the economies of many of the worlds “developing countries” skyrocketed due to an influx of foreign investment. At, first this exponential boom in small countries with emerging economies seemed like it would never end. However, this all changed when investors “caught wind” that these developing countries did not have the means to keep up with the massive inflow of investments. This led to what we know refer to today as the Asian Financial Credit Crisis. In order to understand how to prevent such a disaster from happening again, we must first examine how exactly this event was triggered, and what should have been done differently.

Directly connected to changes in the U.S. interest rates are the value of U.S. Treasury Bonds. In the United States, the Treasury yield curve is the first to reflect changes in domestic interest rates. As the yield curve moves up or down, this largely dictates how global rates are set. Since Treasury bonds are considered a risk free asset, any other security must offer a higher yield to remain attractive. With interest rates expecting to increase, a great deal of pressure is put on emerging markets to remain attractive investment opportunities. Higher interest rates will likely follow with a higher dollar, and entice many global investors to park their money in the United States rather than emerging markets. This could ultimately hinder developing nation’s employment levels, currencies and exports.

In 1997 the country’s exports were no longer booming and the Thai economy entered a unsafe and unpredictable phase. Foreign investors were skeptical about the current-account deficit and the big loans property developers. Bad debt continued to mount up and the stock market crashed to depths not seen in eight years. This caused the baht to fall prey to speculative attack. High debt, heavy borrowing, large current account deficit, and the semi-fixed exchange rate system all played a part to the Thai crisis.

The 2007 - 2009 financial crisis was the worst financial and economic crisis since the 1929 stock market collapse leading to the Great Depression, hence it has been dubbed the Great recession. This disruption in the economy due to the lost confidence in the financial institutions undermined the stability of the financial system and led to the loss of jobs and trillions of dollars in wealth and savings for entities within the economy. The gravity of the U.S crisis influenced the global financial system leading to a worldwide crisis.

In July of 2007, the global financial crisis was initiated from the property market in the United States.

The Global Financial Crisis (GFC) began in July 2007 in the United States (US) following the decline in the countries already poor credit ratings and the subsequent collapse of the US housing market and prominent investment bank Lehman Brothers which sent a wave of fear around global economies including Australia and resulted in the largest drop in global economic activity in the modern era. (W. McKibbin, A.Stoeckel, 2009, pg 1).

High interest rates were provided. With interest rates standing at double level, uncovered interests parity encouraged households, firms, and banks to borrow in foreign currency.

As the economy in Thailand began to slow, foreign confidence in it began to falter as well. Just like many other currencies, the value of Thai currency (the Baht) had been pegged to the US dollar in order to ensure stability. At the time, however, the robust US economy was raising the value of the dollar, therefore the value of the baht, causing some foreign investors to believe that it was overvalued. Investors began selling the baht in exchange for the US dollar because the dollar 's value had a more certain future. Speculators jumped on the bandwagon and began selling their supply of baht in record amounts in order to lower its value and realize a profit. In July of 1997, Thailand 's central bank devalued the baht – or unpegged and lowered its value from the dollar in an effort to stop the sudden and massive sell off in order to restore confidence in the currency. When used in non-emergency situations, devaluation of a country 's currency can work to its advantage. When Thailand devalued the baht, it was able to lower the price of Thai goods in US dollar terms, which made making those products more competitive in foreign markets. Devaluation also tends to attract foreign investment in the country. However, this created an emergency situation, and devaluation of the baht only revealed the fundamental weaknesses in the Thai economy and banking system which continued in the domino effect to other Asian countries.

In 2008 the economy faced the most dangerous crisis especially the western nations. This contagion began in 2007 in the United States when sky-high home prices turned decisively downwards. The spread was also quick to the entire United States financial market and financial sectors overseas. All the financial institutions were affected which included the entire investment

In 1997, the Asian Financial Crisis spread rapidly all over the Asia and affected almost all the economies in the world. Prior to the Asian Financial Crisis, the Asian countries such as Thailand, Malaysia, South Korea, Indonesia, Hong Kong and Singapore experienced a remarkable growth in the economy that was considered the highest in the world. These Asian economies increased by a notable proportion of 6 to 10 percent annually in the GDP. However, what had been regarded as an Asian miracle seemed to crumple down rapidly 1997 when these Asian countries were faced with a severe financial crisis in their local stock and currency

Admittedly, the active speculators capital operation is the catalyze of the crisis: before the crisis, those 3 Asian countries are quite similar: All of them just endure a great economic progress for the recession of Japan in the early 1990s. The rate of export was gradually carrying a higher weight; the real GDP had more than 8 percentage annual growths constantly. (DeRosa 85) Also, they had a quick credit expansion for wooing the global capital for investment. As for the section of currency exchange, Thailand and Indonesia held the peg to the U.S dollar. Malaysia is little bit different: it did hold float exchange rate but that is essentially a sort of “dirty float” which means the government will influence the direction of exchange rate frequently to keep the exchange rate in a certain range.

A fixed exchange rate regime will offer an economy greater stability in international prices and therefore encourage trade. Additionally, for developing countries a fixed rate will assist in promoting institutional discipline as the country will adopt restrictive monetary and fiscal policies that foster an anti-inflationary environment. A significant weakness of a fixed rate is that it is subject to destabilizing speculative attacks which could lead to financial meltdowns and devastating economic contractions. A floating exchange rate regime allows central banks to combat macroeconomic factors such as unemployment, inflation, and interest rates without having to worry about the effect on exchange rates. However, developing countries whose economies depend on trade will be reluctant to allow their exchange rates to fluctuate freely.

The Asian currency crisis was a period of financial crisis started in Thailand in July 1997. Many Asian countries experienced a financial crisis are a large drop in the value of its currency and a large drop in its traded equity prices. Before the crisis happened, many Asian countries produced a dramatic reduction in poverty and rapid economic growth. Behind the boom, there are lots of imbalances: large current account deficit was financed increasingly by short-term inflow; the real exchange rate had appreciated to an unsustainable level; and export growth had slowed obviously. Based on a literature review, a great

The Asian Financial Crisis was a period of financial crisis that gripped much of Asia beginning in July 1997, and raised fears of a worldwide economic meltdown (financial contagion). It is also commonly referred to as the IMF crisis.