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The Asian Financial Crisis

The Asian Financial Crisis. 1997. Pre-crisis. Foreign Capital Inflows US was in a recession (low interest rates) Drastic run-ups in asset-prices Asian Tigers ( Hong Kong, Singapore, South Korea, and Taiwan) accounted for 50% of capital inflows in Asia Fixed Exchange Rates

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The Asian Financial Crisis

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  1. The Asian Financial Crisis 1997

  2. Pre-crisis • Foreign Capital Inflows • US was in a recession (low interest rates) • Drastic run-ups in asset-prices • Asian Tigers (Hong Kong, Singapore, South Korea, and Taiwan) accounted for 50% of capital inflows in Asia • Fixed Exchange Rates • Encouraged external borrowing • High exports which led to driving rapid economical growth • Exports to GDP ratio grew from 35% to 55%

  3. The Tipping Point

  4. Started in Thailand • Meltdown began on Feb 5, 1997 in Thailand • Thai stock market had already dropped 45% from its high in early 1996 • Concerned that property companies might be forced into bankruptcy (Over-building) • Finance One - Eurobond lending • Would borrow in US$ at a low interest rate • Leant Thai Baht at high interest rates • Property developers could no longer pay back loans • Finance One couldn’t pay back creditors

  5. Started in Thailand (Cont.) • Finance One - Eurobond lending (Cont.) • Finance One’s shares fell by 70% in one day • Filed bankruptcy • Thai Baht was pegged to the US$ ($1=Bt25) • Downward pressure on Thai Baht (due to growing CA deficits and dollar denominated debt) • Short sellers swarmed the Thai Baht (Sell Baht for Dollars) • Central Bank spent $5B to defend the peg • July 2, 1997 - Baht would now float freely • Immediately lost 18% of its value • January, 1998 - $1=Bt55 • Thai Debt bomb exploded!!!

  6. The Bubble

  7. Reason for failure

  8. Role of international monetary fund

  9. Conclusion

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