What is the 'Asian Financial Crisis'

The Asian financial crisis, also called the "Asian Contagion," was a series of currency devaluations and other events that spread through many Asian markets beginning in the summer of 1997. The currency markets first failed in Thailand as the result of the government's decision to no longer peg the local currency to the U.S. dollar (USD). Currency declines spread rapidly throughout South Asia, in turn causing stock market declines, reduced import revenues and government upheaval.

BREAKING DOWN 'Asian Financial Crisis'

As a result of the devaluation of Thailand's baht, a large portion of East Asian currencies fell by as much as 38%. International stocks also declined as much as 60%. Luckily, the Asian financial crisis was stemmed somewhat by financial intervention from the International Monetary Fund and the World Bank. However, the market declines were also felt in the United States, Europe and Russia as the Asian economies slumped.

As a result of the crisis, many nations adopted protectionist measures to ensure the stability of their own currencies. Often, this led to heavy buying of U.S. Treasuries, which are used as global investments by most of the world's sovereignties. The Asian crisis led to some needed financial and government reforms in countries such as Thailand, South Korea, Japan and Indonesia. It also serves as a valuable case study for economists who try to understand the interwoven markets of today, especially as it relates to currency trading and national accounts management.

Modern Case of the Asian Financial Crisis

The world markets have fluctuated greatly over the past two years, from the beginning of 2015 through the second quarter of 2016. This has caused the Federal Reserve to fear the possibility of a second Asian financial crisis. For example, China sent a shockwave through equity markets in the United States on August 24, 2016, when it devalued the yuan in relation to the USD. This caused the Chinese economy to slow, resulting in lower domestic interest rates and a large amount of bond float.

The low interest rates enacted by China encouraged other Asian countries to decrease their own domestic interest rates. Japan, for example, cut its already-low short-term interest rates into the negative numbers in early 2016. This prolonged period of low interest rates forced Japan to borrow increasingly larger sums of money to invest in global equities markets. The Japanese yen responded counterintuitively by increasing in value, making Japanese products more expensive and actually further weakening its economy.

The U.S. equity markets responded with a drop of 11.5% from January 1 to February 11, 2016. While the markets have since rebounded by 13% from February 11 to April 13, 2016, the Fed is still concerned about continued volatility throughout the rest of 2016.

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