Nilesh Jasani's Reviews > The Asian Financial Crisis 1995–98: Birth of the Age of Debt

This is a remarkable book on one of the least discussed, most important chapters of financial market history. It helps that Mr. Napier is not another theoretician or a passive observer penning a narrative based on secondary research. He is someone who actively shaped the views and perceptions of key participants during and after the event in Asian markets.

The book derives its material from the author's own written reports in real-time during those long months. The first-hand approach has unique positives and negatives. The author spends a disproportionate amount of material on the organization he worked for, which would be of as much interest only to people connected with the entity like this reviewer (who also worked for CLSA during those times and had the honor of interactions with the author too).

The author presents a solid list of factors that led to the economic and financial crisis in multiple Asian countries in 1997-98. Partly due to his own work - which has been incredibly popular and well-known in Asian markets ever since - the listed causes are unlikely to surprise anyone familiar with the crisis. For the unfamiliar, the book is a one-stop destination to learn about the events that have affected so much in Asian/emerging economies, markets, and with multilateral institutions to this day.

The reviewer will take the remaining space to provide his views on what led to such an unprecedented collapse. Yes, Asian economies had unsustainable currency regimes, unprofitable over-investments, corrupt business practices, terrible asset-liability mismatches in bank/corporate balance sheets, bubble-like asset prices, heavy debts, etc. However, none of these factors individually or collectively were at a level to cause the collapse witnessed. Economies, like human bodies, are always imperfect. These imperfections cause cycles we witness once every few years. However, what happened in Asia - where multiple economies had almost every domestic bank writing down equity to zero and with an unprecedented wave of bankruptcies - cannot be explained simply by pointing fingers at the usual factors, however despicable.

Asian economies witnessed a classical bank run, except it was not by depositors and not necessarily always on banks. Relatively inexperienced investors with their first-time investments in Asia suddenly took fright due to a combination of factors (well discussed in the book). Still, they made everything worse through vicious cycles caused by the same actions. Economies with vastly different fundamentals that did not share almost anything common - like Indonesia and Korea, or HK and Thailand - got swept by the ever-rising levels of sell-offs driven by the market, economic and political events caused by previous rounds of panic.

A doctor does not try to treat the chronic diabetes of a patient on the day he is brought in for life-threatening fire burns. Walter Bagehot detailed the need for countercyclical monetary policies over a hundred years before the events in Asia. In times of investor or depositor panic, it is critical to support liquidity and infuse confidence to ensure that insolvencies of some do not lead to illiquidity-driven-insolvency for many more.

As expounded by Galbraith and many others, 1929 crisis was made worse because of the lack of such measures. It was worse in 1997 in Asia. Theoretically, regional central banks were constrained by exchange rate pegs (still remnants of the Bretton Wood), but this argument does not fully reflect the actual realities. In IMF and developed world public/private institutions, there were an unusual number of monetarists and Austrian school believers who would push for higher interest rates and prevent any regulatory support at the worst possible time.

The crisis ended when the Federal Reserve implemented a series of unexpected cuts in light of the collapse of LTCM. LTCM's woes were partly due to the Russian default, which was also swept away by the same confidence crisis that engulfed at least five Asian economies earlier. If the Federal Reserve had not ended the vicious cycle, the contagion could have consumed many others, including HK, which got saved by the skin of the teeth through a staggering market intervention days before LTCM collapse. There was an attack on HK markets/systems a year before the large one in 1998, and without the arrival of the massive TMT bull run that started with the Fed's policies, there would have been more.

The countercyclical, market-supporting backstops prevented Asian-crisis equivalent vicious cycles in 2008 and 2020. Unfortunately, such proposals were anathema in 1997. Every Asian economy had imbalances then, as now. However, it is reasonable to assume that the domino-like collapse of the era that led to entire financial systems getting wiped out is unlikely to repeat as policy errors played a huge role in making things worse. It also did not help that none of the regional markets had a meaningful local investor base in those early market days. There were just no significant investors with different views or investment horizons.

The aftereffects of the crisis are strong even now. Asia reduced its dependence on debt-based foreign inflows in favor of equity-based that participate in losses and largely abandoned rigid exchange-rate systems. Corporate and banking sector regulations improved markedly, partly as a result of the crisis but also because of the governance-related changes globally. Equity markets became deeper with a substantially larger participation of local investors and institutions, even as the knowledge of Asian economies and markets deepened with foreign institutions who hired more employees whose background is in the region. Corporate structures became simpler and transparencies improved.

The crisis-induced transformation changed the global economy too, none more than the accepted drive towards a build-up of large piles of foreign exchange reserves, built through better current accounts that are partly due to the acceptance of weak exchange rates. The genesis of the second leg of China's rise was in the crisis. When one looks at the overall growth path of South Korea or HK, the Asian crisis proved to be a cyclical dip, while the same - politically and in economic parameters - was not true for the economies in Asean. To a degree, the crisis that is dubbed as the Asian crisis dealt far bigger body blows in terms of investor flows and interests to the smaller economies in Latin America and EMEA.

All that said, there was so much that was preventable in a crisis that was only partly a result of fundamental factors. The contagion was made far worse by the wrong-headed policies recommended by supposed free-market champions and investor classes that lacked diversity. Asian crisis policy response was equivalent of if on the day Lehman collapsed, the Fed had withdrawn liquidity or like the last week (in 2022) when the Nickle market seized, the LME/Western banks had not intervened in the name market-clearance or necessary bloodletting. Markets that freeze up like they did in Asia in 1997 need strong, unqualified, and repeated (until successful in stemming the rot) intervention; when that does not happen like in 1929 or in Asia in 1997, the real-life damage is ghastly. These are the points not covered in the book.

Back to the book: it provides one view on what caused the crisis, although it fails in drawing any lessons from what happened in the following 25 years. Still, this is a must-read for anyone interested in financial market history.