Asian Financial Crisis: Causes, Events, And Aftermath

Timeline of Important Issues Surrounding the Currency Crisis

1. What were the events leading up to the Asian Financial Crisis (policies, events etc.) that made the currency susceptible to an attack? 

2. What was the defining moment that precipitated the attack? 

3. What happened in the aftermath (how was the crisis resolved)? Prepare an analysis (not more than 1,500 words) and include necessary charts, 
graphs and diagrams.

The currency crises occur in a situation, where problems occur for the country’s central banks to have sufficient foreign exchange reserves to maintain the fixed exchange rate conditions. In addition, the currency crises occur in both fixed and floating rate regime, which happens due to the low reserves conducted by the central banks of the country. Moreover, the currency crises increase the debt denomination of a country, where the value of home currency declines substantially in comparison to other currencies. The currency crises relatively indicate a fixed response, where speculative attack on foreign exchange value directly leads to the depreciation of home currency. Furthermore, the measure also initiates a situation, where the economy comes under pressure, where the prevailing exchange rate peg or regime (Krueger 2014).

In addition, there are two outcomes of the attack, where it occurs successfully or unsuccessfully. Under the successful attack measures currency of the home country, which will depreciate in comparison to other countries. On the other hand, the unsuccessful attack will does not alter the exchange rate and leave them unchanged in compassion to other countries. Moreover, the currency crises relevantly feather the international monetary system, where it has been existing since the early 1970s till date. Moreover, there are certain currency crises occurred over the period of time, where crisis occurred in different time lines. 

The Bretton Woods system in 1971 – 73 adopted a new prosperity without war, where a fixed exchange rates are established during World War II. The system allowed the countries post World War, devasted by the event adopted the measure for controlling the currency convertible in comparisons to dollar (Almeida et al. 2015).

British pound in 1976 reached the lowest point, where it was not able to maintain higher value against USD, which indicated a loan of $3.9 billion from the International Monetary Fund for controlling the financial crisis initiated in UK.

European Exchange Rate Mechanism in 1992 – 93 was mainly indicated to reduce the variability and achieve monetary stability in the Europeans sector. However, his measure was discontinued after the introduction of the single euro currency in by the European Union. In addition, the conservative government was not able keep the pound above the agreed lower line of ERM, which initiated the closure of the European Exchange Rate Mechanism (Harvie and Van 2016).

Policies and Events That Made the Currency Susceptible to an Attack

Mexico’s peso devaluation in 1994 – 95 occurred due to the actions taken by the Mexican government sudden devaluation of the peso against US dollar during 1994. This financial crisis was considered to be one of the first international crisis ignited from the capital flight.

Asia in 1997 – 98 occurred due to the violation of impossible trinity, which was conducted by the selected Asian country in boosting their current financial progress.

Financial crisis in 2008 – 09 occurred due to mishap between the mortgage system of the US housing market, which initiated the biggest loss incurred from the financial crisis (Jackson 2018). 

There are two different hypothesis, which could be considered, as the major event leading to the Asian financial crises. One of the first hypothesis indicates that sudden shift int the market expectations and confidence led to the mass panic of the domestic and international investors. This event directly initiated the massive selling process and recovery of funds, which was conducted by the foreign investors. The presence of impossible trinity in the economic activities of Asian countries directly fixed the exchange rate of the currency, which had the negative impact on the currency reserves of the Asian countries. Furthermore, the decisions made by the individuals during financial crisis led to the down fall of the Asian economy, which drastically declined market and currency valuation of Asian countries. The ignorance of impossible trinity mainly led to instability of the financial sector of the Asian countries, while incurring the maximising the negative impact from operations. In this context, Kim, Kim and Lee (2015) stated that financial crisis mainly reduces capability of the economy in maintaining adequate liquidity for continuing operations in within the country. On the other hand, Mera and Renaud (2016) criticises that during the Asian crisis the whole economy of the Asian market was declining, as foreign investors were withdrawing the funds in fixed currency exchange. Hence, the mass panic by both domestic and international traders initiated the selling process in the Asian capital market, which in turn started the Asian financial crisis.

The second hypothesis which could be detected, as the reason behind the occurrence of the Asian financial crisis is the structural and policy distortions adopted by the Asian countries in their region. In addition, the fundamental imbalances were also triggered from the current and financial of the 1997 market overaction and herding. The assumptions of the second hypothesis are also right, as the alteration in the policies and violation of the impossible trinity was the main reason, which augmented the Asian financial crisis. Moreover, the fundamental imbalances implemented by the Asian countries led to the down fall of their capital market. The governments of Asian countries fixed the currency exchange rate, free capital flow and used an independent monetary policy, which led to the down fall of their economy. The hypothesis indicated the use of uncovered interest rate parity conditions, implemented by the Asian countries, which is directly affected their economic conditions (Rosman, Wahab and Zainol 2014). 

Defining Moments That Precipitated the Attack

Indicating the defining moments that precipitated the attack:

There were three specific defining movement that precipitated the attack of the financial crises on their economy. The use of current account imbalances and macroeconomic fundamentals were the major issues, which indicated the augmentation of the financial crisis that dissolved the financial credentials of the Asian countries. The current account imbalance has mainly declined, as it reflects saving and investment provisions conducted by agents. Therefore, the role of financial system is also considered to be one of the biggest flaws, which adhered the problems of the financial crisis. Moreover, the financial system was flawed, as it ignored the significance of impossible trinity and used different type of measures in supporting the financial system. In this context, D’souza (2016) stated that the presence of imperfection in the financial system initiates the augmentation of the financial crisis, which might hamper valuation of the capital market.

Lastly, the presence of imbalance in the foreign debt accumulation and management was also an indicator, which portrayed the augmentation of the financial crisis. This relevantly indicated the use of fixed interest rate by the Asian countries for exchanging the foreign currency system where the actual valuation would decline over the period. The above identified movements, where the overall imbalance in the current accounting system was witnessed with the declining performance of the financial system and increase in imbalance in foreign debt accumulation by the Asian countries. The deformity in the current operations of the Asian counties led to the augmentation of the financial crisis, which pounded their capital market to new lows until different measures were taken by the governments for reducing the negative impact from the financial crises (Dent 2017). 

The Asian financial crisis increased the distress in financial sector for the first half of 1997, which had negative impact on capital market performance of the Asian countries. In addition, different level of measures is mainly used by the governments in improving the level of operations and controlling the rising risk portrayed from the financial crisis. During the distress situation of the overall measures such as control in exchange rate movements through interventions help in curbing the losses incurred by the Asian countries. Furthermore, the Asian countries also used different level of monetary policies controlling the level of exchange rate for reducing the negative impact on the capital market. Wang (2014) stated that during the Asian crisis the countries were not able to control the massive selling process, as investors feared about their current trajectory of the capital market. On the other hand, Sui and Sun (2016) criticises that the measure used by the countries for reducing the negative impact were mainly slow and needed external help from Japan and IMF in curbing the financial crisis and declining currency value.

How the Crisis Was Resolved

Therefore, the use of policy response conducted by the Asian counties led to the decline in the financial crisis. In addition, the measures used by the Asian countries have policy spill overs and contagion effects, which stopped the massive selling process but had negative impact on the economy of the countries. Japan one of the largest exporters to the US dialled down their exports to US and used 20 million dollars in controlling their currency value. The measures used by the Japanese government to control their declining currency value was not adequate, as the policy spills and contagion effects of the financial crisis negative affected the currency value of Japan. In this context, Dewandaru et al. (2015) stated that the measure used by the government in controlling the financial crisis was not adequate, where it was not able control future aspects of the capital market.

Conclusion:

The assessment relevantly evaluates the time line of the currency crises, which occurred till now. In addition, the discussion of the currency crisis is also conducted, which helps in understanding the main problems that rose from the declining currency value. Moreover, the deifying moments that precipitated the Asian Crisis is relevantly discussed, which could be an exclusive hint for the future governments to omit the mistakes conducted by previous Asian governments. The after math of the Asian crisis, which was conducted by the government helped in stabilising their economy and nullify the future possibility of currency crises. Therefore, from the evaluation it is understood that the valuation of impossible trinity should not be conducted by the governments, as it hampers their capability to ensure safe operations of their financial sector, which was seen in the Asian crisis. 

References:

Almeida, H., Kim, C.S. and Kim, H.B., 2015. Internal capital markets in business groups: Evidence from the Asian financial crisis. The Journal of Finance, 70(6), pp.2539-2586.

Dent, C.M., 2017. Coming to Terms: The Economic Impact of the East Asian Financial Crisis on the European Union. In Asia-Europe Cooperation After the 1997-1998 Asian Turbulence (pp. 55-78). Routledge.

Dewandaru, G., Masih, R. and Masih, A.M.M., 2015. Why is no financial crisis a dress rehearsal for the next? Exploring contagious heterogeneities across major Asian stock markets. Physica A: Statistical Mechanics and its Applications, 419, pp.241-259.

D’souza, J., 2016. Once the bubble bursts: An overview on the comparison of the Asian economic crisis and the global financial crisis. Journal of Public Administration and Policy Research, 8(3), pp.25-32.

Harvie, C. and Van Hoa, T., 2016. The causes and impact of the Asian financial crisis. Springer.

Jackson, K., 2018. Asian contagion: the causes and consequences of a financial crisis. Routledge.

Kim, B.H., Kim, H. and Lee, B.S., 2015. Spillover effects of the US financial crisis on financial markets in emerging Asian countries. International Review of Economics & Finance, 39, pp.192-210.

Krueger, A., 2014. Asian financial crises. In The Oxford handbook of the economics of the Pacific Rim.

Mera, K. and Renaud, B., 2016. Asia’s financial crisis and the role of real estate. Routledge.

Rosman, R., Wahab, N.A. and Zainol, Z., 2014. Efficiency of Islamic banks during the financial crisis: An analysis of Middle Eastern and Asian countries. Pacific-Basin Finance Journal, 28, pp.76-90.

Sui, L. and Sun, L., 2016. Spillover effects between exchange rates and stock prices: Evidence from BRICS around the recent global financial crisis. Research in International Business and Finance, 36, pp.459-471.

Wang, L., 2014. Who moves East Asian stock markets? The role of the 2007–2009 global financial crisis. Journal of International Financial Markets, Institutions and Money, 28, pp.182-203.