What caused the Asian financial crisis?

The Asian financial crisis was caused by banks and firms in East and South-East Asia borrowing heavily abroad for short periods in dollars, while their currencies stayed pegged close to the dollar. When foreign lenders pulled out in 1997, the currencies collapsed and those dollar debts became far heavier.

Why the region was exposed

Thailand grew by around 9 per cent a year between 1987 and 1996, and foreign banks were eager to lend. Thai banks borrowed dollars abroad, often for a year or less, and lent at home for property and business investment over many years. With the baht held almost fixed against the dollar, few borrowers insured themselves against a fall.

That invited a run. If lenders refused to renew, borrowers needed dollars immediately, and in Thailand, Indonesia and Korea short-term foreign debt exceeded the central bank's reserves. Defending the currency with higher interest rates would hurt the very banks and firms that owed the money.

How the baht float started the crisis

Speculators sold baht through early 1997. The Bank of Thailand bought them with its dollars and committed roughly four-fifths of its reserves through forward contracts. On 2 July 1997 it gave up and floated the baht. From about 25 baht to the dollar in June 1997 it went to about 53 in January 1998, so every dollar owed cost more than twice as much in baht.

Investors then fled neighbours with similar debts, starting with the Philippines, Malaysia and Indonesia. In late October Hong Kong share prices dropped 23 per cent in three days and the pressure moved to South Korea. Private money that entered Asia at nearly a hundred billion dollars a year in 1996 was leaving as fast in the second half of 1997.

What the rescues asked for and what followed

The IMF approved staged loans in 1997 of about 3.9 billion dollars to Thailand, 10.1 billion to Indonesia and 21 billion to Korea, on conditions that included higher interest rates for a time and closing weak banks. Money alone did not end the panic. Indonesia's closure of 16 banks triggered runs elsewhere, and President Suharto resigned on 21 May 1998. Korea's outflow stopped only when the big foreign banks agreed on 24 December 1997 to keep rolling over its loans.

In 1998 the crisis turned into recession. Indonesia's output shrank by 13.1 per cent and the share of its people below the national poverty line went from 11.0 to 19.9 per cent. Malaysia instead restricted money leaving the country and fixed the ringgit at 3.80 to the dollar.

How the region recovered and what is still argued

Growth came back in 1999, helped by cheap currencies and lower interest rates. Korea grew by about 11.6 per cent while Indonesia barely grew, and the clean-up of banks and companies lagged far behind. On the causes, one side blames weak banks and short-term foreign debt. Another stresses a lenders' panic that brought on the failures it feared. Critics add that the loans' tight budgets and high interest rates deepened the slump.