The Nordic Experience of Financial Liberalization
Edited by Lars Jonoug, Jaakko Kiander and Pentti Vartia
Chapter 9: The Nordic and Asian Crises: Common Causes, Different Outcomes
9. The Nordic and Asian crises: common causes, different outcomes Ari Kokko and Kenji Suzuki INTRODUCTION During the spring and early summer of 1997, there was widespread speculation against the Thai baht. The currency was closely tied to a basket dominated by the US dollar. The gradual appreciation of the dollar after the early 1990s had made the Thai baht more expensive, weakened export competitiveness, and contributed to a current account deficit of around 8 per cent of GDP. Worsening the problems related to the increasingly overvalued currency, there were also severe troubles in the financial sector. Asset prices had risen rapidly with an export boom that started in the late 1980s, but both real estate and stock market prices had collapsed when GDP and export growth rates had begun to slow in the mid-1990s. This left banks and finance companies with masses of non-performing loans (although it was not known at the time how serious this problem was). Most banks and financial institutions were also heavily exposed to currency risk. The high domestic interest rate needed to maintain the fixed exchange rate had made it favorable to borrow abroad. The financial sector was largely financed by Japanese and European investors. While it was clear to many foreign observers that a currency adjustment would be necessary – for instance, in its consultations with the Thai government, the IMF had pressed for action already from the beginning of 1996 – most Thai observers seemed to believe that there was no need for any...
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