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Asian financial crisis 1997: how one currency broke a region
On 2 July 1997, Thailand stopped holding its currency at a fixed price. The baht fell about 20% that month. Within half a year, the trouble had spread to Indonesia, South Korea and beyond.
The world before the crisis
In the early 1990s, East Asia was booming. Thailand, Indonesia, Malaysia and South Korea grew fast for years. People called them the "Asian Tigers".
Money poured in from abroad. Banks and companies borrowed in US dollars because dollar loans were cheaper than local ones.
Here's the catch. They borrowed in dollars, but they earned in baht, rupiah or won.
That only works while the exchange rate stays put.
The peg that made it feel safe
Thailand kept the baht at about 25 baht per US dollar for years. The central bank used its reserves to hold that line.
A fixed rate like that is called a peg. It made dollar debt feel safe. If the rate never moves, a dollar loan costs the same as a baht loan.
But by 1996 and early 1997, cracks showed. Exports slowed. Property prices had run too high. Some finance companies were in trouble.
Traders began to bet that the peg couldn't last. Every bet against the baht forced the central bank to spend more of its dollar reserves to defend it.
What happened
Thailand floats the baht
On 2 July 1997, Thailand gave up. It let the baht float. The IMF said the currency lost about 20% against the dollar during July.
That one move doubled the pain of every dollar loan. A company that owed $1 million now needed far more baht to pay it back.
In August, the IMF put together a rescue package for Thailand of more than $17 billion, with help from Japan and other neighbours.
It spreads
Investors started asking a simple question: "Who else looks like Thailand?"
The answer was: quite a few countries.
- Indonesia asked for help in October 1997 after the rupiah fell more than 30% in two months. Its IMF-led package grew to about $40 billion.
- Hong Kong kept its dollar peg, but at a cost. On 23 October 1997, short-term interest rates spiked and the Hang Seng stock index fell about 10% in one day.
- South Korea asked for help in late November 1997. Its package grew to about $57 billion, the largest the IMF had arranged at the time.
The moment everyone remembers
Indonesia was hit hardest. The rupiah lost most of its value over the next months.
Prices for food and fuel jumped. Banks failed. Protests grew.
On 21 May 1998, President Suharto resigned after more than 30 years in power. A currency crisis had become a political one.
That's the part of 1997 people remember most. It wasn't only a chart going down. It changed governments and daily life for millions of people.
The blame game
Malaysia's prime minister, Mahathir Mohamad, blamed foreign currency traders, and he named George Soros. Soros denied causing the crisis.
In 1998, Malaysia went its own way. It put limits on money leaving the country and fixed the ringgit to the dollar.
Economists still argue about why it spread so far. Most point to the same mix: pegs, heavy dollar borrowing, weak banks, and money that left as fast as it came.
What it teaches
1. A fixed price feels safe until it isn't
A peg is a promise, and promises can break. When one does, the move is often sudden and large, not gentle. The Swiss franc shock of 2015 and Black Wednesday in 1992 tell the same story.
If a trade only works because "that price never moves", ask what happens if it does.
2. Borrowed money changes the math
Dollar debt turned a 20% currency drop into a disaster for many firms. Leverage does the same thing to a trading account. It makes a normal move feel huge.
Read leverage and margin explained and try your own numbers in the margin calculator.
3. Crowds leave through the same door
When investors saw Thailand break, they didn't wait to study each country. They sold anything that looked similar. That's how one country's problem became a region's.
In your own trading, that's a reason to check how alike your trades are. Five trades in the same idea are really one big trade.
Before you add a trade, ask: "If my last trade goes wrong, does this one go wrong too?" If yes, they share one risk. Size them as one.
4. Exotic currencies can move far and fast
Currencies of smaller economies tend to have wider spreads and bigger jumps. Our guide to exotic pairs explains why. Size from your stop with the position size calculator, and expect that a stop may not fill at your price in a gap.
What it doesn't mean
- It doesn't mean pegs always fail. Hong Kong's peg held in 1997 and still exists today.
- It doesn't mean one trader caused it. The blame on speculators was loud, but most studies point to many causes together.
- It doesn't mean Asia stayed broken. South Korea and others grew again within a few years, though many people paid a heavy price first.
- It doesn't mean you can spot the next one early. Plenty of smart people saw cracks in 1996 and were still surprised by the speed. Hindsight makes it look obvious.
Timeline
| Date | Event |
|---|---|
| Early 1990s | Fast growth and heavy dollar borrowing across East Asia |
| 2 Jul 1997 | Thailand floats the baht; it falls about 20% in July |
| Aug 1997 | IMF-led package of more than $17 billion for Thailand |
| Oct 1997 | Indonesia asks for help; package later grows to about $40 billion |
| 23 Oct 1997 | Hong Kong's Hang Seng falls about 10% as it defends its peg |
| Late Nov–Dec 1997 | South Korea asks for help; package grows to about $57 billion |
| 21 May 1998 | Indonesia's President Suharto resigns |
| Sep 1998 | Malaysia limits money leaving the country and fixes the ringgit |
Questions
What started the Asian financial crisis?
Thailand let its currency, the baht, float on 2 July 1997 after it could no longer defend its fixed rate to the US dollar. The baht fell about 20% that month, and fear spread to similar economies.
Which countries were hit hardest in 1997?
Thailand, Indonesia and South Korea were hit hardest and needed IMF-led rescue packages. Malaysia, the Philippines and Hong Kong were also hit.
Did George Soros cause the Asian financial crisis?
Malaysia's prime minister blamed him, and Soros denied it. Most economists point to many causes together: currency pegs, heavy borrowing in dollars, weak banks and fast-moving foreign money.
How did the Asian financial crisis affect the world?
It hit emerging markets everywhere and added to the pressure that led to Russia's default in August 1998. Many investors pulled money out of riskier markets at the same time.
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