Asian Financial Crisis: An Analysis of International Finance

This essay provides a comprehensive analysis of currency crises in international finance, with a specific focus on the Asian Financial Crisis of 1997-98. It begins by outlining a timeline of significant currency crises, including the Bretton Woods system, the British pound crisis, and the Mexican peso devaluation. The essay then delves into the events leading up to the Asian Financial Crisis, highlighting the role of market expectations, the impossible trinity, and structural policy distortions. Key moments that precipitated the crisis, such as current account imbalances and foreign debt accumulation, are identified. Finally, the essay examines the aftermath of the crisis, including policy responses by Asian governments and the role of international organizations like the IMF, concluding that governments should avoid violating the impossible trinity to ensure financial stability. The essay concludes by suggesting governments should avoid the impossible trinity to ensure financial sector stability. Desklib offers similar solved assignments and study tools for students.

Running head: INTERNATIONAL FINANCE
International Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
1. Discuss and present a timeline outlining the important issues surrounding the currency
crisis:..........................................................................................................................................2
2. Indicating the events leading up to the Asian Financial Crisis (policies, events etc.) that
made the currency susceptible to an attack:...............................................................................3
3. Indicating the defining moments that precipitated the attack:...............................................5
4. What happened in the aftermath (how was the crisis resolved):............................................6
Conclusion:................................................................................................................................7
References:.................................................................................................................................8

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1. Discuss and present a timeline outlining the important issues surrounding the
currency crisis:
The currency crises occur in a situation, where problems occur for the country’s
central banks to have sufficient foreign exchange reserves to maintain the fixed exchange rate
conditions. In addition, the currency crises occur in both fixed and floating rate regime,
which happens due to the low reserves conducted by the central banks of the country.
Moreover, the currency crises increase the debt denomination of a country, where the value
of home currency declines substantially in comparison to other currencies. The currency
crises relatively indicate a fixed response, where speculative attack on foreign exchange
value directly leads to the depreciation of home currency. Furthermore, the measure also
initiates a situation, where the economy comes under pressure, where the prevailing exchange
rate peg or regime (Krueger 2014).
In addition, there are two outcomes of the attack, where it occurs successfully or
unsuccessfully. Under the successful attack measures currency of the home country, which
will depreciate in comparison to other countries. On the other hand, the unsuccessful attack
will does not alter the exchange rate and leave them unchanged in compassion to other
countries. Moreover, the currency crises relevantly feather the international monetary system,
where it has been existing since the early 1970s till date. Moreover, there are certain currency
crises occurred over the period of time, where crisis occurred in different time lines.
The Bretton Woods system in 1971 – 73 adopted a new prosperity without war, where
a fixed exchange rates are established during World War II. The system allowed the countries
post World War, devasted by the event adopted the measure for controlling the currency
convertible in comparisons to dollar (Almeida et al. 2015).

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British pound in 1976 reached the lowest point, where it was not able to maintain
higher value against USD, which indicated a loan of $3.9 billion from the International
Monetary Fund for controlling the financial crisis initiated in UK.
European Exchange Rate Mechanism in 1992 – 93 was mainly indicated to reduce the
variability and achieve monetary stability in the Europeans sector. However, his measure was
discontinued after the introduction of the single euro currency in by the European Union. In
addition, the conservative government was not able keep the pound above the agreed lower
line of ERM, which initiated the closure of the European Exchange Rate Mechanism (Harvie
and Van 2016).
Mexico’s peso devaluation in 1994 – 95 occurred due to the actions taken by the
Mexican government sudden devaluation of the peso against US dollar during 1994. This
financial crisis was considered to be one of the first international crisis ignited from the
capital flight.
Asia in 1997 – 98 occurred due to the violation of impossible trinity, which was
conducted by the selected Asian country in boosting their current financial progress.
Financial crisis in 2008 – 09 occurred due to mishap between the mortgage system of
the US housing market, which initiated the biggest loss incurred from the financial crisis
(Jackson 2018).
2. Indicating the events leading up to the Asian Financial Crisis (policies, events etc.)
that made the currency susceptible to an attack:
There are two different hypothesis, which could be considered, as the major event
leading to the Asian financial crises. One of the first hypothesis indicates that sudden shift int
the market expectations and confidence led to the mass panic of the domestic and

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international investors. This event directly initiated the massive selling process and recovery
of funds, which was conducted by the foreign investors. The presence of impossible trinity in
the economic activities of Asian countries directly fixed the exchange rate of the currency,
which had the negative impact on the currency reserves of the Asian countries. Furthermore,
the decisions made by the individuals during financial crisis led to the down fall of the Asian
economy, which drastically declined market and currency valuation of Asian countries. The
ignorance of impossible trinity mainly led to instability of the financial sector of the Asian
countries, while incurring the maximising the negative impact from operations. In this
context, Kim, Kim and Lee (2015) stated that financial crisis mainly reduces capability of the
economy in maintaining adequate liquidity for continuing operations in within the country.
On the other hand, Mera and Renaud (2016) criticises that during the Asian crisis the whole
economy of the Asian market was declining, as foreign investors were withdrawing the funds
in fixed currency exchange. Hence, the mass panic by both domestic and international traders
initiated the selling process in the Asian capital market, which in turn started the Asian
financial crisis.
The second hypothesis which could be detected, as the reason behind the occurrence
of the Asian financial crisis is the structural and policy distortions adopted by the Asian
countries in their region. In addition, the fundamental imbalances were also triggered from
the current and financial of the 1997 market overaction and herding. The assumptions of the
second hypothesis are also right, as the alteration in the policies and violation of the
impossible trinity was the main reason, which augmented the Asian financial crisis.
Moreover, the fundamental imbalances implemented by the Asian countries led to the down
fall of their capital market. The governments of Asian countries fixed the currency exchange
rate, free capital flow and used an independent monetary policy, which led to the down fall of
their economy. The hypothesis indicated the use of uncovered interest rate parity conditions,

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implemented by the Asian countries, which is directly affected their economic conditions
(Rosman, Wahab and Zainol 2014).
3. Indicating the defining moments that precipitated the attack:
There were three specific defining movement that precipitated the attack of the
financial crises on their economy. The use of current account imbalances and macroeconomic
fundamentals were the major issues, which indicated the augmentation of the financial crisis
that dissolved the financial credentials of the Asian countries. The current account imbalance
has mainly declined, as it reflects saving and investment provisions conducted by agents.
Therefore, the role of financial system is also considered to be one of the biggest flaws,
which adhered the problems of the financial crisis. Moreover, the financial system was
flawed, as it ignored the significance of impossible trinity and used different type of measures
in supporting the financial system. In this context, D'souza (2016) stated that the presence of
imperfection in the financial system initiates the augmentation of the financial crisis, which
might hamper valuation of the capital market.
Lastly, the presence of imbalance in the foreign debt accumulation and management
was also an indicator, which portrayed the augmentation of the financial crisis. This
relevantly indicated the use of fixed interest rate by the Asian countries for exchanging the
foreign currency system where the actual valuation would decline over the period. The above
identified movements, where the overall imbalance in the current accounting system was
witnessed with the declining performance of the financial system and increase in imbalance
in foreign debt accumulation by the Asian countries. The deformity in the current operations
of the Asian counties led to the augmentation of the financial crisis, which pounded their
capital market to new lows until different measures were taken by the governments for
reducing the negative impact from the financial crises (Dent 2017).

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4. What happened in the aftermath (how was the crisis resolved):
The Asian financial crisis increased the distress in financial sector for the first half of
1997, which had negative impact on capital market performance of the Asian countries. In
addition, different level of measures is mainly used by the governments in improving the
level of operations and controlling the rising risk portrayed from the financial crisis. During
the distress situation of the overall measures such as control in exchange rate movements
through interventions help in curbing the losses incurred by the Asian countries. Furthermore,
the Asian countries also used different level of monetary policies controlling the level of
exchange rate for reducing the negative impact on the capital market. Wang (2014) stated that
during the Asian crisis the countries were not able to control the massive selling process, as
investors feared about their current trajectory of the capital market. On the other hand, Sui
and Sun (2016) criticises that the measure used by the countries for reducing the negative
impact were mainly slow and needed external help from Japan and IMF in curbing the
financial crisis and declining currency value.
Therefore, the use of policy response conducted by the Asian counties led to the
decline in the financial crisis. In addition, the measures used by the Asian countries have
policy spill overs and contagion effects, which stopped the massive selling process but had
negative impact on the economy of the countries. Japan one of the largest exporters to the US
dialled down their exports to US and used 20 million dollars in controlling their currency
value. The measures used by the Japanese government to control their declining currency
value was not adequate, as the policy spills and contagion effects of the financial crisis
negative affected the currency value of Japan. In this context, Dewandaru et al. (2015) stated
that the measure used by the government in controlling the financial crisis was not adequate,
where it was not able control future aspects of the capital market.

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Conclusion:
The assessment relevantly evaluates the time line of the currency crises, which
occurred till now. In addition, the discussion of the currency crisis is also conducted, which
helps in understanding the main problems that rose from the declining currency value.
Moreover, the deifying moments that precipitated the Asian Crisis is relevantly discussed,
which could be an exclusive hint for the future governments to omit the mistakes conducted
by previous Asian governments. The after math of the Asian crisis, which was conducted by
the government helped in stabilising their economy and nullify the future possibility of
currency crises. Therefore, from the evaluation it is understood that the valuation of
impossible trinity should not be conducted by the governments, as it hampers their capability
to ensure safe operations of their financial sector, which was seen in the Asian crisis.

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References:
Almeida, H., Kim, C.S. and Kim, H.B., 2015. Internal capital markets in business groups:
Evidence from the Asian financial crisis. The Journal of Finance, 70(6), pp.2539-2586.
Dent, C.M., 2017. Coming to Terms: The Economic Impact of the East Asian Financial
Crisis on the European Union. In Asia-Europe Cooperation After the 1997-1998 Asian
Turbulence (pp. 55-78). Routledge.
Dewandaru, G., Masih, R. and Masih, A.M.M., 2015. Why is no financial crisis a dress
rehearsal for the next? Exploring contagious heterogeneities across major Asian stock
markets. Physica A: Statistical Mechanics and its Applications, 419, pp.241-259.
D'souza, J., 2016. Once the bubble bursts: An overview on the comparison of the Asian
economic crisis and the global financial crisis. Journal of Public Administration and Policy
Research, 8(3), pp.25-32.
Harvie, C. and Van Hoa, T., 2016. The causes and impact of the Asian financial crisis.
Springer.
Jackson, K., 2018. Asian contagion: the causes and consequences of a financial crisis.
Routledge.
Kim, B.H., Kim, H. and Lee, B.S., 2015. Spillover effects of the US financial crisis on
financial markets in emerging Asian countries. International Review of Economics &
Finance, 39, pp.192-210.
Krueger, A., 2014. Asian financial crises. In The Oxford handbook of the economics of the
Pacific Rim.
Mera, K. and Renaud, B., 2016. Asia's financial crisis and the role of real estate. Routledge.

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Rosman, R., Wahab, N.A. and Zainol, Z., 2014. Efficiency of Islamic banks during the
financial crisis: An analysis of Middle Eastern and Asian countries. Pacific-Basin Finance
Journal, 28, pp.76-90.
Sui, L. and Sun, L., 2016. Spillover effects between exchange rates and stock prices:
Evidence from BRICS around the recent global financial crisis. Research in International
Business and Finance, 36, pp.459-471.
Wang, L., 2014. Who moves East Asian stock markets? The role of the 2007–2009 global
financial crisis. Journal of International Financial Markets, Institutions and Money, 28,
pp.182-203.