Asian financial crisis of 1997 and its consequences, The

Multinational Business Review, Fall 1999 by Garg, Ramesh, Kim, Suk H, Swinnerton, Eugene

In Spring 1997, currency turmoil erupted in Southeast Asia. This currency crisis, in turn, triggered the market rout on Wall Street on October 27, 1997. This article discusses interlinked capital markets, the potential impact of Asian currency crisis on the U.S. economy, and trade-halting rules.

On October 27, 1997, the Dow Jones Industrial Average (Dow Average) plunged 554.26 points to 7161.15 or 7.18 percent, its largest decline ever in points but its the second-largest fall in percentage terms. The day's sell-off in U.S. stocks triggered first and second shutdowns of U.S. stock markets under rules set up in the wake of the 508-point, 22.6 percent stockmarket crash of 1987. The first halt came at 2:35 p.m. Eastern Standard Time, which ended at 3:05. The Dow Average promptly plunged 200 more points, triggering the second halt at 3:30 p.m. and closed the market for the day. This example raises a strong possibility that an economic crisis in an emerging economy such as Thailand or Hong Kong could have serious consequences on even the world's strongest economy.

The 1997 Asian crisis is the third international financial crisis. The first major flow to the international financial system took place in the Latin America between 1982 and 1984. Lenders, borrowers, the International Monetary Fund, and the World Bank worked together to overcome this crisis through rescheduling, refinancing, additional loans, and restrictive economic policies. The second crisis came on December 20, 1994, when the Mexican government

The rest of this paper is organized as follows: The first section explains how Hong Kong's market caused a global stock-market turmoil on announced its decision to devalue the peso against the dollar by 14 percent. Thai decision, however, touched off a panic situation to sell pesos. As a result, on December 22, the peso fell against the dollar by as much as 40 percent, compelling the Mexican government to float the peso. On January 31, 1995, the IMF and the U.S. government put together a $50 billion package to bail out Mexico. Fortunately, the financial crisis of 1982-1984 were contained to the Latin America, and the Mexican peso crisis of 1994 turned out to be an isolated case to just one country. However, world leaders are concerned about the possibility that the third crisis, the Asian financial crisis of 1997, may spread throughout the world.

The Asian currency crisis of 1997, despite prompt and concerted action by developing countries, industrialized countries, and international organizations to contain it, quickly and ferociously spread to north Asian, Latin, and eastern European economies to varying degrees. This crisis has raised a variety of questions not only about the future of the region's economy, but also about the impact of the crisis on multinational companies and the world economy, including the U.S. economy.

October 27, 1997. The second section discuses how an economic crisis in an emerging economy such as Thailand spread throughout the world. The third section describes the potential impact of Asian currency crisis of 1997 on the U.S. economy. The fourth section compares the "old circuit breakers" with the "new circuit breakers." The fifth section discusses the effectiveness of daily price limited or U.S. circuit breakers.

HONG KONG'S MARKET CAUSES A GLOBAL STOCK-MARKET TURMOIL

On October 27, 1997, the market rout on Wall Street was preceded by a 5.8 percent plunge in the Hong Kong stock market which snowballed through the world's developed and emerging stock markets. Most markets in the Asia-Pacific region tumbled in sympathy, with Australia down 3.4 percent, Tokyo down 1.9 percent, and South Korean down 3.3 percent.

When Europe woke up to that gloomy news, markets from London to Frankfurt, in turn, registered their own sharp falls. London fell 2.6 percent, while Germany, France, and Italy all shed 2.8 percent. Among the smaller markets, Finland plunged 5.7 percent, while Spain skidded 4.1 percent.

The decline grew even more spectacular as the action shifted to the Americas. Bill Gates, Chairman of Microsoft, lost $1.8 billion from October 24 to October 27; and Warren Buffet

It is easy to be a global investor these days. You just put some savings into one of the 766 international mutual funds that invest everywhere from Bangkok to Buenos Aires. Millions of Americans have done just that, pouring more than $350 billion into such funds. But their enthusiasm for overseas investing could have an unintended consequence: it might trigger the turmoil in world stock markets and the global economy as well.

Capital flows--international movements of investment funds--are the Achilles' heel of the world economy. As investors shift funds among countries, they foster booms and busts. Asia's crisis represents the third global episode since 1980. Major Latin economies stagnated in the lost $750 million during the same period. A decline of 7.2 percent in the U.S. market, whi h triggered two trading halts on the Big Board, was accompanied by plunges of 15 percent in Brazil, 13.7 percent in Argentina, and 13.3 percent in Mexico (Catlike 1997).