Ten years ago on July 2, Thailand decided to float its currency, the baht, triggering the region-wide chain reaction known as the Asian Financial Crisis. In less than six months, the U.S. dollar more than doubled in value against the baht. As the baht plunged in value, Thailand's stock market took a massive beating.
Other currencies and stock markets in the region also suffered, sending newly industrialized economies of Asia – in particular Indonesia, Malaysia, South Korea and Thailand – into a tailspin over the next two years.
Thailand’s stock market shed over three-quarters of its value by the end 1997, as did those in Malaysia and Indonesia. South Korea fared slightly better, but still fell 70%.
One after another, like dominoes stacked in a row, currencies in the region that had previously been pegged against the dollar (with the exception of the Malaysian ringgit) succumbed to market forces. August saw the Indonesian rupiah’s managed float replaced by a free-floating rate. The South Korean won was floated on Christmas Eve that year. Malaysia went the opposite way, instituting capital controls in September 1998, fixing the ringgit at 3.8 to the dollar. These controls were only lifted in 2005.
For the hardest hit countries of Indonesia, South Korea and Thailand, it was a baptism by fire, but the crisis – which quickly earned the catchy moniker "Asian Contagion" – had much wider repercussions and highlighted the tight-knit nature of global markets.
When the South Korean stock market fell 11% one day, so-called circuit breakers were triggered on the New York Stock Exchange, forcing a halt to trading before the official closing time. Later on, among other things, Asian Contagion was given partial blame for the collapse of the U.S. hedge fund Long Term Capital Management as well as the Russian debt crisis in 1998.
Who would have thought that a run on the Thai baht could have triggered a regional cataclysm that also reverberated through the world?
Roots Of The Crisis
Even with a decade’s worth of hindsight, experts are still at odds over the causes of the crisis. What we do know is this:
During the years preceding the crisis, regional economies experienced rapid growth that attracted large amounts of foreign investment in the form of foreign debt financing. Marc Chandler, global head of currency strategy at Brown Brothers Harriman, says that during this period of boom in the early 1990s, the system of fixed exchanges and managed floats gave people a false sense of comfort and encouraged poor investment decisions. The implicit guarantee against exchange rate risk very comfortably facilitated international trade and foreign debt financing, which in turn, supported high and sustained growth in many countries.
The strong and sustained economic growth and subsequent wealth created led to a huge demand for property, which in turn led to oversupply. The abundant foreign debt financing that flowed into Asian economies and into real estate development was aggravated by very poor due diligence on the part of banks and financial institutions, loose private credit and the lack of corporate governance. In short, banks were not lending wisely to the private sector, which had turned a blind eye to corporate governance, something Chandler likens it to a World Cup game without referees.