The Asian financial crisis of 1997: timeline and causes

1. Early 1990sForeign capital flows into the region. Currencies are held steady against the dollar, and banks and companies borrow short-term in dollars.
2. May 1997The baht comes under heavy selling. The Bank of Thailand defends the rate, committing much of its reserves through forward contracts.
3. 2 July 1997Thailand floats the baht, which falls at once. This is the date usually given for the start of the crisis.
4. July 1997The Philippines lets the peso float on 11 July, and on 14 July Malaysia stops defending the ringgit.
5. August 1997Indonesia floats the rupiah on 14 August. Later in the month the International Monetary Fund approves a programme for Thailand.
6. Late Oct 1997Hong Kong’s share market falls sharply as its dollar link is defended with very high overnight interest rates. On 27 October the Dow falls 554 points and circuit breakers halt trading in New York for the first time.
7. Nov–Dec 1997South Korea asks the International Monetary Fund for help in late November and reaches agreement in early December. The won is floated on 16 December.
8. May 1998In Indonesia, after a collapse in the rupiah, price rises and riots, the president resigns on 21 May after three decades in power.
9. September 1998Malaysia imposes controls on capital movements and fixes the ringgit at 3.80 to the dollar.
10. May 2000The countries of South-East Asia with China, Japan and South Korea agree the Chiang Mai Initiative, a network of currency swap arrangements between their central banks.

• Most of the countries affected moved to more flexible exchange rates, and many built up far larger foreign currency reserves than before, as insurance against a repeat.
• The Chiang Mai Initiative of May 2000 set up currency swap lines between the region’s central banks, so that a country short of dollars could borrow from its neighbours.
• Bank supervision was tightened and limits were placed on borrowing in foreign currency in several countries.
• The International Monetary Fund’s programmes, which required high interest rates and cuts in public spending, were heavily criticised, and the Fund’s own later evaluations accepted some of that criticism.

• Borrowing in one currency to hold assets in another is a position in the exchange rate, whether or not it is thought of as one. A peg hides that risk without removing it.
• Short-term funding of long-term assets depends on lenders continuing to renew. When they stop, a firm that is sound on paper can still run out of cash.
• The crisis moved from country to country faster than their economic links alone would explain. Investors who lose in one place reassess similar places, and sell.
• Reserves that have been promised in forward contracts are not available. The published number and the usable number were different things.

These are observations about how markets and rules work, drawn from one episode. They are not advice, and they do not say that anything like it will or will not happen again.

It is easy to judge an episode once its ending is known. This exercise takes three moments from the timeline above, one at a time. At each it shows only what had been made public by then, asks a hypothetical question with three plain choices, and then shows what came next and what each choice would have meant.

The text headed “what had been made public by then” is this site’s own summary of the record, written afterwards. It is not a contemporary document and nothing in it is a quotation. The position described is imagined. No choice is marked right, there is no score, and nothing is stored.

A hypothetical for study, not advice. It does not say what anyone should have done then, or what to do now.

The dates of the floats and the agreements are a matter of record. The causes are argued over: some accounts stress weak banks, poor supervision and bad lending inside the countries; others stress a panic among foreign lenders that would have damaged even sound economies. The effects of the International Monetary Fund’s conditions, and of Malaysia’s capital controls, are also still debated. Figures for the size of the rescue programmes and the depth of the currency falls vary with the dates chosen and are not given here.

What started the Asian financial crisis?

The event usually named is Thailand’s decision on 2 July 1997 to stop defending the baht’s link to the US dollar, after its reserves had been largely committed to the defence. The underlying conditions were pegged currencies, heavy short-term borrowing in dollars and weak banks, in Thailand and in several neighbours.

Which countries were hit hardest in the Asian crisis?

Thailand, Indonesia and South Korea, each of which turned to the International Monetary Fund, together with Malaysia and the Philippines. Hong Kong kept its link to the dollar but saw its share market fall sharply. Indonesia suffered the deepest fall in its currency and a change of government.

What changed after the Asian financial crisis?

Most of the affected countries let their currencies move more freely, built much larger foreign currency reserves, and tightened the supervision of banks. In May 2000 the region’s governments agreed the Chiang Mai Initiative, a set of currency swap arrangements between central banks.

• Central Bank
• Liquidity
• Leverage
• Volatility
• Hedging

International Monetary Fund histories and its independent evaluation of the programmes, central bank accounts from the region, and contemporary newspaper reports.

A number is given on this page only where it is famous and certain. Nothing here is a quotation.