Asian financial crisis (1997-1998)

Definition

In mid-1997 Thailand’s forced abandonment of its dollar peg triggered a regional cascade: currencies across Thailand, Indonesia, Korea, Malaysia, and the Philippines fell 35-80%, equity markets halved or worse in dollar terms, and economies with celebrated “miracle” fundamentals went from capital darlings to IMF programs within months. The episode is the KB’s master class in CURRENCY-REGIME FRAGILITY: fixed pegs + foreign-currency corporate borrowing + open capital accounts formed a documented self-reinforcing trap, and contagion repriced the whole region on shared STRUCTURE rather than shared fundamentals.

How it works / structure

• The trap’s anatomy (Radelet-Sachs): pegged currencies invited unhedged dollar borrowing (why hedge a “guaranteed” rate?); short-maturity foreign debt exceeded reserves in the crisis countries (the measurable fingerprint); when pegs cracked, every unhedged borrower’s balance sheet imploded simultaneously — devaluation CREATED the insolvency that justified further devaluation (philosophy-reflexivity in FX form).
• The contagion mechanics: investors repriced countries by STRUCTURAL RESEMBLANCE (peg + short dollar debt + current-account deficit), not by individual fundamentals — the documented common-creditor and portfolio-rebalancing channels; Korea, with different fundamentals but similar debt structure, fell anyway (risk-correlation-exposure at sovereign scale).
• The diagnosis debate (carried honestly): Radelet-Sachs argue self-fulfilling panic on solvent- but-illiquid economies (the run reading); the rival reading (crony-capitalism fundamentals) carried the early policy response; the documented middle — structural vulnerability made BOTH readings true at different margins.
• The aftershocks (engine-relevant): Russia’s 1998 default and LTCM (episode-ltcm-1998) were the cascade’s next dominoes; post-crisis Asia built the reserve stockpiles that define EM policy today — the episode rewired global capital flows for a generation.

When it applies

EM allocation analysis (ext-international-equities — the structural checklist: reserve coverage of short-term external debt, peg credibility, external-borrowing currency mix); currency-regime theses (ext-fx, style-global-macro — peg breaks remain the cleanest reflexive-break template); contagion mapping (structural-resemblance repricing is the documented pattern — portfolio country “diversity” sharing one funding structure is one position).

Risk profile & failure modes

• Fundamentals-only blindness (the signature failure): growth, fiscal discipline, and high savings did not protect against a balance-sheet currency mismatch — the STRUCTURE sheet is a separate mandatory analysis.
• Peg-credibility asymmetry: pegs work until the reserve arithmetic says they can’t — defending one is finite, breaking one is instant; positions priced on peg persistence carry a hidden binary.
• Contagion underestimation: single-country EM theses in crisis regimes trade as the bloc — the documented correlation convergence.
• IMF-program path risk: rescue conditionality reprices domestic assets on its own schedule — policy response is a second event, not a resolution.

Evidence & limits

Radelet-Sachs (1998) is the standard academic anatomy (with the panic-vs-fundamentals debate documented inside it); currency and market moves are public record. Modern EM structures differ materially (floating rates, local-currency debt, reserves) — the episode’s checklist transfers; its magnitudes may not.

Falsifiable-thesis examples

Illustrations only, not signals:

• “Countries with short-term external debt exceeding reserves underperform EM peers by 10%+ in the next global tightening year (structural-fingerprint screen)” — falsified by the cohort return.
• “Currency X’s peg survives the next 12 months as reserve coverage stays above 6 months of imports (peg-arithmetic thesis)” — falsified by the reserve series or the break.

Cross-references

• The structural lenses: ext-fx, ext-international-equities
• The loop form: philosophy-reflexivity; the trade grammar: style-global-macro
• The next domino: episode-ltcm-1998
• The aggregation lesson: risk-correlation-exposure