What is the 'Asian Financial Crisis'

The Asian financial crisis, also called the "Asian Contagion," was a sequence of currency devaluations and other events that began in the summer of 1997 and spread through many Asian markets. 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 Southeast 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 percent. International stocks also declined as much as 60 percent. Luckily, the Asian financial crisis was stemmed somewhat due to 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 currencies. This often 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 much-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 manager.

What Solved the Asian Financial Crisis?

As mentioned above, the IMF intervened, providing loans to stabilize the Asian economies — also known as “tiger economies” — that were affected. Roughly $110 billion in short-term loans were advanced to Thailand, Indonesia, and South Korea to help them stabilize their economies. In turn, they had to follow strict conditions including higher taxes and interest rates, and a drop in public spending. Many of the countries affected were beginning to show signs of recovery by 1999. 

Lessons Learned From the Asian Financial Crisis

Many of the lessons learned from the Asian financial crisis can still be applied to situations happening today and can also be used to help alleviate problems in the future. First, investors should beware of asset bubbles — some of them may end up bursting, leaving investors in the lurch once they do. Another possible lesson is for governments to keep an eye on spending. Any infrastructure spending dictated by the government could have contributed to the asset bubbles that caused this crisis — and the same can also be true of any future events. 

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 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 against 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 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 further weakening its economy.

The U.S. equity markets responded with a drop of 11.5 percent 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.

RELATED TERMS
  1. Asian Infrastructure Investment ...

    The Asian Infrastructure Investment Bank (AIIB) is an international ...
  2. Asian Productivity Organization ...

    A union of 20 Asian countries formed in 1961 to promote socioeconomic ...
  3. Pacific Rim

    The Pacific Rim refers to the geographic area surrounding the ...
  4. Crisis Management

    Crisis management is the identification of threats to an organization ...
  5. Financial Crisis

    A financial crisis is a situation where the value of assets drop ...
  6. European Sovereign Debt Crisis

    The European debt crisis refers to the struggle faced by eurozone ...
Related Articles
  1. Investing

    Rising Private Market Debt Create a Bubble In ASEAN Economies

    The decline of several Asian currencies after China’s surprise August devaluation of the yuan has sparked worries of a currency war leading to conditions similar to those that preceded the 1997 ...
  2. Insights

    Introduction To Asian Financial Markets

    We look at the history of Asia's financial development and how investors can get involved in these growing markets.
  3. Insights

    An In-Depth Look At The Credit Crisis

    The credit crisis reshaped the financial landscape and changed Wall Street forever. Find out how it happened.
  4. Insights

    3 Financial Crises in the 21st Century

    Take a look at several of the most prominent financial crises of the 21st century, and understand why the Great Recession was a truly remarkable contraction.
  5. Investing

    Will South Korea Devalue the Won?

    Learn why the largest countries in Asia are devaluing their currencies. Discover how South Korea may respond and what this means for Asian economies.
  6. Investing

    Top 10 Asian Cities For Real Estate Investment

    Emerging Asian markets are on a building tear. Countries in the region have focused on providing the housing, infrastructure and commercial buildings needed for the millions of new urbanites ...
  7. Trading

    Why the Euro Failed to Become the World's Reserve Currency

    Examine the current state of the U.S. dollar as the world's reserve currency; learn the major reasons why the euro has failed to replace it in that capacity.
RELATED FAQS
  1. How often do exchange rates fluctuate?

    Exchange rates float freely against one another, which means they are in constant fluctuation, as they are driven by demand. Read Answer >>
  2. How did moral hazard contribute to the 2008 financial crisis?

    Learn about moral hazard, how it can affect outcomes and how it contributed to the conditions that led to the 2008 financial ... Read Answer >>
  3. Did the repeal of the Glass-Steagall Act contribute to the 2008 financial crisis?

    Understand the argument that the repeal of the Glass-Steagall Act caused the 2008 financial crisis, and learn why the argument ... Read Answer >>
Hot Definitions
  1. Net Present Value - NPV

    Net Present Value (NPV) is the difference between the present value of cash inflows and the present value of cash outflows ...
  2. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing a company that measures its current share price relative ...
  3. Internal Rate of Return - IRR

    Internal Rate of Return (IRR) is a metric used in capital budgeting to estimate the profitability of potential investments.
  4. Limit Order

    An order placed with a brokerage to buy or sell a set number of shares at a specified price or better.
  5. Current Ratio

    The current ratio is a liquidity ratio that measures a company's ability to pay short-term and long-term obligations.
  6. Return on Investment (ROI)

    Return on Investment (ROI) is a performance measure used to evaluate the efficiency of an investment or compare the efficiency ...
Trading Center