Event 08 · History as decisions
The currency crisis that began in Bangkok
Fast-growing Asian economies had borrowed heavily in US dollars; when Thailand let its currency fall in July 1997, panic spread across the region and millions of people lost jobs and savings.
- The 1997 Asian financial crisis
- Thailand, Indonesia, South Korea and the region
- 1997
- 3 min read
On this page
Before you readWhat would you do?
Your import business plans to take a large loan in US dollars because the interest rate is lower than for a loan in dong. An AI spreadsheet shows big savings, assuming the exchange rate stays the same for five years. What should you check first?
Pick an answer now. The file tells you whether you were right.
01The file in one minute
1The setup
Fast-growing Asian economies borrowed heavily in US dollars, short-term, while keeping currencies near fixed values.
2The trigger
On 2 July 1997 Thailand let the baht float. It fell sharply and dollar debts became much harder to repay.
3The spread
Panic hit Indonesia, South Korea and others. The IMF arranged large rescue loans with strict conditions.
4The lesson for AI
Write down the hidden assumptions in a forecast and test what happens if each one fails.
02Timeline
Early 1990s
Large amounts of foreign money flow into fast-growing Asian economies.
2 July 1997
Thailand floats the baht, which falls sharply.
Late 1997
The IMF arranges rescue loans for Thailand, Indonesia and South Korea.
May 1998
Indonesian President Suharto resigns amid the crisis.
03What happened
In the early 1990s Thailand, Indonesia, Malaysia, South Korea and others grew fast and attracted large amounts of foreign money. Many banks and companies borrowed in US dollars for short periods, then lent or invested in local currency, often in property. Currencies such as the Thai baht were kept close to a fixed value against the dollar, which made the borrowing look safe.
As doubts grew about bad loans and property prices, investors started betting against the baht. Thailand spent much of its foreign currency reserves defending it, then on 2 July 1997 let it float. The baht fell sharply, and dollar debts suddenly became far more expensive to repay.
Panic spread to Indonesia, South Korea, Malaysia and the Philippines. The IMF arranged large rescue loans for Thailand, Indonesia and South Korea, with strict conditions that are still debated. Indonesia was hit hardest: its currency lost most of its value, and President Suharto resigned in May 1998. Vietnam, whose currency was not freely traded and which had little short-term foreign borrowing, was less directly affected, though its exports and foreign investment slowed.
04The decisions that shaped it
The core mistake was a mismatch: borrowing short-term in a foreign currency to fund long-term local projects, on the assumption that exchange rates would stay fixed. Once that assumption broke, many borrowers failed at once, and fear made investors pull money even from sound countries.
The AI angle: plans and models often rest on one assumption that nobody writes down, like a fixed exchange rate. Write down the key assumptions behind a forecast and check what happens if each one fails.
The idea behind this caseLesson: Spreadsheets and data →
05What to take from it
- Avoid borrowing in a currency different from the one you earn in, unless you are protected against swings.
- Match short-term borrowing with short-term uses, not long-term projects.
- Write down the key assumptions behind a plan, and test what happens if each one breaks.
- Keep a reserve to get through a sudden shock without forced sales.
07 — Sources
- Asian Financial Crisis · Federal Reserve History · 2013
- The Asian Crisis: Causes and Cures · International Monetary Fund, Finance & Development · 1998-06