The Asian (Global?) Financial Crisis, the IMF, and Japan: Economic Issues (CRS Report for Congress)
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| Release Date |
Sept. 3, 1998 |
| Report Number |
98-434 |
| Report Type |
Report |
| Authors |
Dick K. Nanto, Economics Division |
| Source Agency |
Congressional Research Service |
Summary:
The Asian financial crisis involves four basic problems or issues: (1) the role, operations, and
replenishment of funds of the International Monetary Fund, (2) a shortage of foreign exchange in
Thailand, Indonesia, South Korea and other Asian countries that has caused the value of currencies
and equities to fall dramatically, (3) inadequately developed financial sectors and mechanisms for
allocating capital in the troubled Asian economies, and (4) effects of the crisis on both the United
States and the world. In 1998, the crisis that had been confined primarily to Asia appeared to be
spreading to the world. The crisis was taking global dimensions.
The Asian financial crisis was initiated by two rounds of currency depreciation that have been
occurring since early summer 1997. The first round was a precipitous drop in the value of the Thai
baht, Malaysian ringgit, Philippine peso, and Indonesian rupiah. As these currencies stabilized
temporarily, the second round began with downward pressures hitting the Taiwan dollar, South
Korean won, Brazilian real, Singaporean dollar, and Hong Kong dollar. Governments have
countered the weakness in their currencies by selling foreign exchange reserves and raising interest
rates, which, in turn, have slowed economic growth and have made interest-bearing securities more
attractive than equities. The currency crises also has revealed severe problems in the banking and
financial sectors of the troubled Asian economies.
The International Monetary Fund has arranged support packages for Thailand ($17.2 billion),
Indonesia ($42.3 billion), and South Korea ($58.2 billion). The packages include an initial infusion
of funds with conditions that must be met for additional loans to be made available. The actual
funds disbursed to date include only those from the IMF, World Bank, and Asian Development
Bank. The United States has offered a line of credit from its Exchange Stabilization Fund for
Indonesia and South Korea. Under separate initiatives, the U.S. Export-Import Bank and U.S.
Department of Agriculture have allocated trade credits and loan guarantees to finance U.S. exports
to the troubled Asian countries.
The U.S. Congress is considering the Asian financial crisis within three broad legislative
contexts. The first is in the financing and scope of the activities of the IMF. This includes
legislation to provide the IMF with a $17.9 billion increase in its quotas or capital subscriptions and
New Arrangements to Borrow. Questions are being asked, however, about the need for the
additional funding, whether the IMF creates a moral hazard, and whether the IMF should attach
different conditions to its support packages. The second legislative context is in the impact of the
crisis on the U.S. economy and American financial institutions. Forecasters foresee a decline in U.S.
economic growth of about 0.5 percentage point and an increase in the U.S. trade deficit of about $65
billion because of the crisis. The third context is the efforts of other countries, particularly Japan,
in resolving the problem. Although Japan has pledged credits under the IMF support packages, its
economy is in recession and it has not been performing its role as an engine of growth and absorber
of exports from its neighbors in Asia. Rather, Japan's trade surplus is rising, particularly with the
United States.
