Asian Flu

Date: 1997   /   Region: APAC
Published October 20th, 2016
Ron Rimkus, CFA

The phrase “financial contagion” was born in 1997 as several Asian countries experienced currency crises in rapid succession. However, the use of the word contagion is something of a misnomer.  All the countries that experienced the crisis simply shared similar policies and economic characteristics, namely pegs or managed exchange rates relative to the US dollar, export-led economies and substantial amounts of debt denominated in US dollars.  As the US changed its policy on the dollar via the Reverse Plaza Accord, the rising US dollar thrust these countries into an awkward situation: Either devalue or default. One by one, these countries chose to devalue their currencies in what has come to be known as the Asian Flu.

Analysis and Commentary

From the 1960s to the early 1990s, many southeastern Asian nations — including Thailand, South Korea, Indonesia, Malaysia, and the Philippines — experienced a long period of prosperity dubbed the “Asian Miracle.” This strong growth continued through the 1980s and early 1990s. In the 10 years preceding the crisis of 1997, Asian economies experienced robust growth (according to World Bank Statistics[1]). For instance, Thailand’s GDP growth rate averaged 9.5%, South Korea’s averaged 8.7%, Indonesia’s averaged 6.5%, and Malaysia’s averaged 9.1%. Exports were even more robust. In this same period, Thailand’s export growth averaged 15% annually, South Korea’s averaged 12.2%, Indonesia’s averaged 9.0%, and Malaysia’s averaged 14.9%. With such perennially strong growth rates, these countries came to be known as “Asian Tigers.”

Many of these countries achieved their growth by using some variant of the “infrastructure growth model” (sometimes known as the “mercantilist model”). In this approach, the countries invested heavily in manufacturing, exports, technology, and infrastructure while coupling these investments with abundant cheap labor. To protect their fledgling industries, many of them also pegged their currencies to the value of the US dollar.

In the 18 months after the Plaza Accord, the US dollar declined by about 50% and took all the pegged currencies with it, including, among others, the Thai baht, the South Korean won, the Indonesian rupiah, and the Malaysian ringgit.

Thailand, for example, first pegged its currency to the US dollar in 1956. Under a free-floating exchange rate regime, if enough foreigners either invest in or purchase goods and services of a particular country, the price of that country’s currency gets bid up. The escalating price of the currency then slows down the growth of that country’s foreign investment and exports thereby creating balance. However, when one country’s currency is pegged to another country’s currency, the balancing mechanism of floating exchange rates is suspended — until the point when economic forces overwhelm the central bank managing the pegged exchange rate. Hence, countries using fixed exchange rates create imbalances by overbuilding their export industries, by taking in too much capital, by taking on too much debt, and so on. So, in the case of the Asian Tigers, fixing their currencies to the US dollar provided exchange rate stability, albeit temporarily, and ensured that their export products maintained competitive prices within their end markets — particularly, the United States.

During the late 1980s and early 1990s, many of the Asian Tiger economies began to experience the economic imbalances brought on by their fixed exchange rate regimes. So, in some cases they abandoned the currency peg in favor of a managed exchange rate. By the time the crisis erupted in Asia in 1997, there were essentially two kinds of countries in the area, namely, those with currencies pegged to the US dollar and those with currencies partially pegged to the US dollar (through managed exchange rates). Nevertheless, the managed exchange rates used by South Korea and Indonesia, for instance, still prevented these economies from maintaining balance. So, the managed exchange rate regimes created similar problems to the fixed exchange rate regimes: nonmarket exchange rates create macroeconomic imbalances. The difference is only one of magnitude.

Pegging a currency also more closely aligns the monetary, trade, and even geopolitical policies of the pegging country with the “peggee” — in this case, the United States. So, in 1985, when the United States entered into the Plaza Accord (with France, the United Kingdom, West Germany, and Japan) to weaken the value of the US dollar on international exchange markets in the hopes of correcting burgeoning trade imbalances in the US, the currencies of the Asian Tiger markets were also affected by the US move (due to their respective currency pegs). As a backdrop, note that the US dollar had been appreciating sharply in the early 1980s. As the dollar rose, US manufacturers found themselves less competitive in world export markets, and consequently, the US current account deficit grew to roughly 3.5% of GDP.[2] On the flip side, Japan and Germany experienced large and growing current account surpluses.

In the 18 months after the Plaza Accord, the US dollar declined by about 50% and took all the pegged currencies with it, including, among others, the Thai baht, the South Korean won, the Indonesian rupiah, and the Malaysian ringgit. The lower dollar stimulated not only US exports but also the export-driven economies of the pegged Asian Tigers. Obviously, the exchange rate between the two currencies in a peg (e.g US$ and Thai Baht) can remain fixed indefinitely.  However, the exchange rates between the local currency (Thai baht) and other countries (e.g. Japanese yen) may change substantially, with a large impact on trade levels and current account balances in a given country.

Many Asian Tiger markets were too immature to raise adequate capital to finance their growth internally and thus relied heavily on foreign capital. The pegged currencies likely amplified the interest of foreign investors and lenders, who were enticed by the promise of limited currency risk. Similarly, the pegs influenced many local Asian issuers to borrow money in US dollars (and some other currencies) because interest rates in more liquid currencies were lower and funding markets could provide more capital. Naturally, dollar-denominated loans needed to be repaid in US dollars, so these local [Asian] borrowers, rather than the investors, assumed the currency risk.

The last line of defense for a government trying to maintain a currency peg (or collar) in the face of selling pressure is to sell its foreign currency reserves to purchase its home currency on the currency markets.

As capital flowed into the Asian Tiger markets, much of it found a home in the export sectors or in financial markets. Large markets, such as the United States, were importing substantial amounts of goods produced elsewhere, while foreign investors, such as large multinational companies, attracted by the cheap labor, were investing in the Asian Tiger economies. In 1993, the US Fed Funds Rate was at 3%, whereas comparable interest rates — in Thailand, for instance — were about 9%. Many investors saw the spread in interest rates as a way to increase returns. The inflow of capital led to a rapid expansion of money supply and credit in these markets, which contributed materially to their booming economies. For instance, in the 1993–96 period, Indonesia, Thailand, Malaysia, and the Philippines each experienced money supply growth in excess of 20% per year. Central banks in these countries had to issue substantial amounts of new currency to help prevent the local currencies from appreciating against the US dollar. Of course, the Asian central banks could have chosen to float their currencies at any time. Throughout the decade leading up to the crisis, the pressures on the Asian Tiger markets to float their currencies were accelerating, yet many invested as if the pegs and managed exchange rates would remain in place. The status quo is a powerful force in shaping the perception of market participants and, ultimately, market prices. In the case of Thailand, the peg to the dollar began in 1956 and remained in place (at various levels) until 2 July 1997, a full 41 years. Moreover, the power and authority of the state also adds to the appearance of certainty for many investors.

In late 1995, the United States adopted the so-called Reverse Plaza Accord, whereby the US Federal Reserve coordinated monetary policy with Japan and Germany to increase the value of the dollar and decrease the value of the yen (and mark). This escalation in the value of the dollar was a pivotal moment for what became known as the “Asian Contagion.” Over the 1995–97 time frame, the yen fell approximately 60% against the US dollar, making Japanese exports much cheaper on the international export market — and, naturally, much more competitive against exports from Asian Tiger countries that were still pegged to the (now rapidly appreciating) US dollar.

By early 1997, the Asian Tiger economies were confronted with a choice: (1) Do nothing, and watch their exports become much less competitive as the US dollar appreciated but be better be able to pay their US dollar–denominated debts or (2) break the peg to the US dollar, devalue their currencies, and resume their export growth. In the second choice, the Asian Tigers could recover much of their lost competitiveness, even though their US dollar–denominated obligations became much more costly. This choice wasn’t merely a theoretical exercise. The new currency levels were sharply hurting the Asian Tiger economies, whose exports and economic activity were faltering across the board. The currency markets astutely sensed the dilemma and, despite official pegs to the dollar, began selling the domestic Asian currencies.

In the very long run, market power exceeds government power.

The last line of defense for a government trying to maintain a currency peg (or collar) in the face of selling pressure is to sell its foreign currency reserves to purchase its home currency on the currency markets. However, this game lasts only as long as a country’s foreign currency reserves do. In May 1997, intense selling pressure erupted against the Thai baht; quoted exchange rates departed sharply from the government’s “official” exchange rate of 25 baht to the US dollar. The market sensed the growing imbalance between the “strength” of the pegged currencies and the growing weakness in the underlying economies. On the balance sheet, the Bank of Thailand’s foreign reserves had fallen from $37.2 billion in December 1996 to $30.9 billion by June of 1997 (Moreno 1998). Off the balance sheet, however, the Bank of Thailand was rapidly accumulating obligations to deliver baht in the forward markets; the total was as much as $23.4 billion by August 1997. So, in reality, the net foreign currency reserves in Thailand were much lower than the official reports (Moreno 1997).

As the selling pressure quickly overwhelmed the Thai government’s (failing) efforts to maintain the currency peg, another powerful lesson was demonstrated. In the very long run, market power exceeds government power. Nevertheless, in the short and medium term, the opposite is typically true. Governments can force industries to set prices that depart from supply and demand equilibrium for just about any product, service, or market. Policy can constrain supply or enhance it. Similarly, it can constrain demand or enhance it also. Whatever the case, government interventions create nonmarket prices and tap into nonmarket levels of supply and demand. Regardless of whether you view the government interventions as worthwhile, nonmarket prices often create imbalances in supply and demand that eventually must be rebalanced. The correction can manifest itself in supply and demand within the industry, in asset prices (or markets), in interest rates, or in currency values.

On 2 July 1997, Thailand officially broke the peg and allowed the price of the Thai baht to be determined by the market. Before the crisis broke out, the Thai baht traded at roughly 25 baht to the US dollar. After Thailand broke the peg, the currency traded (by October of 1997) as high as 53 baht to the dollar — meaning that it fell more than 50% in just three months. Once Thailand broke its peg, the markets swooned and other countries with financial profiles similar to Thailand’s, particularly those with pegs to the US dollar, became similar targets. The selling pressure moved first to the Philippine peso. Just two weeks after Thailand broke the peg, the Philippines broke its peg to the US dollar. Then, on 14 August 1997, Indonesia broke the rupiah’s peg and the currency immediately fell by 30%. By November 1997, South Korea had solicited and received a $57 billion bailout package from the IMF. The crisis rippled through all similar currencies, including those of non-Asian countries that had comparable financial profiles, such as Brazil and Russia. Hence, the phrase “financial contagion” was born. Ultimately, the IMF stepped in to provide financial support for these governments, to help arrest the capital flight, and to support continuity in local markets.

[1] The World Bank, GDP Growth by Country 1961 — 2015.

[2] Federal Reserve Bank of St. Louis Economic Research

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  • 1956: Thailand establishes a currency peg at 20.8 baht to the US dollar.
  • 1964: The Korean won is pegged to the US dollar.
  • 1971: The Indonesian government establishes a currency peg of 415 rupiah (Rp) to the US dollar.
  • 1973: Thailand changes its currency peg from 20.8 baht to 20 baht to the US dollar.
  • 1975: The Malaysian dollar is officially renamed the ringgit (RM), and its value is fixed to a basket of currencies that remains in place until 1998 (after the crisis).
  • 1978: Indonesia introduces a managed floating exchange rate (called Flexible Credit Foreign Exchange) for the rupiah.
  • 1980: South Korea abandons its fixed exchange rate to the US dollar and introduces a controlled exchange rate mechanism.
  • 1984: Thailand changes its currency peg from 20 baht to the US dollar to 25 baht to the US dollar.
  • 1985: The United States enters into the Plaza Accord with Japan, Germany, France, and the United Kingdom, which reduces the value of the US dollar by about 50% over the ensuing 18 months. Because of the currency peg, the Thai baht falls commensurately with the US dollar, making the baht also 50% cheaper on world markets.
  • 1986: Indonesia devalues the rupiah by 31%; that is, the rupiah falls from Rp1,134 per US dollar to Rp1,664 per US dollar.
  • 1995: The United States enters into the so-called Reverse Plaza Accord to increase the value of the US dollar and weaken the value of the Japanese yen. Over the ensuing 24 months, the US dollar increases in value by roughly 50% — taking pegged currencies with it.
  • February 1997: Thai property developer Somprasong Land defaults on an $80 billion eurobond loan.

Central Events

  • June 1997: Thailand’s foreign currency reserves decline from $30 billion to $2 billion because of the country’s efforts to defend the value of the Thai baht.
  • 2 July 1997: Thailand breaks the currency peg by announcing a managed float of the baht. The value of the baht drops by as much as 20%. Malaysia’s central bank intervenes to defend its currency, the ringgit.
  • 11 – 18 July 1997: The Philippine peso is devalued. The International Monetary Fund (IMF) approves a $1.1 billion emergency loan to the Philippines to alleviate pressure on the peso.
  • 24 July 1997: Asian currencies fall dramatically. Malaysian Prime Minister Mahathir bin Mohamad attacks “rogue speculators” and later blames financier George Soros for Southeast Asia’s economic decline.
  • 5 August 1997: The IMF announces a $17.2 billion support package for Thailand in return for the country adopting a variety of economic measures.
  • 13 – 14 August 1997: Currency markets put intense pressure on the Indonesian rupiah. The central bank of Indonesia abandons the official rupiah trading band, triggering a plunge in the currency.
  • 28 August 1997: Asian stock markets dive. Manila (Philippines) is down 9.3% and Jakarta (Indonesia) is down 4.5% on the day.
  • 20 – 21 September 1997: At the IMF/World Bank annual conference in Hong Kong Malaysian Prime Minister Mahathir tells delegates, “currency trading is immoral and should be stopped.” In response, investor George Soros claims, “Dr. Mahathir is a menace to his own country.”
  • 8 October 1997: The rupiah hits a low after falling more than 30% in two months. Indonesia seeks assistance from the IMF and World Bank.
  • 20 – 23 October 1997: The Hong Kong dollar comes under pressure; Hong Kong aggressively defends its currency by buying HK dollars in the open market. The Hong Kong stock index falls by nearly 10%.
  • October – December 1997: The South Korean won falls from roughly 850 won per US dollar to 1,600 won per US dollar by year-end 1997.
  • 31 October 1997: The IMF announces a stabilization package of about $40 billion for Indonesia.
  • 3 November 1997: Sanyo Securities, one of Japan’s top 10 brokerage firms, goes bankrupt with more than $3 billion in liabilities.
  • 17 November 1997: The Bank of Korea ceases efforts to prop up the value of the won, which promptly falls to a record low of 1,000 won to the US dollar.
  • 21 November 1997: South Korea seeks IMF support.
  • 3 December 1997: The IMF approves a $57 billion bailout package for South Korea.
  • 5 December 1997: Malaysia imposes tough reforms to reduce its balance of payments deficit.
  • 18 December 1997: South Koreans elect opposition leader Kim Dae Jung as new president.
  • 25 December 1997: The World Bank provides a $10 billion support package to South Korea, which agrees to expedite financial reforms and open its domestic financial markets.
  • 8 January 1998: International creditors agree to a 90-day rollover of South Korea’s short-term debt.
  • 8 – 9 January 1998: The Indonesian rupiah hits an all-time low after Indonesian President Suharto unveils his state budget plan, because the budget is unrealistic and does not comply with the IMF reform program. Indonesians, fearing that further currency declines will lead to food shortages, clear store shelves of food and staple goods.
  • 10 January 1998: Responding to pressure from the IMF, Indonesian President Suharto postpones 15 major government-subsidized projects — many of which are linked to members of the Suharto family — trying to cut expenditures and foreign debt.
  • 12 January 1998: Asia’s largest private investment bank, Hong Kong–based Peregrine Investments, files for liquidation as a result of bad or questionable loans. (Its debts are believed to have been somewhere between $400 million and $1 billion.)
  • 13 – 14 January 1998: South Korean labor unions agree to discuss layoffs with businesses and government leaders in exchange for a $57 billion aid package from the IMF. Students in Jakarta protest against the agreement.
  • 15 January 1998: The Indonesian rupiah falls to Rp10,000 to the US dollar. The IMF and Suharto sign a new loan deal in which Indonesia agrees to eliminate the country’s monopolies and state subsidies. Prices of basic food staples increase by almost 80%.
  • 28 January 1998: South Korea and international banks agree to exchange $24 billion in short-term debt for longer-term loans.
  • 6 February 1998: South Korean unions, businesses, and government reach a landmark agreement to legalize layoffs. The legislation is ratified by Seoul’s National Assembly.
  • 9 March 1998: The IMF, citing Suharto’s unwillingness to implement his side of the deal, announces that it is delaying a $3 billion installment of its $40 billion loan package to Indonesia. This announcement prompts a charge from Suharto that the IMF reforms are “unconstitutional.”
  • 11 March 1998: President Suharto is sworn in for a seventh five-year term in Indonesia.
  • 23 March 1998: Russian President Boris Yeltsin discharges his entire cabinet, including Prime Minister Viktor Chernomyrdin. Yeltsin appoints Energy Minister Sergei Kirienko is appointed acting premier.
  • 24 March 1998: The United States announces that it will send $70 million in food and medical emergency aid to Indonesia in an effort to subdue food riots.
  • 8 April 1998: Indonesia and the IMF reach their third pact in six months for a bailout. Both sides make concessions: The IMF withdraws its mandate that the government dismantle its subsidies of food and fuel, and Suharto agrees to close more insolvent banks.
  • 5 May 1998: In response to political and economic turmoil, students in Indonesia hold demonstrations across the country to protest.
  • 12 May 1998: Indonesian troops fire into a peaceful protest at a Jakarta university, killing six students and sparking a week of riots.
  • 21 May 1998: Suharto resigns after 32 years in power. Vice President Habibie succeeds as president.
  • 22 May 1998: The IMF indefinitely postpones the $1 billion aid disbursement to Indonesia scheduled for June 4 until the political situation stabilizes.
  • 27 May 1998: Russia’s stock and bond markets continue to plunge, forcing the central bank to triple interest rates to 150% in an attempt to avert a collapse of the ruble.
  • 27 – 28 May 1998: Union workers in South Korea strike to protest the growing wave of unemployment in the country. South Korean companies are now laying off 10,000 workers per day.
  • 1 June 1998: Russia’s stock, bond and currency markets experience intense selling pressure., Foreign exchange reserves held by the Central Bank of Russia decline to $14 billion.
  • 12 June 1998: Japan announces that its economy is in recession.
  • 17 June 1998: Japan and the United States intervene in currency markets with $6 billion to support the yen.
  • 24 June 1998: Russian Prime Minister Kiriyenko submits to the IMF a budget austerity plan for Russia, which releases a previously held loan installment of $670 million.
  • 25 June 1998: Indonesia and the IMF announce a fourth agreement; the IMF agrees to restore subsidies for food and fuel and provide another $4 billion.
  • 13 July 1998: The IMF announces a package of $23 billion of emergency loans for Russia. To provide its share of financing, the IMF dips into an emergency line of credit. Russian stocks and bonds soar.
  • 16 July 1998: Russia’s Duma approves some of Yeltsin’s $16 billion proposed tax reforms needed to meet conditions for IMF loans. But it rejects higher sales and land taxes.
  • 18 July 1998: Yeltsin vetoes tax cuts approved by the Duma. He issues decrees imposing a 3% tax on imports and quadrupling land taxes to close the budget deficit and secure IMF loans. He also pledges renewed efforts to collect taxes.
  • 20 July 1998: The IMF gives final approval to a $22.6 billion loan package to Russia. Because the Duma fails to enact some of the austerity measures mandated in the loan agreement, however, the first two planned installments are reduced from $5.6 billion to $4.8 billion.
  • 28 July 1998: The IMF announces that it will ease conditions on its $57 billion aid package to South Korea; the package had been blamed for rising unemployment and overburdened welfare programs.
  • 3 August 1998: Wall Street reacts to the deepening crisis; the Dow Jones Industrial Average plunges 300 points.
  • 4 August 1998: Amid speculation that China will be forced to devalue its currency, Hong Kong’s dollar and the Hang Sang Index fall sharply.
  • 6 August 1998: The World Bank approves a $1.5 billion loan for Russia.
  • 11 August 1998: The Russian markets collapse and trading on the stock market is temporarily suspended.
  • 17 August 1998: Russia devalues the ruble and announces a 90-day moratorium on foreign debt repayment.
  • 17 August 1998: On fears of default and devaluation in South America, Latin American stock and bond markets plunge.
  • 19 August 1998: Russia defaults on GKO bonds and treasury bills.The IMF and Group of Seven (G–7) say they won’t provide additional loans to Russia until it meets existing promises.
  • 21 August 1998: The crisis in Russia creates a massive flight to safety for investorscausing US treasury yields to drop to record lows.
  • 24 August 1998: Yeltsin dismisses Kiriyenko and names Chernomyrdin as prime minister.
  • 31 August 1998: the DJIA declines 512 points, the second-worst single-day point loss in the Dow’s history.
  • 8 September: Federal Reserve Chairman Alan Greenspan suggests that policymakers consider an interest rate cut; the Dow surges 381 points.
  • 10 September 1998: Brazilian stocks fall 16%. In Mexico, the central bank sells some $50 million in its first attempt to buoy the peso in three years. The Dow loses 249 points. Yeltsin nominates Yevgeny Primakov as prime minister.
  • 23 September 1998: Organized by the New York Federal Reserve, a consortium of large US financial institutions provides a $3.5 billion bailout to Long-Term Capital Management, one of the largest US hedge funds.
  • 29 September 1998: The Federal Reserve cuts interest rates by a quarter point.
  • 3 October 1998: Japan announces a $30 billion aid package for Southeast Asia to help the region recover from recession.
  • 15 October 1998: To prevent weak financial markets from tripping the United States into a recession, the Fed cuts interest rates for a second time. The Dow increases by 331 points.
  • 22 October 1998: Russia approves an emergency spending plan requiring the Central Bank of Russia to print at least $1.2 billion to help pay back wages, rescue banks, and bring food to desperate regions.
  • 27 October 1998: Brazil announces $80 billion in tax increases and spending cuts over three years in order to secure IMF loans.
  • 31 October 1998: The IMF, saying it will not resume negotiations about disbursement until Russia produces a realistic budget for 1999, refuses to disburse a $4.3 billion installment of the $22.6 aid package to Russia.
  • 5 November 1998: Russia reaches an agreement where international investors accept repayment in rubles for $40 billion of debt that was frozen in August. Russia also secures an $800 million loan from Japan, originally part of an IMF rescue deal.
  • 6 November 1998: The United States agrees to provide 3.1 million tons of food to Russia.
  • 13 November 1998: The IMF, the World Bank, and several nations announce a $41.5 billion rescue package for Brazil.
  • 17 November 1998: The Fed cuts interest rates for a third time in seven weeks.
  • 15 – 27 January 1999: The Brazilian government allows its currency to float freely on world markets by lifting exchange controls. Brazil’s central bank raises interest rates in an effort to stabilize the market.
  • 25 March 1999: The IMF increases its emergency loan package for Indonesia by $1 billion.


  • 29 March 1999: The Dow closes above 10,000 for the first time in its history.
  • 12 May 1999: The Dow tops 11,000.
  • 2003: South Korea surpasses its pre-crisis peak in economic activity by posting GDP per capita of $14,219 in 2003 (World Bank) making the country the first Asian Tiger to fully recover — a full six years after the crisis. Russia also surpasses its pre-crisis peak in economic activity by posting GDP per capita of $2,975 in 2003.
  • 2004: Malaysia surpasses its pre-crisis peak in economic activity by posting GDP per capita of $4,918 in 2004 (World Bank) — seven years after the crisis.
  • 2005: Indonesia surpasses its pre-crisis peak in economic activity by posting GDP per capita of $1,263 in 2005 (World Bank). Phillipines surpasses its pre-crisis peak in economic activity by posting GDP per capita of $1,200 in 2005 — eight years after the crisis.
  • 2006: Thailand surpasses its pre-crisis peak in economic activity by posting GDP per capita of $3,129 (World Bank) — nine years after the crisis.

Investment Principles

Principle #1

Material changes in exchange rates can set off a cascade of events ranging from capital outflows to interest rate changes to runs on banks.

Principle #2

Nonmarket exchange rates (pegs, collars, so-called managed exchange rates, etc.) create macroeconomic imbalances.

Principle #3

Rebalancing an economy can be accomplished in two ways: through real growth to offset the impact or through the correction of markets.

Principle #4

Policy changes in one country can have powerful effects in other countries through capital flows, exchange rates, interest rates, and other transmission mechanisms.

Principle #5

The status quo is a powerful force in shaping the perception of market participants and, ultimately, market prices.

Principle #6

The last line of defense for a government trying to maintain a currency peg amidst selling pressure from the market is to sell its foreign currency reserves to purchase its home currency on the open market. When the foreign exchange reserves get too low, the government must turn to currency devaluation or debt restructuring.

Principle #7

When foreign capital inflows taper off or shift to net outflows, central banks must also shift strategy. To finance a current account deficit, a central bank can, and often does, spend its foreign exchange reserves to offset the lack of capital inflows and to, in effect, finance the current account deficit.

Principle #8

Even countries with a current account surplus can experience net outflows of capital through the repayment or restructuring of foreign debt (as in the case of Thailand).

Principle #9

Borrowing in one currency and investing in another opens the borrower up to currency risk, even when the currency is pegged, because government monetary policies can and do change.

Principle #10

Official reports (from companies and governments) often lack important data that are necessary to create a complete picture.

Principle #11

In the very long run, market power exceeds government power.

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Ten Years On.” 2007. Economist (4 July).

Additional Reading

Richardson, P., I. Visco, and C. Giorno. 1999. “Predicting the Evolution and Effects of the Asia Crisis from the OECD Perspective.Economic Notes, vol. 28, no. 3: 383.

Weisbrot, Mark. 2007. “Ten Years After: The Lasting Impact of the Asian Financial Crisis.” Woodrow Wilson International Center for Scholars (August).