Asian Financial Crisis and How Term Paper

  • Length: 13 pages
  • Subject: Economics
  • Type: Term Paper
  • Paper: #57691772

Excerpt from Term Paper :

Nevertheless, more crucial remained the truth that the dollar itself oscillated severely as against the yen that is another vital currency for carrying out business for the affected nations. The fading of the dollar within the decadal period from 1985 to 1995 made a huge boon in the trade surplus for the affected nations. Thereafter, the acute turnaround began in 1995 wiped their enormous edge in price and damaged their current account situation, which in its effect spoiled the trust in the market created an appropriate climate for the crisis. To put it differently, it was not the system of linking the dollar in its own which is responsible. The cause was the non-observance of the basic instability in the economies of the nations and the uncontrolled oscillation of the exchange rate of dollar-yen. The dilemma was the outcome of the huge quantity of unstable capital and the blind follower attitude of the market participants that can be set off by impulsive flow of information. (Two Lessons of the East Asian Financial Crisis)

The international monetary system has been functioning under chaotic circumstances ever since the row of the Asian financial crisis and the international financial system has been the topic of severe argument by the global community ever since the crisis broke out. (International Monetary System under Changing Conditions and China's Policy Options) the dilemma evoked several crucial questions for the international system, a lot of which are connected with the progress of a new international financial structure. The unfurling of the crisis emphasized the innate complexity of preventing a disaster once it has began, taking into consideration the rapidity with short-term capital is able to progress in reaction to the varying market reaction: deterrence is the solution. (the Asian Financial Crisis What Have We Learned?)

The International Monetary Fund and Finance Ministers of the Group of Seven progressive industrialized economies urged the developing nations to ease up their monetary system however did not caution them that huge flow of capital might be precarious for the countries with poor banks, substandard managerial controls and slack corporate governance. The impact of the disaster on the exchange rate and asset prices was not limited to Asia. Since a year of its outbreak, the Asian financial crisis had extended to Russia and Latin America, and endangered to pull the world economy into a deflationary state of slump. This had revealed the vulnerability of the monetary system of the world and the dangers of globalization in case of small open economies. (Fix the Global Financial System)

Exchange rates were tight wherever big inflows of foreign borrowing were present as lenders tried to send home monies. In the beginning, rates in South Africa, Latin America and Eastern Europe bore the brunt. South Africa, Brazil and the Russian Federation everybody experienced considerable inflows of capital. Even though the Czech Republic has since been pressurized to shun its oscillating band in front of the problems in Thailand, the currency of the country came under more selling pressure. As the institutional investors are likely to consider promising markets as an asset category, anticipations of losses in a particular promising market has likelihood to travel rapidly to other promising markets, regardless of their economic basis. This was without hesitation a reason in the extending of the disaster to Eastern Europe and Latin America. but, the rising globalization of financial linkages even contributed to it. For instance banks in the Republic of Korea and Hong Kong, had hedged their investments in a lot of developing nations or economies that are in state of change, together with Indonesia, the Russian Federation and Brazil. (International Financial Instability and the East Asian Crisis)

As these situations were funded by borrowed monies, they sharply converted to loss while the borrowing rates went up and the worth of the assets came down in reaction to the exchange rate instability, resulting in the banks to refrain from financing to these nations so as to loosen their stakes and trim down their losses. This resulted in the sales of Brady Bonds of Latin America and the Russian treasury securities and acted to spread the disaster from Asia to other promising markets. The degree of this interrelation can be viewed in the very speedy and identical rise in the spread of Asian and Latin American bonds bought and sold in secondary markets over yardstick over United States government securities. (International Financial Instability and the East Asian Crisis)

The Asian crisis has impacted sub-Saharan Africa in several manners, even though its exact influence on economic growth and the external accounts of the region is hard to quantify. But tagged with internal causes and other external setbacks like the impact of the El Nino and a fall in the costs of the commodity, the crisis in Asia has resulted in a lowering of the anticipated real GDP growth rate in case of sub-Saharan Africa of approximately 1/2 of 1% to nearly 4% in 1998, and a rise of nearly 2 percentage points in the anticipated external current account shortfall for 1998, which is calculated at 6% of GDP. Even through South Africa appeared comparatively intact from the chaos of late 1997, demands on its economy deepened during May and June 1998 and resulted in the significant fall in the stock markets of the country, a significant rise in the returns on long-term bonds and a considerable fall in the Rand, regardless of rise in the internal interest rates and the interference of the Central Bank in the exchange markets. (How Has the Asian Crisis Affected Other Regions?)

The outcome of the Asian crisis on European nations has till now been low-key, showing their comparatively restricted direct business with other nations in crisis and the healthy financial status of the majority of them, even though by no way everyone, banks having Asian experience. European monetary markets, particularly of the economies in a state of change over, have been battered intermittently. The consequence of the Asian crisis on nearly every nation of the erstwhile Soviet Union was extensive however comparatively pretentious. But in Russia and Ukraine, the two nations which have been vigorously engaged in borrowing from the global stock markets, significant force on the internal monetary markets have grown as an outcome of infectivity from Asia which might have experienced by a number of outside frights. Butt is in hard to extricate the consequences of the Asian crisis from similar distress like the fall in the price of oil, carrying out of the nuclear tests in India and Pakistan, and other local problems of security. Even though the Asian crisis was not as damaging for the area as the Mexican crisis was, it unleashed a considerable residual impact in developing nations of the area. (How Has the Asian Crisis Affected Other Regions?)

The Asian financial crisis has exhibited that the present international financial system can no more meet the challenges of the global economic and monetary development. This in its way has achieved as an inducement for several nations to speed up their investigation of the international monetary system and its performances. (International Monetary System under Changing Conditions and China's Policy Options) While the countries affected by the crisis witnessed that in just a year there happened a capital reversal of around U.S.$105 billion within 1997 and 1998, the socio-political ramifications that the crisis put on the East Asian nations have not been estimated till now. Majority of the policy formulators and businessmen in Asia have been reasonably busy with the current crisis and did not pay much heed to the happenings in the European Union. (Counterbalance: The Euro in Asia) This disregard is fateful as on the European continent, chaos at the international market, have catered to reinforce the resolve of the European nations for the realization of a single currency, and to hasten the process of the unification of European currencies. On January 1, 1999, chosen economies of the EU started a common currency - an important and which has never happened earlier in the international monetary system. Eleven nations inclusive of Germany, France, Austria, Netherlands, Luxembourg, Belgium, Finland, Ireland, Italy, Spain and Portugal have joined on board the "inaugural bus." (International Monetary System under Changing Conditions and China's Policy Options)

Nearly 66% of worldwide foreign reserves leaving aside gold are denominated in dollars, nearly 50% of the world exports are billed in dollars and a little in excess of 40% of foreign exchange turnover contains the dollar. The matching figures for the EU currencies in total are 25%, 34% and 31.5% respectively. The euro is estimated to overhaul the Japanese yen as the world' second most important currency, and perhaps defy the domination of the dollar, with the entire EU comprising about one fifth of global output, two fifths of world trade, and half of the global foreign exchange turnover. For Asia, the negligence of the EMU will be deliberately detrimental. The arguments over whether the EMU will be positive or negative to the contributing…

Cite This Term Paper:

"Asian Financial Crisis And How" (2005, March 05) Retrieved January 17, 2017, from

"Asian Financial Crisis And How" 05 March 2005. Web.17 January. 2017. <>

"Asian Financial Crisis And How", 05 March 2005, Accessed.17 January. 2017,