Term Paper on "Asian Financial Crisis and How it Affect the International Monetary System"

Term Paper 13 pages (5251 words) Sources: 1+

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Asian Financial crisis and how it effects the international monetary system

International monetary system or IMS is a structure of rules and principles, which manages international finance. It has major distributive consequences on the authority and the well being of states in the international system. IMS does not maintain a non-aligned status either economically or politically. IMS deals with three technical issues. Liquidity of supply of money to fund business and monetary assets; Fine-tuning of appropriate short-term imbalances and; Bringing back trust in the national currency and avert weakening swing in the currency of the country. Gold standard was the foremost modern global monetary system. In force during the late 19th and 20th century, the gold standard gave for free movement among countries of gold coins of standard specification. Within the system, the sole standard of value was gold. In the decades after World War II, international trade was carried out as per the gold standard. In such a system, countries decide the worth of their currencies not in relation to gold, but to certain foreign currency that is linked with and exchangeable in gold. Majority of the countries fixed their currencies to the U.S. dollar and maintain dollar reserves in the United States which is called as the "key currency's nation." (the International Monetary System (IMS))

The United Nations Monetary and Financial Conference that took place on July1-22, 1944 at Bretton Woods, N.H. is usually called as the Bretton Woods System. The International Monetary Fund- IMF was the outcome of the conference for promotion of international monetary assistance and of the International Bank for Reconstruction and Development -at present World Bank. By December 1945, the requisite number of governments had approved the accord giving birth to the two organizations, and till the summer of 1946, they had started functioning. Bretton Woods was an arrangement of systematic exchange rates, which will make possible unhindered flow of business and commerce. At some point in the 1960s, with U.S. assurances overseas withdrew gold reserves from the country, trust in the dollar undermined, resulting in some countries which were holding dollars and speculators to look forward for exchange of their dollars for gold. The gold reserves of U.S. fell sharply and to remedy the state of affairs, the purported two-tier structure was made during 1968. The dumping of the Bretton Woods as well as gold standards indicated that the worth of the different currencies was to be established by the market forces. (the International Monetary System (IMS))

During the later part of 20th century, Yen of Japan and the Deutschmark improved and came to be progressively more vital in global financial markets, whereas the U.S. dollar - even though the most major national currency- destabilized in comparison to them and weakened in value. The Euro was launched in financial markets in 1999 as a substitute for the currencies of 11 nations coming under the European Union -EU; it started distributing in 2002 in 12 EU countries. The Euro was used instead of the European Currency Unit. That has come to be the second most regularly used currency next to dollar in the primary bond market. IMF is a specific organization that uses a fund pledged by the member countries, procures foreign currencies on application from its members in order to release global money owing and normalize exchange rates. The IMF is the pivotal body of the international monetary system, which is the arrangement of worldwide payments and rates of exchange between currencies of the nation, which facilitate business to happen among nations. The objective of the system is to avert disaster within the system by inciting nations to take up fair economic policies; in keeping with its name, the fund is also one that can be utilized by the member nations requiring short-term funds to tackle the Balance of Payments - BoP matters. Nevertheless IMF was condemned during 1998 for aggravating the Asian financial crisis, through the choice of the fund to need Asian economies to hike their interest rates to unprecedented points. (the International Monetary System (IMS))

In this paper we shall study the manner in which the international monetary system was influenced by the Asian financial crisis. The Asian financial crisis that extended from Thailand to other nations of the area during 1997's second half pushed the nations which had slipped into intense recession which resulted in mounting unemployment, poverty and social displacement. The outburst, multiplied, and the constancy of the crisis also confronted certain fundamental notions: the nations most intensely influenced were "tiger economies" which possessed few limitations normally linked with nations who knock the door of the IMF seeking assistance. These countries had excess monetary reserves; increased rates of private savings, and low inflation; and in maximum instances the exchange rates of these nations were in the right track. (the Asian Financial Crisis What Have We Learned?)

It is not easy to forecast the Asian crisis when compared to the Mexican, Russian or Brazilian crisis. This is because these economies have been apprehended as cases of practical and continuous economic policies and due to the conventional trust in the infallibility of markets and the definite benefits of free capital movements. but, there were exceptions. The BIS Report 1996 advised about the revelation in East Asia. The 1996 TDR gave a clear caution on South-East Asia, stating that the growth in the region depended mainly on foreign resources, and that these economies will undergo loss of competitiveness and were highly susceptible to intrusion of capital inflows. Like in some other places, the crisis in East Asia bust out suddenly with a loss of confidence and an immense removal of capital by both domestic and foreign investors as well as unhedged debtors. Both external as well as internal factors including the domestic policies seem to have played a vital role. (Causes and sources of the Asian Financial Crisis)

There are four fundamental matters ingrained in the Asian financial crisis: a dearth of foreign exchange in Thailand, Indonesia, South Korea and other Asian nations which has resulted in the value of currencies and equities to go down severely, improper growth of financial sectors and systems for apportioning money in the disturbed Asian economies, impact of the crisis on United States as well as the world, and the responsibility, functioning and refilling of the funds of the International Fund. The disaster was triggered off by depreciation of currency in two phases that started in early part of summer 1997. The initial phase was marked by the steep crash in the value of the Thai Baht, Malaysian Ringgit, Philippine Peso, and the Indonesian Rupiah. With these currencies becoming stable at lower values, the second phase started with downward force striking the Taiwan dollar, South Korean Won, Brazilian Real, Singaporean dollar, and the Hong Kong dollar. (the 1997-98 Asian Financial)

As a step towards balancing the downward forces on the currencies, dollars have been sold by governments from their stock of foreign exchange reserves, procured their own currencies, and have hiked the rates of interest to thwart speculators and to draw foreign capital. The expensive rate of interest, in its effect, has made the economic growth sluggish and rendered interest-bearing securities more alluring compared to equities. The prices of shares have plummeted. During November 1997, this weakening in value of shares spread to other stock markets in the world, even though U.S. And European markets have thereafter improved. (the 1997-98 Asian Financial) the problem in the East Asian economies was set off by the quick setback of short-term capital inflows. First of all, the nations, which have suffered, attempted to offset the process by interfering in the market. But their capital stocks were exhausted in no time and their confrontation was ended. (Two Lessons of the East Asian Financial Crisis)

The incidents which happened thereafter was a quick fall of the value of the currency- the enormity of which surpassed till then the required intensity of alteration- plus even the sharp dearth of liquidity of foreign exchange. The consequence of this was that the interest payments for external debts shot up abruptly and non-payment started to be rampant. Industries failed in their efforts in financing imports of required materials, elements and component; exporters failed to secure the advantage of letter-of-credit. To put it differently, the major areas of the economies of the nations experienced severe loss and the dilemma left a permanent wound on the balance sheet of banks and business organizations of those nations who have been affected. The second precept is the significance of exchange rate stability. Presently it is usual perception that the alleged system of linking to the dollar was the reason behind the East Asian financial quandary. Therefore, definitely it is fact that affected nations overlooked the basic instability, which has surfaced in their economies, and was unsuccessful in fine-tuning the exchange rate in their currencies consequently. (Two Lessons of the East Asian Financial Crisis)

In that view, the inflexibility of exchange rate policies was to blame for… READ MORE

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