Bad Lending Leading to the East Asian Crisis In 1990s Essay

Bad Lending Leading to the East Asian Crisis In 1990s - Essay Example Bad Lending Leading to the East Asian Crisis In 1990s The East Asian economic crisis was later analysed as caused by several external and internal stimuli such as improper maintenance of financial market activities, inadequate foreign borrowing and absence of inducements towards risk management among others (Dullum & Kulkarni, 2005). Considering this aspects, this essay will describe how different activities resulted in high lending activities in East Asian economies causing a crisis situation. The objective of the essay is to analyse and describe the main economic problem that triggered the economic crisis in East Asian nations. Hence, the rationale for choosing this topic is to understand various facets which can lead to bad economic crisis with the aim to gain knowledge regarding measures which can be implemented to avoid such circumstances. Major Features of Asian Economic Crisis In the year 1997, when the financial crisis was identified, International Monetary Fund (IMF) reported that the situation was fundamentally caused due to t he inefficiency of East Asian financial markets to manage its foreign debt as well as lending policies. As soon as this crisis hit, IMF assigned that it was the responsibility of East Asian capitalism. This occurrence was further observed to have created a significant impact upon the Asian financial markets including Indonesia, Korea, Thailand, Malaysia and Philippines. In these nations, bank lending dues on private organisations had increased remarkably before and during the crisis situation. For instance, in Philippines, credit to private organisations surpassed 40% growth from 1993 to 1996. The amount of liabilities also ascended from 8.8% of GDP in 1995 to 21% of GDP in 1997 in Philippines. In Korea, the amount of foreign liabilities of banks had been observed to gain growth in almost two-folds, i.e. from 4.5% of GDP in 1993 to 9.5% of GDP in 1997. Only in Indonesia, even though the credit growth was recorded at a modest level within the national financial structure, the private organisations were engaged in borrowing openly from foreign sources. The most risky circumstance was observed in Thailand where the aggregate amount of foreign liabilities of banks had increased rapidly to almost 28% of GDP in 1995 (Radelet & et. al., 1998). This huge amount of liabilities can further be observed as the result of weak regulatory measures taken by governments and poor financial structure of different East Asian nations. This huge amount of liabilities imposed a degree of negative impact on the economic performances of these East Asian nations, as most of the foreign creditors began extracting their capital from these countries as well as the other nations in the East Asian region. Due to deep capital outflow, the currency exchange rates came under strong burden. It can be observed that in 1997, the currency exchange rates of Indonesia, Malaysia, Philippines and Thailand had reduced by more than 20%. The collapse of economic conditions in these nations triggered the feeling among investors that other nations in the East Asian region will soon fall under economic crisis. The major rating organisations slowly demoted the nations in East Asian region, causing more capital extraction by the creditors. Furthermore, as exchange rate depreciated,