Introduction

In this essay, we will discuss about Asian financial crisis. This crisis happened in 1997. Thailand, South Korea, and Indonesia are the worst countries that affected. There are two views that created the crisis, one is fundamental view and the other one is panic view. Hot money is money that flows between financial markets to get the highest short-term interest rates possible. Capital inflow is increase in the amount of money available from foreign sources for the purchase of local capital assets such as buildings, lands, and machinery. IMF intervention until now still become controversial, two of well-known economist which are Stiglitz and Sachs said that because of IMF intervention the crisis has become much worse rather than before. Moreover, we will discuss about global crisis, this crisis happened in 2007. This started in US because of housing mortgage, and also credit crunch. The difference between Asia crisis and the Global crisis also will be discussed.
Asian Crisis

Hot money is “Money that flows regularly between financial markets as investors attempt to ensure they get the highest short-term interest rates possible. Hot money will flow from low interest rate yielding countries into higher interest rates countries by investors looking to make the highest return” (Investopedia, 2011).

Capital Inflow is “increase in the amount of money available from foreign sources for the purchase of local capital assets such as buildings, lands, and machinery” (Business Dictionary, 2011).

According to Juzhong Zhuang and J. Malcolm Downing (2002) the first attributes that started financial disturbance in some Asian countries in 1997 and its transmission over time primarily because of sudden movements in market expectations and confidence followed by regional contagion. While confessing the worsening of the macroeconomic performance of some affected countries in the mid-1990s, this view suggests that the area and depth of the crisis should not be recognized to weakening in fundamentals, but rather to panic on the part of domestic and international investors. This is called the panic view

On the other hand, Bhagwan Chowdry and Amit Goyal (n/d) suggested that the crisis occurred mostly as a result of structural and policy misrepresentations. According to this view, fundamental imbalances makes and started the currency and financial crisis in 1997 even as after the crisis started, market overreaction and herding caused the downturned in exchange rates, assets prices, and economic activity to be more severe than guaranteed by the initial weak economic and financial conditions. This is called the fundamental view

There are some key points that caused Asian financial crisis, for the four large ASEAN economies theire foreign debt to GDP ratios increased rapidly from 100 % to 167 % during 1993 – 1996. Thailand, Indonesia, and South Korea had very large current account deficits, furthermore these countries is financed by hot money flows on capital account. Most of the hot money flows were accumulated because of higher interest rates in the Asia (Economicshelp, N/D).

Bubbles also created in most of Asia because the financial deregulation encouraged more loans and this boost the bubbles more. Firms also greedy and become more active in expansive borrowing because of booming economy and booming property markets. In the late 1990s, US increased its interest rate to reduce inflation and its pressures. As the interest rates rises in the US, now the US market is much more attractive rather than in Asia, as hot money flows to Asia is blocked, currency in Asia is starting to fall and most of the governments cannot keep up to keep exchange rates at their fixed level (Economicshelp, N/D).

Thailand was the first to come with the regulation to float the Thai Baht, this soon caused a major devaluation, which triggered a loss of confidence throughout the Asian economies. Because of this, soon other countries in Asia are forced to devalue as all investors wanted to get out of Asian currencies. This devaluation has caused debt to be even harder to repay the debts, and most countries started to default.

During this stage the IMF intervened them from trying to stabilize the crisis; however their intervention has proved to be very controversial, with many of economist arguing that their intervention made things much worse. IMF insisted on fiscal restraint, lower spending, higher taxes, and more privatization. This contractionary fiscal policy caused more economic downturn and changed into recession which is very common during that time. Bankruptcies level has increased and more flight of capital. Top economists such as Stiglitz and Sachs highlighted the importance of market fluctuation in increasing the scale and size of the problem. The initial problem can be solved at first, but because confidence has gone there was a flight of investors, such as classic bank run causing an unstoppable downward momentum (Economicshelp, N/D).

Table 1. FDI during Asian Crisis (UNCTAD, 1999)

In Thailand during 1997 fiscal year, the government had a budget deficit of 44 billion baht. The first deficit Thailand had after nine years of surpluses. Its expenditure for 1997 was 888 billion baht. With 844 billion baht in revenue and 13 billion baht in non-budget surplus, therefore the government had a cash deficit of 31 billion baht. Furthermore private spending had a downturn in 1997 because laying off employee has started. Most of retail sales decreased in Thailand by 4 percent in the first three quarters of 1997 rather than in 1996 at the same period. Imports also got affected as imports of consumer goods also decline by 1 percent in the same period. Manufacturing production was decreased as a result of a declining in domestic demand and the financial crisis (Julian, C., C., 2000). On the other hand, Exports in Thailand has risen by 26 percent primarily because of the heavy devaluation of the baht. This rapid increase in exports because of the devaluation of the baht would help comfort the impact of the economic downturn and hopefully will initiate for an economic recovery. Among the exports, electrical and electronic sector has become well expanded. Because of collapsing baht, it helped exports of labour intensive manufactured sector, for example, during the first 10 months of 1997, while exports of industrial products raise by 18 percent the exports of agricultural products rise by only 4 percent (Julian, C., C., 2000).

Because of the crisis, we now can see a huge downturn wave spreading itself throughout Asia. International banks have limited almost all credit lines to every single borrower; even it includes the firms that are focusing on export which usually should have several advantages from currency devaluation. Even the large Korean chaebols with worldwide brand reputation, are finding it is hard to get the letters of credit to cover the import of inputs into export production. Luckily foreign banks can choose not to lend to high debt/equity local companies, and they may not participate in the kind of alliances between government, the banks, and companies that a high debt/equity financial structure requires. If Citibank buy a Korean banks and using its normal measuring limits which is lending to a company with a debt/equity ratio of 1:l is very risky, it definitely will not give any loan to Daewoo with a debt/equity ratio of 5:l. The amount needed for Daewoo to restructure its debt/equity ratio comes close to 1:l is almost impossible (Wade, R., 1998).

Meanwhile in Indonesia, the banking sector was at the middle of the financial crisis. Irregular banking practices were inescapable, and most of the state banks had bad debt ratios. The practice of central bank regulations is not enough, which means that rules were always violated with liberty. A total of 16 banks closed in November 1997, underlining downward confidence towards the financial system and regulations. Furthermore, in Indonesia the total number of banks has decreased from 238 to 162 by 1999, and it’s all because of the crisis. The value of Indonesia currency called Rupiah dropped intensely. Problems with corruption and governance were very general. Only a small portion of the population in Indonesia had large force of power and control, which was preserved through the system of patronage. The courts was always bias, and authorities were opposed to take decisive action whenever it threatened vested interests. The factors shown above also combined with political instability increased pessimism for both of the foreign and domestic investors (Hartono, D., & Ehrmann, D., 2001).

Furthermore, the crisis resulted in a significant rise in unemployment level and 6.4 million workers were out of job in 1998. This unemployment was distributed in different economic sectors. The worst affected economic sectors included construction, commerce, manufacturing, hotels and restaurants, transportation, finance, communication, rent and company services. However, a few of economic sectors are hiring more workers, including forestry, electricity, agriculture, fishery, animal husbandry, gas, and drinking water. Fortunately many laid off workers were able to move to the agricultural sector, which used as a safety net. Effects of the crisis to the regional impacts are different with the economic structures. Urban areas were hit more severely than rural ones. These two observations concluded that the crisis hit modernized areas harder than less modernized area (Hartono, D., & Ehrmann, D., 2001).

Graph 2. Currency in Asia during Crisis (Ohno, Y., N/D)
The “subprime loan crisis” has been making name for its own since it began in August 2007. The fact that a high percentage of mortgages offered to the people with high probability cannot pay it back has gone wild (Juurikkala, O., 2008).
It’s a credit crisis, but the problem not only lies on credit. The problem is caused by the credit that was traded from one hand to another on an extraordinary scale. This was done through financial innovations called derivatives (Juurikkala, O., 2008).
Credit derivatives allowed borrowers to transfer their credit risks to third parties, such as hedge funds. Thus banks can do more business. If used properly, derivatives are useful and ethically unobjectionable. They provide efficient risk allocation that benefits all parties concerned. However their abuse is a very wrong decision. They become a house of cards, built on greed (Juurikkala, O., 2008).
Derivatives could be used to avoid rules that protect investors and the public. Most of the stakeholders lack the time or ability to track the risks taken by companies, which is why financial institutions cannot easily invest in risky assets. However using derivatives, many institutions made difficult speculative bets without regulators tracking them. When it works, it pays off. Companies make huge profits and managers will get huge bonuses. However when it doesn’t work, someone else will usually pay the bill, such as investors and bank depositors (Juurikkala, O., 2008).
Furthermore, the global financial crisis is begun with the credit crunch, the loss of confidence by US investors in the value of derivatives caused crisis for the liquidity. Thus, it makes the US Federal Bank injecting a large amount of liquid capital into the financial market. By September 2008, the crisis become much worse as stock markets around the globe and become highly volatile. Most of the investor confidence hit the bottom level as everyone prepared for what will come (Canstar, 2009).

The housing market in the US has suffered the most because many home owners who had taken out loans found they were unable to pay. As the value for home markets are going down, most of the lenders realized that they have negative equity. With a large number of lenders are bankrupt, banks are forced to retake the house and land that was worthless. Now the banks had a liquidity crisis for themselves. Giving and obtaining loans has become very hard as the effect from the bubble burst created by credit crunch. Even though the housing market has collapse in the US is regularly mentioned as the starting point for the global financial crisis, some experts and most of the politicians has realized that better financial system and regulation are needed to discourage unusual lending (Canstar, 2009).

Asia was the center of the 1997 economic crisis. The countries that affected by the crisis having sharp economic downturn, and it worsened by tight monetary and fiscal regulation that were part of the rescue strategy. Even though the area of the crisis was affecting across the world, the damage was largely focused in Asia. Economic growth was steady in the United States and the European Union (Sirimanne, S., 2009).
Harsh reforms were initiated to reborn the financial sector and achieve macroeconomic stability. The most difficult condition was the incapability to fully address the social effects of the crisis. The lack of experience in the Asia-Pacific area in controlling a crisis, the surprised element of the crisis and the weakened macroeconomic fundamentals led to rush and unreasonable rescue packages. These packages mainly focused on macroeconomic and financial sector stability without looking clearly at the condition, especially towards the social effects (Sirimanne, S., 2009).

Meanwhile for the global crisis yesterday, US as the largest economy in the world are the center of the crisis. Other than extremely open economies in the area, economic recession in other economies is probably being extended—rather than the quick and infectious meltdown during 1997. However looking at the positive side, it gives countries extra time compared to 1997, to create more efficient and effective policies. Most of the developing countries in the Asia-Pacific region also have more “policy space” to create the right fiscal and monetary policies. Looking back at unpleasant lessons during 1997, the area has carefully set up save and strong macroeconomic fundamentals. As a result, many of the countries’ Central Banks are capable of supplying needed liquidity to the financial sector. Furthermore the top trading partners in the Asia-Pacific area is experiencing major economic recession. There is almost no possible way for the area to infect this crisis out. Also, as no one knows how big the financial sector difficulties of industrial countries, it is unknown whether the world economy has hit the bottom level or not (Sirimanne, S., 2009).

Conclusion Thus the Asian crisis during 1997 is created by hot money flows, lack in fundamental economy situation such as financial regulations, also the lack of confidence and panic situation occur in Asia, whereas it centralized in Asia and doesn’t evolve to became a Global Crisis. However, during 2007 the crisis was started at US. It started because credit crunch, the misused of derivatives, and ineffective policies that created by the government. The difference between 2007 and 1997 crisis are during 2007, as US are the global economic leader their crisis spread throughout the world, however as it is not as infectious as the Asian crisis, and it gave other countries more time to evaluate and create the “right” policies to counter the crisis. Therefore many of the Central banks are able to overcome the problem of financial liquidity.

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