The Asian Financial Crisis

Causes, Solutions, and Lessons Learned

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

The Asian Financial Crisis of 1997 affected many Asian countries, including South Korea, Thailand, Malaysia, Indonesia, Singapore, and the Philippines. After posting some of the most impressive growth rates in the world at the time, the so-called "tiger economies" saw their stock markets and currencies lose about 70% of their value.


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, which in turn led to soaring real estate values, bolder corporate spending, and even large public infrastructure projects. Heavy borrowing from banks provided most of the funding.

Ready investors and easy lending often lead to reduced investment quality, and excess capacity soon began to show in these economies. The U.S. Federal Reserve also began to raise its interest rates around this time to counteract inflation, which led to less attractive exports (for those with currencies pegged to the dollar) and less foreign investment.

The tipping point was the realization by Thailand's investors that the rate of appreciation in that country's property market values had stalled, and its price levels were unsustainable. This was confirmed by property developer Somprasong Land's default and the 1997 bankruptcy of Finance One, Thailand's largest finance company. After that, currency traders began attacking the Thai baht's peg to the U.S. dollar. This proved successful and the currency was eventually floated and devalued.

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


The Asian financial crisis was ultimately solved by the International Monetary Fund (IMF), which provided the loans necessary to stabilize the troubled Asian economies. In late 1997, the organization had committed more than $110 billion in short-term loans to Thailand, Indonesia, and South Korea to help stabilize the economies. This was more than double IMF's largest loan ever.

In exchange for the funding, the IMF required the countries to adhere to strict conditions, including higher taxes, reduced public spending, privatization of state-owned businesses, and higher interest rates designed to cool the overheated economies. Some other restrictions required countries to close illiquid financial institutions without concern for jobs lost.

By 1999, many of the countries the crisis affected showed signs of recovery and resumed gross domestic product (GDP) growth. Many of the countries saw their stock markets and currency valuations dramatically reduced from pre-1997 levels, but the solutions imposed set the stage for the re-emergence of Asia as a strong investment destination.