Explain how the Asian crisis of 1997 began. What precipitated the crisis? Did rescue loans prevent recessions in the crisis countries?
What will be an ideal response?
POSSIBLE RESPONSE: In the early and mid-1990s, foreign investors looked favorably on the rapidly growing developing countries of Southeast and East Asia. However, in Thailand and South Korea, much of the foreign borrowing was conducted by banks and other financial institutions. Due to the lack of proper government supervision, the banks took on significant exchange-rate risk by borrowing dollars and yen, and lending in local currencies. The lending boom led to loans to riskier local borrowers and increasing defaults on loans. The external balances of these countries were also problematic. The real exchange-rate values of these countries' currencies were somewhat overvalued. Their exports began to decline in 1996. The crisis first started in Thailand, and spread to other Asian countries. The local currencies depreciated and the foreign investors lost confidence in local bank borrowers and the local stock markets. The International Monetary Fund (IMF) provided large rescue packages of loans, but the countries still suffered recessions for several years after the crisis hit.
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