The Contagion of 1997 Asian Financial Crisis- Focus on South Korea
The Financial contagion is the downward fall in the market that is observed with the help of exchange rates movements, changes in capital flows, stock prices and sovereign spreads. It can be a possible risk for nations who are trying to incorporate the financial system with the worldwide financial institutions and markets (Kim, Kim and Lee 2015). Under the recent financial system, where there is cash flow of large volume, such as hedge fund and cross-regional operation of large banks, financial contagion usually happens simultaneously both among domestic institutions and across countries. The cause of financial contagion usually is beyond the description of real economy, such as the bilateral trade volume.
The Asian financial crisis was a time of financial crisis that absorbed much of East Asia beginning in July 1997 and raised fears of global economic meltdown due to the reason of financial contagion.
The emergency took place in Korea and other Asian countries when there was a fall in the currency of Thailand. This resulted when the government of Thailand was forced to float the currency value due to the lack in the foreign currency. The most affected currency includes South Korea, Indonesia, and Thailand. The foreign debt to GDP ratio rose from 100% to 167% and then increased 180% resulting in the worst of the crisis (Rizvi, Arshad and Alam 2015). It has been a crisis for many individuals in Asia as far as their household, economies, business, reserve funds, training, wellbeing, and prospects were concerned. President Clinton, in his state of the union address in January, called it "the most serious money financial crisis in 50 years." A famous economist have also referred to as "something that has no parallel in history of mankind." For many individuals, it has expanded joblessness, costs, and destitution, while cutting open doors for education, wellbeing, and other social projects.
The banking sector was loaded with non-performing credits as its huge companies were financing forceful developments. At that time, there was a rush to construct great companies to compete on the world stage. Numerous organizations at last neglected to guarantee returns and profitability. The chaebol, South Korean company, essentially assimilated increasingly capital investment. In the long run, excess debt obligation prompted real disappointments and takeovers. In July 1997, South Korea's third-biggest car creator, Kia Motors, requested for crisis credits.
The emergency had critical impacts at macroeconomic-level, incorporating sharp diminishments in securities exchanges, monetary standards estimations and other resource costs of a few Asian countries. The nominal U.S. dollar GDP of ASEAN fell by $9.2 billion of every 1997 and $218.2 billion (31.7%) in 1998. In South Korea, the $170.9 billion fall in 1998 was equivalent to 33.1% of the 1997 GDP. Many organizations collapsed, and as an outcome, a huge number of individuals fell beneath the poverty line in 1997– 1998 (Bekaert et al.,2014). As shown in the following chart:
Numerous financial analysts consider that the Asian crisis was made not by market technology or else innovation, but rather by arrangements which had twisted incentives inside the lender– borrower relationship (Ahmed, Coulibaly and Zlate 2017). The subsequent vast amounts of credit that wound up accessible created an exceedingly utilized financial climate, and pushed up resource costs to a level that is unsustainable. These benefit costs in the end started to collapse, making people and organizations default on debt obligation.
Ahmed, S., Coulibaly, B. and Zlate, A., 2017. International financial spillovers to emerging market economies: How important are economic fundamentals?. Journal of International Money and Finance, 76, pp.133-152.
Bekaert, G., Ehrmann, M., Fratzscher, M. and Mehl, A., 2014. The global crisis and equity market contagion. The Journal of Finance, 69(6), pp.2597-2649.
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.
Rizvi, S.A.R., Arshad, S. and Alam, N., 2015. Crises and contagion in Asia Pacific—Islamic v/s conventional markets. Pacific-Basin Finance Journal, 34, pp.315-326.