The Asian Financial Crisis

Causes, Solutions, and Lessons Learned

Aerial View of Shanghai Financial District after Snow
Photo: Jackal Pan / Getty Images

The Asian Financial Crisis of 1997 affected many Asian countries. These "tiger economies" included South Korea, Thailand, Malaysia, Indonesia, Singapore, and the Philippines. The countries were seeing compound annual growth rates of 6% to 9%. These were some of the largest growth rates in the world at the time. The crisis caused their stock markets and currencies to lose about 70% of their value.

What Caused the Crisis?

The Asian financial crisis, like many other financial crises before and after it, began with a series of asset bubbles. Growth in the region's export economies led to high levels of foreign direct investment. That, in turn, led to soaring real estate values in places like Hong Kong and Bangkok, bolder corporate spending, and even large public infrastructure projects. Fueling this wildfire growth was heavy borrowing and bank lending.

Ready investors and easy lending often lead to reduced investment quality. As early as 1995, the International Monetary Fund (IMF) was warning of dangers after the collapse of the Mexican peso. This advice went unheeded.

Excess capacity soon began to show in the tiger economies. The U.S. Federal Reserve also began to raise its interest rates around this time to counteract inflation. This led to less attractive exports (for those with currencies pegged to the dollar). This meant less foreign investment flowed into the Asian economies.


The tipping point came when Thailand's investors realized that the rate of growth in that country's property market values had stalled. This made price levels unsustainable.

Results were severe. Developer Somprasong Land defaulted and Thailand's largest finance company, Finance One, went bankrupt in 1997.

Next, currency traders began attacking the Thai baht's peg to the U.S. dollar. This was a success. On July 2, 1997, the currency was eventually floated and devalued. Consumers lost their spending power. Loans taken out when the currency was worth more became impossible to pay off.

Soon, other Asian currencies all moved sharply lower. Among them were the Malaysian ringgit, Indonesian rupiah, and Singapore dollar. These devaluations led to high inflation and a host of problems that spread as wide as South Korea and Japan.

What Solved the Crisis?

Some $118 billion in loans came through to help end the crisis, led by the IMF. This went on to solve the Asian financial crisis. The IMF supplied the bulk of the loans needed to stabilize the troubled Asian economies. The World Bank and Asian Development Fund also threw in support.


By late 1997, the IMF alone had pledged more than $110 billion in short-term loans to Thailand, Indonesia, and South Korea to help stabilize their economies. That was more than double IMF's largest loan ever.

In exchange for the funding, the IMF set strict conditions and the countries had to adhere. These included higher taxes, reduced public spending, privatized state-owned businesses, and higher interest rates to cool the overheated economies. The countries also had to close illiquid financial institutions with no concern for jobs lost.

On December 24, 1997, the Federal Reserve Bank of New York hosted a meeting of banks with loans made out to South Korea. Banks with the largest loans agreed not to call in short-term loans. They worked with the country to restructure them into medium-term loans. This gave much needed time.

By 1999, many of the countries that had been in distress showed signs of recovery. Gross domestic product (GDP) growth resumed. Many saw their stock markets and currency valuations greatly reduced from pre-1997 levels.

But the solutions imposed set the stage for Asia to re-emerge as a popular choice for investors.

Frequently Asked Questions (FAQs)

What role did the government of Thailand have in the Asian Financial Crisis?

The government of Thailand released its currency from its peg to the U.S. dollar, which sparked a rapid devaluation that shocked the entire region's economy. However, while it decided to release its currency from the peg, currency traders forced this decision by draining Thailand's national exchange reserves.

When does a financial crisis occur?

A financial crisis occurs when an asset bubble pops and threatens the integrity of the broader financial system. In the case of the Asian Financial Crisis, the asset bubble came in the form of foreign direct investment and real estate inflation. When it burst, the value of currencies rapidly fell, threatening to upend entire local economies.

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  1. Charles W.L. Hill, University of Washington. "The Asian Financial Crisis," Page 1.

  2. Federal Reserve History. "Asian Financial Crisis."

  3. International Monetary Fund. "Asian Flu: Financial Crisis in the Pacific," Page 501.

  4. V. S. Somanath. "International Financial Management," Page 74. I. K. International Pvt Ltd, 2011.

  5. USF Center for the Pacific Rim. "Bitter Medicine for Sick Tigers: The IMF and Asia's Financial Crisis," Page 5.

  6. USF Center for the Pacific Rim. "Bitter Medicine for Sick Tigers: The IMF and Asia's Financial Crisis," Pages 5-6.

  7. University of Michigan. "Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management, Chapter 8 - Japan and the United States in the Asian Financial Crisis Management," Page 1.

  8. USF Center for the Pacific Rim. "Bitter Medicine for Sick Tigers: The IMF and Asia's Financial Crisis," Pages 6-8.

  9. International Monetary Fund. "Recovery From the Asian Crisis and the Role of the IMF."

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