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The Asian Financial Crisis — 1997 to 2000

What Caused the Asian Financial Crisis

Explain the main explanations of the Asian financial crisis and the argument over the rescues, who holds each view, and why they are still argued over.

Before you start

What you'll be able to answer

  1. What did the IMF and others see as the root of the crisis, and why do some economists stress the panic of foreign lenders?
  2. What did critics say was wrong with the rescues, and how did the IMF answer?
  3. What did the IMF's own evaluators later conclude about South Korea, and why is the argument still going on?

Where this sits

The Asian Financial Crisis — 1997 to 2000 · this module is lit

  1. 2 Jul 1997Thailand stops holding the baht at a fixed rate to the dollar and lets it float
  2. 14 Aug 1997Indonesia lets the rupiah float
  3. 20 Aug 1997The IMF approves a loan of about $3.9 billion for Thailand
  4. Nov 1997The IMF approves a loan of about $10.1 billion for Indonesia
  5. Nov 1997Indonesia closes 16 banks
  6. 4 Dec 1997The IMF approves a loan of about $21 billion for Korea
  7. 24 Dec 1997Korea's programme is speeded up
  8. 21 May 1998President Suharto of Indonesia resigns
  9. Aug 1998A crisis in Russia spreads panic beyond Asia
  10. 1-2 Sep 1998Malaysia brings in rules on money leaving the country
  11. 1999Growth returns in most of the region

12 February 1998

On 12 February 1998 the chairman of the US Federal Reserve, Alan Greenspan, spoke to a committee of the US Senate. He backed the US government's request to add to the money of the International Monetary Fund (IMF), which lends to countries that cannot pay their foreign bills. The IMF had led rescues for Thailand, Indonesia and South Korea. Greenspan also told the senators what, in his view, lay at the root of Asia's problems.

Predict first

What do you think Greenspan said lay at the root of the problems?

The IMF and the Bank for International Settlements blamed weak financial systems

The crisis came mainly from weaknesses in financial systems and, to a lesser degree, in how the countries were governed, not primarily from imbalances across whole economies, such as government budgets, the IMF said in January 1999. In its account banks were poorly supervised, risks were badly judged, and exchange rates were held close to fixed. These led banks and firms to borrow large sums abroad in foreign currency, much of it short-term, so soon due back, and unhedged, with no protection if their own currency fell. If it fell, each dollar owed would cost more local money. Slow growth in Europe and Japan, which left few good investments and kept interest rates low there, helped the borrowing build up, the IMF adds.

The Bank for International Settlements (BIS), the central banks' own bank, blamed banks that lent too freely, and short-term loans from abroad that could leave quickly.