What caused the crisis?

As I said in the previous blog George is the person who pulled the trigger, but he is not all the reason for the Crisis.

-"Like other financial crises of years past, the Asian crisis can be traced to a set of interrelated problems" - M. Goldstein (1998)

According to Goldstein (1998), there are three factors should be mention here:            1)Financial-sector weakness; 2) External-sector problems; 3) Contagion.

     1)  Financial-sector weakness - from Mishkin (1998) asymmetric information acted an important role in this crisis. “In most financial crises, and particular in the East Asian crises, the key factor that causes asymmetric information problem to worsen and launch a financial crisis is a deterioration in balance sheets, particularly those in the financial sector.”

All the developing countries have a same target, which is to maintain economy to last high-speed develops. When the conditions of the rapid development of economy are insufficient, these countries turned to rely on external borrowing to maintain the economic growth. In the middle of 1990s, some Asian countries no longer have the ability to repay debt. In East Asian countries, real estate blown bubble for just bank loans and occurring of bad debts. The market institutional in Asia is not mature, especially the inadequate regulatory system.

     2)  External-sector problems – as Asian Financial Market is a young market in 1990s, the foreign exchange policies in some Asian countries are improper. To attracting more foreign investments they have to retain a fixed exchange rate and expansion of financial liberalization. All these provide a perfect opportunity for international speculators (like George Soros) to speculating currencies. To maintain a fixed exchange rate system, these countries use foreign exchange reserves to make up for the deficit that leads to increase of external debt.

     3)  Contagion – the following video shows the 97 Asian Crisis contagion.