ABSTRACT
Contagion of currency and financial crises has been a great concern for policymakers and investors in the emerging countries because of the painful domino effects felt in these countries in the last decade. Following the Mexican devaluation of December 1994, Argentina suffered a crisis of investor confidence and, as a result, its economy slumped. The Asian Crisis of 1997 also wreaked havoc on emerging markets near and far. On July 2 1997, the value of the Thai baht dropped as much as 20 percent and the Thai government had to request “technical assistance” from the IMF. This crisis quickly spread through a number of Southeast Asian economies. On July 8 1997, Malaysia’s Central Bank had to intervene to defend ringgit. Shortly after that, on July 11 1997, the Philippine peso was devalued. Indonesia had to widen its trading band for the rupiah in order to discourage speculators. Singapore also felt the pinch. On July 24 1997, the Singapore dollar began a gradual decline. On August 14 1997, Indonesia abandoned the rupiah’s trading band and allowed the currency to float freely, triggering a plunge in the currency. On Oct 23 1997, Hong Kong’s stock index fell 10.4 percent after the bank lending rate skyrocketed to 300 percent as a result of the monetary authority’s effort to fend off speculative attacks on Hong Kong Dollar. At the same time, the South Korean Won began to weaken. On Nov 17 1997, the Bank of Korea abandoned its effort to prop up the value of the won, allowing it to fall below 1,000 against the dollar. The spillovers continued into 1998. On January 22 1998, Indonesia’s currency plunged to an all-time-low, 12,000 rupiah against the dollar. On August 6 1998, the Asian markets plummeted as Hong Kong and China stepped in to defend their currencies against the attack. The Russian crisis of 1998 also exerted enormous pressure on the exchange rates and financial markets of other countries. The pressure quickly spread from one corner of the globe to the other. It forced the collapse of the Brazilian Real and brought about economic instability. The 1998 Russian Crisis pushed up Latin borrowing spreads 700 basis point to about 1,100, causing painful episodes of instability in Latin America (Mazmi, 2001).
