By Richard C. Longworth
How the Asian Financial Crisis Started
The crisis began in Thailand, where years of over-lending and growing debts resulted in a sudden loss of confidence in the economy in mid-1997. There does not appear to be a specific reason why it happened just then, nor any one incident that set it off. Rather, the excessive exuberance that led to the boom turned suddenly into excessive fears of its future. Just as there were no real controls on the flow of investment into Thailand, so there were no controls on the flow out. Foreign banks and investors pulled out billions of dollars of investment and demanded repayment of billions of dollars in loans.
Global capital markets, suddenly convinced that the Thai currency, the baht, could no longer stay pegged to the dollar, began to sell it in such volume that the fear became a self-fulfilling prophecy. The value of the baht plummeted, and Thai investors, having borrowed billions of dollars, found that it would take nearly twice as many baht to repay those dollars. Depression followed quickly. National output fell by 8 percent, and the Thai stock market lost 75 percent of its value. Factories closed, jobs disappeared, consumer demand dried up, and the dreams of middle-class life evaporated.
And then the crisis moved on. Again, there was no reason why it should have. Other Asian countries had their problems of debt, corruption, over-building, and inadequate regulation. But these were problems, not crisis points. These problems had existed during the boom years, when the markets happily overlooked them. But panic has its own logic. As Soros has pointed out, markets always overshoot: They invest too much when times are good and pull back too sharply when times turn bad. Markets are fueled as much by emotion as logic, and a herd mentality is common.
This is what happened to Malaysia, and then to Indonesia, then to the Philippines and, at year’s end, to South Korea. Each had grown rich on foreign investment, and each was plunged into depression by the market’s sudden disapproval. The government fell in Thailand. In Indonesia, the weakening dictatorship of President Suharto was toppled. Currencies collapsed and standards of living fell.