The East Asian Financial Crisis in 1997 Essay Example | Topics and Well Written Essays - 2000 words

The East Asian Financial Crisis in 1997 - Essay Example There is much to be done on the Asian financial status and more so the financial architecture. It was believed that the crisis would only take few months but it surpassed this ideology and what are observed are cases of unemployment and the deterioration in the Gross National Produt (GNP). The crisis has gone beyond East Asia and other countries like Russia, South America and South Africa are also experiencing it. The development of advanced technology like the use of computers had a significant impact on the financial status of East Asia. However, Asia adopted the use of computers in carrying out its transactions and in which it was at a much higher rate than normal. On the other hand, screening of the repercussions of the global financial systems was zero and it rather encouraged it (Borthwick pp 121). East Asia also accepted the idea of interconnection of markets across the world and development of big institutional financial players. The combination of all this resulted into tremendous shocks and instability. Thailand as an example was struck by the crisis rapidly and within a short time, it crossed all over East Asia. The carrying out of this financial liberalization was done at a wrong time since its institutions did not have an idea or rather it was not prepared for any outcomes or consequences over it. In addition, the transaction that the country was making was at a high speed and in return it affected the short-term capital flowing across the boarders where by there were high and quick returns. "Only one to two percent is accounted for by foreign exchange transactions relating to trade and foreign direct investment. The remainder is for speculation or short-term investments that can move very quickly when the speculators' or investors' perceptions,"(Director Para 6). What took place in East Asia was not unique because even other countries across the world have already experienced the very problem, especially from the Latin America and this is to say, there is need to check on capital inflow so us to avoid the shocks and instability and also discouragement to the large institutional investors and players. Rumor had it that, East Asia currencies were being over valued but observation made stated market over-reaction which consequently led to overshooting of these currencies beyond unjustifiable levels by fundamentals. "A report ... revealed that hedge funds made big profits from speculative attacks on South East Asian currencies in July 1997", (Director para 12). The sudden depreciation of the currency of East Asia, led to short term debts which appeared to pose the threats. The depreciation was caused by the speculators attacks and reduction in their foreign reserves. As a result of these problems, the country's capability to repay the loan was deterred and the debt accumulated correspondingly. The foreign reserves dropped drastically and could not repel off the speculative attempts. The short term foreign funds also begun to fall too destabilizing further the reserves and this consequently affected the country terribly in a way that it could not manage to clear away the debts, oblig ation and the calamity necessitated assistance which finally it obtained from IMF. It is argued that financial crisis in East Asia was as a result of