What Was the Asian Financial Crisis?

The Asian financial crisis, also called the “Asian Contagion,” was a sequence of currency devaluations and other events that began in July 1997 and spread across Asia. The crisis started in Thailand when the government ended the local currency’s de facto peg to the U.S. dollar after depleting much of the country’s foreign exchange reserves trying to defend it against months of speculative pressure.

Just weeks after Thailand stopped defending its currency, Malaysia, the Philippines, and Indonesia were also compelled to let their currencies fall as speculative market pressure built. By October, the crisis spread to South Korea, where a balance-of-payments crisis brought the government to the brink of default.

Other economies also came under pressure, but those with solid economic fundamentals and hefty foreign exchange reserves fared much better. Hong Kong fended off several major but unsuccessful speculative attacks on its currency, which is pegged to the U.S. dollar via a currency board system and backed by massive U.S. dollar reserves. 

Impact of the Asian Financial Crisis

As the Thai baht fell, other Asian currencies fell—some precipitously. Across Asia, inflows of capital slowed or reversed.

The Thai baht had been trading at about 26 to the U.S. dollar before the crisis but lost half its value by the end of 1997, falling to 53 to the dollar by January 1998. The South Korean won fell from about 900 to the dollar to 1,695 by the end of 1997. The Indonesian rupiah, which had been trading at around 2,400 to the dollar in June 1997, plummeted to 14,900 by June 1998, less than one-sixth its precrisis level.

Some of the more heavily affected countries fell into severe recession. Indonesia’s gross domestic product (GDP) growth fell from 4.7% in 1997 to -13.1% in 1998. In the Philippines, it slid from 5.2% to -0.5% over the same period. Malaysia’s GDP growth similarly slid from 7.3% in 1997 to -7.4% in 1998, while South Korea’s contracted from 6.2% to -5.1%.

In Indonesia, the ensuing economic crisis led to the collapse of the three-decade-old dictatorship of President Suharto.

The crisis was alleviated by intervention from the International Monetary Fund (IMF) and The World Bank, among others, which poured some $118 billion into Thailand, Indonesia, and South Korea to bail out their economies.

As a result of the the crisis, affected countries restructured their economies, generally because the IMF required reform as a condition of help. The specific policy changes were different in each country but generally involved strengthening weak financial systems, lowering debt levels, raising interest rates to stabilize currencies, and cutting government spending.

The crisis also serves as a valuable case study for economists to understand how interwoven markets affect one another, especially as it relates to currency trading and national accounts management.

Causes of the Asian Financial Crisis

The crisis was rooted in several threads of industrial, financial, and monetary government policies and the investment trends that they created. Once the crisis began, markets reacted strongly, and one currency after another came under pressure. Some of the macroeconomic problems included current account deficits, high levels of foreign debt, climbing budget deficits, excessive bank lending, poor debt-service ratios, and imbalanced capital inflows and outflows.

Many of these problems were the result of policies to promote export-led economic growth in the years leading up to the crisis. Governments worked closely with manufacturers to support exports, including providing subsidies to favored businesses, more favorable financing, and a currency peg to the U.S. dollar to ensure an exchange rate favorable to exporters.

While this did support exports, it also created risk. Explicit and implicit government guarantees to bail out domestic industries and banks meant investors often did not assess the profitability of an investment but instead looked to its political support. Investment policies also created cozy relationships among local conglomerates, financial institutions, and the regulators who oversaw their industries. Large volumes of foreign money flowed in, often with little attention to potential risks. These factors all contributed to a massive moral hazard in Asian economies, encouraging major investment in marginal and potentially unsound projects.

As the crisis spread, it became clear that the impressive economic growth rates in these countries were concealing serious vulnerabilities. In particular, domestic credit had expanded rapidly for years, often poorly supervised, creating significant leverage along with loans extended to dubious projects. Rapidly rising real estate values (often fueled by easy access to credit) contributed to the problem, along with rising current account deficits and a buildup in external debt. Heavy foreign borrowing, often at short maturities, also exposed corporations and banks to significant exchange rate and funding risks—risks that had been masked by long-standing currency pegs. When the pegs fell apart, companies that owed money in foreign currencies suddenly owed a lot more in local currency terms, forcing many into insolvency.

Many Asian economies had also slid into current account deficits. If a country has a current account surplus, that means it is essentially a net lender to the rest of the world. If the current account balance is negative, then the country is a net borrower from the rest of the world. Current account deficits had grown on the back of heavy government spending (much of it directed to supporting continued export growth).

Response to the Asian Financial Crisis

The IMF intervened to stem the crisis with loans to stabilize the affected economies. The IMF and others lent roughly $118 billion in short-term loans to Thailand, Indonesia, and South Korea. The bailouts came with conditions, though: Governments had to raise taxes, cut spending, and eliminate many subsidies. By 1999, many of the affected countries began to show signs of recovery.

Other financial institutions also intervened. For example, in December 1997, the U.S. Federal Reserve Bank brokered a deal under which U.S. banks owed money by South Korean companies on short-term loans voluntarily agreed to roll them over into medium-term loans.

Lessons from the Asian Financial Crisis

Many of the lessons of the Asian financial crisis remain relevant today. First, beware of asset bubbles, as they have a habit of bursting. Another is that governments need to control spending and pursue prudent economic development policies.

The Bottom Line

In 1997, decades of economic policy planning that featured close relationships among government policy planners, regulators, the industries they regulated, and financial institutions came to a head when markets began putting downward pressure on Asian currencies. The most vulnerable were those countries with high levels of debt and insufficient financing to pay it.

The IMF stepped in to bail out the most affected economies, but it imposed strict conditions in exchange for the help. Some measures included requiring governments to cut spending, raise taxes, eliminate subsidies, and restructure their financial systems.

The crisis also serves as a case study in asset bubbles and how quickly panic selling can trigger contagion that central bankers cannot control.

What Is an Asset?

An asset is a resource with economic value that an individual, corporation, or country owns or controls with the expectation that it will provide a future benefit.

Assets are reported on a company’s balance sheet. They’re classified as current, fixed, financial, and intangible. They are bought or created to increase a firm’s value or benefit the firm’s operations.

An asset can be thought of as something that, in the future, can generate cash flow, reduce expenses, or improve sales, regardless of whether it’s manufacturing equipment or a patent. 

Understanding Assets

An asset represents an economic resource owned or controlled by, for example, a company. An economic resource is something that may be scarce and has the ability to produce economic benefit by generating cash inflows or decreasing cash outflows.

An asset can also represent access that other individuals or firms do not have. Furthermore, a right or other type of access can be legally enforceable, which means economic resources can be used at a company’s discretion. Their use can be precluded or limited by an owner.

For something to be considered an asset, a company must possess a right to it as of the date of the company’s financial statements.

Assets can be broadly categorized into current (or short-term) assets, fixed assets, financial investments, and intangible assets.

Types of Assets

Current Assets

In accounting, some assets are referred to as current. Current assets are short-term economic resources that are expected to be converted into cash or consumed within one year. Current assets include cash and cash equivalents, accounts receivable, inventory, and various prepaid expenses.

While cash is easy to value, accountants periodically reassess the recoverability of inventory and accounts receivable. If there is evidence that a receivable might be uncollectible, it’ll be classified as impaired. Or if inventory becomes obsolete, companies may write off these assets.

Fixed Assets

Fixed assets are resources with an expected life of greater than a year, such as plants, equipment, and buildings. An accounting adjustment called depreciation is made for fixed assets as they age. It allocates the cost of the asset over time. Depreciation may or may not reflect the fixed asset’s loss of earning power.

Generally accepted accounting principles (GAAP) allow depreciation under several methods. The straight-line method assumes that a fixed asset loses its value in proportion to its useful life, while the accelerated method assumes that the asset loses its value faster in its first years of use.

Financial Assets

Financial assets represent investments in the assets and securities of other institutions. Financial assets include stocks, sovereign and corporate bonds, preferred equity, and other, hybrid securities. Financial assets are valued according to the underlying security and market supply and demand.

Intangible Assets

Intangible assets are economic resources that have no physical presence. They include patents, trademarks, copyrights, and goodwill. Accounting for intangible assets differs depending on the type of asset. They can be either amortized or tested for impairment each year.

What Is the American Stock Exchange (AMEX)?

The American Stock Exchange (AMEX) was once the third-largest stock exchange in the United States, as measured by trading volume. The exchange, at its height, handled about 10% of all securities traded in the U.S.

Today, the AMEX is known as the NYSE American. In 2008, NYSE Euronext acquired the AMEX. In the subsequent years, it also became known as NYSE Amex Equities and NYSE MKT.

Understanding the American Stock Exchange (AMEX)

The AMEX developed a reputation over time as an exchange that introduced and traded new products and asset classes. For example, it launched its options market in 1975. Options are a type of derivative security. They are contracts that grant the holder the right to buy or sell an asset at a set price on or before a certain date, without the obligation to do so. When the AMEX launched its options market, it also distributed educational materials to help educate investors as to the potential benefits and risks.

In 1993, the AMEX introduced the first exchange traded fund (ETF). The ETF, now a popular investment, is a type of security that tracks an index or a basket of assets. They are much like mutual funds but differ in that they trade like stocks on an exchange.

Over time, the AMEX gained the reputation of listing companies that could not meet the strict requirements of the NYSE. Today, a good portion of trading on the NYSE American is in small cap stocks. It operates as a fully electronic exchange.

History of the American Stock Exchange (AMEX)

The AMEX dates back to the late 18th century when the American trading market was still developing. At that time, without a formalized exchange, stockbrokers would meet in coffeehouses and on the street to trade securities. For this reason, the AMEX became known at one time as the New York Curb Exchange.

The traders who originally met in the streets of New York became known as curbstone brokers. They specialized in trading stocks of emerging companies. At the time, many of these emerging businesses were in industries such as railroads, oil, and textiles, while those industries were still getting off the ground.

In the 19th century, this type of curbside trading was informal and quite disorganized. In 1908, the New York Curb Market Agency was established in order to bring rules and regulations to trading practices.

In 1929, the New York Curb Market became the New York Curb Exchange. It had a formalized trading floor and a set of rules and regulations. In the 1950s, more and more emerging businesses began trading their stocks on the New York Curb Exchange. The value of companies listed on the exchange almost doubled between 1950 and 1960, going from $12 billion to $23 billion during that time. The New York Curb Exchange changed its name to the American Stock Exchange in 1953.

Special Considerations

Over the years, the NYSE American has become an attractive listing place for younger, entrepreneurial companies, some of whom are in the early stages of their growth and certainly not as well-known as blue chip companies. Compared to the NYSE and Nasdaq, the NYSE American trades at much smaller volumes.

Because of these factors, there could be concerns that investors would not be able to quickly buy and sell some securities in the market. To ensure market liquidity—which is the ease at which a security can be converted to cash without impacting its market price—the NYSE American offers electronic designated market makers.

Market makers are individuals or firms that are available to buy and sell a particular security as needed throughout the trading session. These designated market makers have quoting obligations for specific NYSE American-listed companies. In return for making a market for a security, market makers earn money through the bid-ask spread and from fees and commissions. So, despite the fact that the NYSE American is a smaller-volume exchange specializing in listing smaller companies, its use of market makers enables it to maintain liquidity and an orderly market.