THE 1997-98 ASIAN FINANCIAL CRISIS

The Asian financial crisis involves four basic problems or issues: (1) a shortage of foreign exchange that has caused the value of currencies and equities in Thailand, Indonesia, South Korea and other Asian countries to fall dramatically, (2) inadequately developed financial sectors and mechanisms for allocating capital in the troubled Asian economies, (3) effects of the crisis on both the United States and the world, and (4) the role, operations, and replenishment of funds of the International Monetary Fund.

The Asian financial crisis was initiated by two rounds of currency depreciation that have been occurring since early summer 1997. The first round was a precipitous drop in the value of the Thai baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah. As these currencies stabilized, the second round began with downward pressures hitting the Taiwan dollar, South Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. Governments have countered the weakness in their currencies by selling foreign exchange reserves and raising interest rates, which, in turn, have slowed economic growth and have made interest-bearing securities more attractive than equities. The currency crises also has revealed severe problems in the banking and financial sectors of the troubled Asian economies.

The International Monetary Fund has arranged support packages for Thailand, Indonesia, and South Korea. The packages include an initial infusion of funds with conditions that must be met for additional loans to be made available.

This financial crisis is of interest to the U.S. government for several reasons. First, attempts to resolve the problems are led by the IMF with cooperation from the World Bank and Asian Development Bank and pledges of standby credit from the Exchange Stabilization Fund of the United States. Second, financial markets are interlinked. What happens in Asian financial markets also affects U.S. markets. Third, Americans are major investors in the region, both in the form of subsidiaries of U.S. companies and investments in financial instruments. Fourth, the currency turmoil affects U.S. imports and exports as well as capital flows and the value of the U.S. dollar; the U.S. deficit on trade is now rising as these countries import less and export more. Fifth, the crisis is causing economic turmoil that is exposing weaknesses in many financial institutions in Asia; some have gone bankrupt. The economic problems of the troubled Asian economies are adversely affecting the United States, Japan, and others.

The U. S. Congress is likely to consider the Asian financial crisis within three broad legislative contexts. The first is in the financing and scope of the activities of the IMF. This includes legislation to provide the IMF with an increase in its quotas or capital subscriptions, New Arrangements to Borrow, an allocation of Special Drawing Rights, and an amendment to the IMF's Articles of Agreement. The second legislative context is in the impact of the crisis on the U.S. economy and American financial institutions. Forecasters foresee a decline in U. S. growth and an increase in the U.S. trade deficit because of the crisis. The third context is in efforts to liberalize trade and investment in the world.

reference:-http://www.fas.org/