The 1997 Asian Financial Crisis, which originated with the devaluation of the Thai baht in July 1997, profoundly impacted East Asian economies, leading to currency devaluations, banking crises, and recessions across the region. Countries like Thailand, Malaysia, the Philippines, Indonesia, and South Korea experienced severe market pressures. South Korea, in particular, faced immense balance-of-payments pressures and was on the brink of default, requiring a substantial international bailout of $118 billion, primarily from the IMF, World Bank, and various governments.
The crisis exposed significant vulnerabilities in these rapidly growing economies, including excessive domestic credit growth, weak supervisory oversight, and reliance on short-term foreign borrowing. This led to a build-up of financial leverage and doubtful loans, making firms vulnerable to exchange rate fluctuations when long-standing currency pegs became unsustainable. The crisis also prompted structural reforms, including deleveraging, strengthening financial systems, and improving economic competitiveness.
Contagion spread rapidly, nicknamed the "Asian flu," affecting not only East Asia but also causing spillover effects in Latin America and Eastern Europe, including Russia and Brazil, in 1998. Hong Kong faced speculative attacks but maintained its currency peg, while China's capital controls helped it avoid a similar fate. The crisis also triggered global stock market sell-offs, and in October 1997, Hong Kong's stock index plummeted by 10.4% after interest rates were hiked to defend its currency. The Federal Reserve played a key role in coordinating international responses and helping South Korea avoid a disorderly default by encouraging banks to roll over short-term loans. By 1998, the World Bank projected that the crisis had halved global growth to about 2%.
