The Origin Of Asian Crisis Essay Research — страница 3

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bowing to foreign and domestic pressure to rescue Japan’s faltering economy, Japanese Prime Minister announced a special two billion yen ($15.7 billion) cut in personal income taxes. Stock market rallies, then weakens. On Dec.18, fed up with their economy’s falling, voters in South Korea elected longtime dissident Kim Dae-jung to serve a five-year term as president, leaving some concerned that the country’s financial markets will be further battered. + The second phase The management of the crisis entered a second phase on December 24. With Korea on the brink of default, the U.S. Government (led by the Federal Reserve Board and U.S. Treasury) decided to press the foreign commercial banks to roll over their short-term credits on an enforced basis, rather than waiting for

market confidence to be restored. Initially, the banks and the Korean Government announced a standstill on debt servicing, pending a formal agreement. Till early 1998, the IMF provided $36 billion to support reform programs in the three worst-hit countries–Indonesia, Korea, and Thailand. The IMF gave this financial support as part of international support packages totaling almost $100 billion. In these three counties, unfortunately, the authorities’ initial hesitation in introducing reforms and in taking other measures to restore confidence led to a worsening of the crisis by causing declines in currency and stock markets that were greater than a reasonable assessment of economic fundamentals might have justified. This overshooting in financial markets worsened the panic and

added to difficulties in both the corporate and financial sectors. In particular, the domestic currency value of foreign debt rose sharply. While uncertainties persisted longer in Indonesia, strengthened commitments were made elsewhere to carry out adjustment reform. And the Asia’s crisis may not be over yet. On June 11, the Japanese yen falls to an eight-year low against the U.S. dollar, driving down the prices of stocks and currencies around the world. On August 11, deepening gloom about the Japanese economy sends the yen tumbling to another eight-year low, and stock markets plunge around the world-including in the United Stated -in a dramatic display of financial contagion. On November 5, Japan’s already-low interest rates fall below zero on certain types of borrowing.

What caused the Asian crisis? The Asia financial crisis is remarkable in several ways. The crisis hit the most rapidly flowing economies in the world, and prompted the largest financial bailouts in history. It is the sharpest financial crisis to hit the developing world since the 1982 debt crisis. It is the least anticipated financial crisis to hit the developing world since the 1982 debt crisis. It is the least anticipated crisis in years. What were the causes of the Asian economic, currency and financial crisis? There is multifaceted evidence about it. According to one view, sudden shifts in market expectations and confidence were the key sources of the initial financial turmoil, its propagation over time and regional contagion. According to other view, the crisis reflected

structure and policy distortions in the countries of the region. Fundamental imbalances triggered the currency and financial crisis in 1997, even if, once the crisis started, market overreaction and herding caused the plunge of exchange rates, asset prices and economic activity to be more severe than warranted by the initial weak economic conditions. We identify five main types of reason for the crisis. + Large currency appreciation in the 1990s Several Asian currency had appreciated in real terms in the 1990s and large growing current account imbalances had emerged in the countries that faced a speculative attack in 1997. Between 1990 and 1997, the real appreciation in several countries whose currencies collapsed in the crisis exceeds 25 percent and especially rapid after 1994,

when the US dollar began to appreciate against other major world currencies. The overvalue was due in part to the widespread choice of fixed exchange rate regimes in the region and the related large capital inflows in the 1990s. It was clear that several regional currencies were seriously overvalued and that such overvaluations appeared to be increasing needed to adjust the current account position to the deficit countries. + Large current account imbalance and related growth of foreign debt The current account imbalance and related growth of foreign debt was also driven by investment boom (as well as a consumption boom). The Asian countries were characterized by very high rates of investment throughout the 1990s, In most countries these rates were well above 30% of GDP. Such