The 1997 Asian crisis began when speculators attacked baht, the Thai currency. Thailand, like many Asian economies, had a fixed exchange rate system whereby the baht was fixed relative to the US dollar. The country was running substantial balance of payments deficits and was losing reserves as it was defending the exchange rate against the dollar. As markets realized that the government could not sustain the exchange rate any longer, investors shifted to other hard currencies. The Thai stock market index plunged by 50 percent within a year and banks were in danger of collapse as they had loaned funds using inflated assets as collateral. The domino effect also hit the other Asian economies as they were experiencing similar problems. Investors fled from the Philippines, Malaysia, and Indonesia, as expectations of a fall in their exchange rates grew stronger. The authorities in these countries were forced to abandon the exchange rate peg and, at the same time, Taiwan and Singapore also abandoned their fixed exchange rates. The United States was also affected by fears of a widespread financial crisis and the Dow Jones plunged 554 points in October 1997. The selling spell spread from Asia to Russia and Brazil. The governments of the affected countries had to generate recessions, with disastrous consequences in terms of lost output and unemployment, by raising interest rates to stop capital outflows and by resorting to devaluations in order to restore international competitiveness. In doing so, the prices of imports rose and so did domestic inflation. In addition, as these countries had resorted to heavy foreign borrowing, devaluation raised the cost of repaying international debt as its value in terms of domestic currency was also raised. Source: Compiled by Dr. Spyros Hadjidakis, Associate Professor of Economics and Finance, School of Business, Intercollege, Nicosia, Cyprus. Question: Was the Asian Crisis resolved? How? Please conduct outside research to support your answer
The 1997 Asian crisis began when speculators attacked baht, the Thai currency. Thailand, like many Asian economies, had a fixed exchange rate system whereby the baht was fixed relative to the US dollar. The country was running substantial balance of payments deficits and was losing reserves as it was defending the exchange rate against the dollar. As markets realized that the government could not sustain the exchange rate any longer, investors shifted to other hard currencies. The Thai stock market index plunged by 50 percent within a year and banks were in danger of collapse as they had loaned funds using inflated assets as collateral. The domino effect also hit the other Asian economies as they were experiencing similar problems. Investors fled from the Philippines, Malaysia, and Indonesia, as expectations of a fall in their exchange rates grew stronger. The authorities in these countries were forced to abandon the exchange rate peg and, at the same time, Taiwan and Singapore also abandoned their fixed exchange rates. The United States was also affected by fears of a widespread financial crisis and the Dow Jones plunged 554 points in October 1997. The selling spell spread from Asia to Russia and Brazil. The governments of the affected countries had to generate recessions, with disastrous consequences in terms of lost output and
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