Asian Currency Crisis
The now infamous Asian currency crisis originated in Thailand in July 1997 and spread almost instantaneously throughout Indonesia, Malaysia, the Philippines and Korea. ... The crisis was instigated with the devaluation of the speculation-weakened Thai baht, which served to make Thai exports more competitive with those from China (Kawai & Kentaro; 1998). Thus, feeling the pressure other East Asian countries; namely the Philippines, Malaysia, and Indonesia; in turn, devalued their respective currencies in an effort to gain the Thai competitive edge. Currency speculators were quick to follow; hence as the East Asian currencies depreciated, foreign capital flew out of their domestic markets, sending stock, real estate, and other markets tumbling. ... As much of East Asia’s highly acclaimed growth was financed by huge foreign investment, the devaluation of their currencies and subsequent flight of foreign capital left the hardest-hit East Asian countries with stagnant domestic markets and piles of debt denominated in hard foreign currencies, which appreciated in local currency terms by huge percentages. Here, I must point out that Kawai and Kentaro (1998) argue that China’s devaluation of its own currency in 1994 may have been the initial cause of the recent turmoil in East Asia, as it made Chinese exports to the U. ... and Western countries relatively cheaper than other East Asian exports, thus beginning the devaluation race which all export-driven economies of East Asian nations felt compelled to compete in. Another main foundation of the crisis were the misjudgments on the part of the Japanese Government and the major national banks with regards to interest rates that sparked a widespread panic within the financial markets. According to Montes (1998), a currency crisis takes place when there is a run on official foreign exchange reserves, thus exerting pressure on the exchange rate in the economy. ... Compounding the crisis effect throughout the region was the strong trade linkages among these economies which was evidently a good thing gone sour. Following from these cataclysmic beginnings to the crisis, currency speculators began targeting other Asian currencies for devaluation, hoping financial troubles in Malaysia, the Philippines, Indonesia and Thailand would spread fear into further Asian markets and cause a similar flight of foreign capital.