Answers needed more funds in order to pay their

to the questions on Mini-Case Asian currencies sink in 1997

     Based on the Asian Currencies Sink in 1997
scenario, the Asian currency crisis was caused by a combination of factors that
include East Asian countries’ large trade deficits, huge short-term foreign
debts, overvalued currencies, and financial systems that were rotten at their
core. (Ba)  These causes were further aggravated by the
loss of foreign investors’ confidence that caused them to withdraw their
investments and began the contagious effect to other stakeholders.  The banks and companies tried to hedge against
the US dollar, yen or Deutsche mark so they can pay their foreign currency
loans. In addition, many banks and companies became bankrupt due to excessive
careless lending that resulted in a large amount of non-performing loans and payment
default.   Furthermore, even local
investors dumped their own currencies in favor of the US dollar and then foreign
lenders refused to renew existing loans.  Thus, Asian central banks had to devalue their
currencies to alleviate the serious effect of the problem.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!

order now

     Foreign investors like to put investments
in countries that have favorable political climate, strong economy and has a
high rate of after-tax return. Based on these factors, the foreign investors
analyze and estimate the situation of a country before investing and during the
period of investment.  When they figure
out that the country does not possess these important signs anymore, they pull
out their investments and everything is affected. This is how expectation works
and this is what happened during the Asian currency crisis. 

     During the Asian currency crisis, many
East Asian banks and companies financed themselves by US dollar, yen, and
Deutsche mark through dollar and other foreign currency loans that carried
lower interest rates than local currency loans. 
Therefore when the US dollar appreciated, the banks and companies need
to purchase the dollar at a higher price and needed more funds in order to pay
their loans.  Moreover, the Chinese
yuan’s depreciation aggravated the situation because many companies all over
the world transferred their production and sourced local materials from China due
to cheaper labor and materials cost. 
This occurred at the expense of the other East Asian countries.

     Moral hazard means the tendency to incur
risk that can be avoided through observance of the rules and regulations that
are in place for the protection of the business.  It helped cause the Asian currency crisis in
1997 because of the lack of market discipline and risk-based bank lending.  Banks and financial institutions financed
projects of companies without considering their profitability and capacity to
pay that resulted to large amounts of non- performing loans and payment
default.  Many banks during that time
became bankrupt.

     During that time many East Asian companies
and banks borrowed US dollars, yen, and Deutsche marks to finance their
operations because the dollar and other foreign currency loans carried lower
interest rates compared to local currency loans.  In so doing, these companies and banks expose
themselves to the effect of foreign exchange rate that can fluctuate higher or
lower depending on the situation.  Once
the US dollar, yen or Deutsche mark appreciate, these companies will incur huge
foreign exchange loss unless they have enough US dollar, yen or Deutsche mark
on hand to repay the loan interest and principal.  The higher the amount of foreign currency loan,
the higher the loss.