Asian Crisis Essay

2698 words - 11 pages

The beginning of the Asian financial crisis can be traced back to 2 July 1997. That was the day the Thai Government announced a managed float of the Baht and called on the International Monetary Fund (IMF) for 'technical assistance'. That day the Baht fell around 20 per cent against the $US. This became the trigger for the Asian currency crisis. Within the week the Philippines and Malaysian Governments were heavily intervening to defend their currencies. While Indonesia intervened and also allowed the currency to move in a widened trading range a sort of a float but with a floor below which the monetary authority acts to defend the currency against further falls. By the end of the month there was a 'currency meltdown' during which the Malaysian Prime Minister Mahathir attacked 'rogue speculators' and named the notorious speculator and hedge fund manager, George Soros, as being personally responsible for the fall in value of the ringgit. Soon other East Asian economies became involved, Taiwan, Hong Kong, Singapore and others to varying degrees. Stock and property markets were also feeling the pressure though the declines in stock prices tended to show a less volatile but nevertheless downward trend over most of 1997. By 27 October the crisis had had a world wide impact, on that day provoking a massive response on Wall Street with the Dow Jones industrial average falling by 554.26 or 7.18 per cent, its biggest point fall in history, causing stock exchange officials to suspend trading.

Countries such as Thailand, Indonesia, Malaysia and the Philippines have embraced an unusual policy combination of liberalisation of controls on flows of financial capital on the one hand, and quasi-fixed/ heavily managed exchange rate systems on the other. These exchange rate systems have been operated largely through linkages with the United States (US) dollar as their anchor. (1) Such external policy mixes are only sustainable in the longer term if there is close harmonisation of economic/ financial policies and conditions with those of the anchor country (in this case, the United States). Otherwise, establishing capital flows will inevitably undermine the exchange rate.

Rather than harmonisation, there seems to have actually been increased economic and financial divergence with the US, especially in terms of current account deficits, inflation and interest rates. These increasing disparities have prompted global (and local) financial interests to speculate against the administered exchange rate linkages, i.e. speculative pressure mounted that the monetary authorities in these countries would not be able to hold their exchange rate links. In most cases, such financial speculation has been of sufficient magnitude to actually provoke the collapse of the administered exchange rate links, in the manner of 'self fulfilling' prophecies. Defence of the exchange rate through the use of foreign exchange reserves and higher interest rates proved to be insufficient....

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