What is a currency crisis, and how did it impact Asian countries during the 1997 financial meltdown?
Answer (1)
A currency crisis happens when the value of a country’s money (its currency) drops sharply and suddenly, often because investors lose confidence in that country’s economy. This is what happened to many Asian countries during the 1997 financial crisis, and the effects were severe.In 1997, several Asian countries—including Thailand, Indonesia, and South Korea—experienced sharp devaluations of their currencies. For example, the Thai baht, the Indonesian rupiah, and the South Korean won lost more than half their value in just a few months. This was because investors began selling these currencies in large amounts, causing their prices to fall.A falling currency has several serious effects. First, it makes foreign debt more expensive. Many Asian companies and banks had borrowed money in U.S. dollars. When their local currencies lost value, it became much harder to pay back their loans because they now needed more of their own money to buy the same amount of dollars.Second, a weaker currency leads to higher import prices. For example, if a country imports food, oil, or medicine, and its currency falls, these products become more expensive. This can lead to inflation, which hurts consumers, especially the poor.Third, a currency crisis can trigger wider economic problems. Banks may fail, businesses may close, and people may lose jobs. In Indonesia, for example, the currency crisis turned into a full-blown economic and political crisis that led to mass protests and the resignation of President Suharto.The Philippine peso was also affected, though not as badly as the currencies of some of its neighbors. The government responded by raising interest rates and managing the flow of foreign money.In conclusion, a currency crisis is dangerous because it affects loans, prices, and people’s trust in the economy. It teaches countries to manage their debt wisely and build strong financial systems that can handle shocks.
