The Asian Financial Crisis of 1997

Before you start

Where this sits

On 2 July 1997 Thailand stopped holding its currency steady

For years Thailand's central bank had kept its currency, the baht, close to a fixed rate against the US dollar. In 1997 traders bet that it could not last, and the bank spent its dollars buying baht to hold the rate. On 2 July 1997 it gave up and let the baht float, so the market would set its price.

The borrowing of the 1990s

Through the 1990s banks and companies in Thailand, Indonesia, South Korea and their neighbours borrowed heavily from abroad. The banks lent much of that money on at home, and bank lending grew by more than 10 per cent a year after inflation in most of the region, much of it into property and company investment.

Much of the foreign borrowing was due within a year, and it was owed in dollars or yen. With the local currency held close to the dollar, few borrowers paid to protect themselves against a fall. So a fall in the currency would raise their debts in local money. Lenders who saw the risk would stop renewing loans. A central bank can defend its currency by raising interest rates, which pays investors more to hold it. But higher rates also raise what borrowers pay, so the defence would hurt the same indebted banks and firms.

The float and the fall of the baht

The chart shows how many baht one US dollar bought each month. A rising line means a weaker baht. Speculators had been selling baht for months, and the Bank of Thailand had committed much of its dollars to defending the rate. After the float the baht fell fast. By January 1998 it took about 53 baht to buy a dollar, against about 25 in June 1997.

Every Thai bank and firm with dollar debts now owed far more in baht, and lenders abroad grew less willing to renew their loans.

The spread to the neighbours and Korea

Investors who had lent to Thailand looked again at its neighbours. Where they saw the same short-term dollar debts and weak banks, they pulled money out. Within weeks of the float the Philippine peso, the Malaysian ringgit and the Indonesian rupiah came under pressure, and in August Indonesia let the rupiah float. By late October the pressure had reached South Korea, the world's eleventh largest economy, and in December Korea floated its currency, the won.

In January 1998 the chairman of the US Federal Reserve, Alan Greenspan, told Congress: "Vicious cycles of ever rising and reinforcing fears have become contagious."

The rescue loans and their conditions

The IMF approved loans of about 3.9 billion dollars for Thailand in August 1997, about 10.1 billion for Indonesia in November and about 21 billion for Korea in December. The money was paid in stages, and only as each country met its conditions: higher interest rates for a time to steady the currency, budget targets, and closing or rebuilding weak banks.

In Indonesia the government closed 16 banks on 1 November. Three of them were partly owned by relatives of President Suharto, and the family fought the closures: a son moved his bank's business elsewhere, and a half-brother went to court. The fight, and a belief, rightly held, that other weak banks were still open, made the public doubt the clean-up. Runs followed at many other banks. In Korea foreign banks kept pulling their short-term loans until, on 24 December 1997, the big international banks agreed to keep lending.

Indonesia in 1998, and Malaysia's route

The rupiah kept falling into 1998. Indonesia's IMF programme required the government to cut the subsidies that kept fuel cheap. In early May it raised fuel prices, faster than the IMF had advised, according to the IMF's evaluation office. The rises set off unrest, including riots targeting Indonesia's ethnic Chinese community, and later that month President Suharto resigned.

In August 1998 a crisis in Russia spread panic far beyond Asia. Malaysia had not taken IMF loans, as a US Congressional Research Service report notes. At first it tightened policy much as the rescued countries did. Then it took a different route: on 1 September it restricted money leaving the country, and the next day it fixed the ringgit against the dollar.

The recession of 1998 and the recovery

In 1998 the financial crisis became a recession. Output fell by about 13 per cent in Indonesia, by more than 7 per cent in Thailand and Malaysia, by about 5 per cent in Korea and slightly in the Philippines. Firms closed, jobs were lost and poverty rose.

In 1999 growth returned. Korea grew by about 11.6 per cent, Thailand by about 4.6 per cent and Indonesia by under 1 per cent. The IMF put the rebound down to households and firms spending again, to exports, and to interest rates kept low to support growth, and it credited its own programmes too. Why the crisis happened, and whether the IMF's conditions helped or hurt, is still argued; the last module of this series takes it up. But what had the region borrowed before 1997, and why could Thailand not hold the baht? The next module goes back to the start.

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