The 1997 Asian Financial Crisis, explained: how a currency peg breaking in Thailand shook an entire region.

Through the 1990s, several fast-growing Southeast Asian economies kept their currencies pegged, or fixed, at a stable rate against the US dollar, which made trade and foreign investment feel predictable and low-risk. At the same time, many banks and companies in the region borrowed heavily in dollars, since dollar loans often carried lower Interest Rate, while their revenue and assets were mostly in local currency. This combination, a fixed Exchange Rate plus large amounts of foreign-currency debt, worked fine as long as confidence held and the peg stayed credible. It became extremely dangerous the moment that confidence cracked.

In July 1997, currency speculators, doubting Thailand could keep defending its peg given its shrinking foreign currency reserves, began selling the Thai baht heavily. Thailand's central bank spent through its reserves trying to defend the peg and eventually had to let the currency float freely, and it dropped sharply in value. Investors, spooked by what had just happened in Thailand, started pulling money out of neighboring economies that shared similar vulnerabilities, a pattern known as financial contagion. Indonesia, South Korea, Malaysia, and the Philippines all saw their currencies come under heavy pressure in the following months, even though each country's specific circumstances differed.

For countries and companies that had borrowed in dollars, a weaker local currency was devastating, since it meant needing far more local currency to repay the same dollar debt, pushing some borrowers toward default. The International Monetary Fund stepped in with emergency rescue packages worth tens of billions of dollars for the hardest-hit economies, in exchange for commitments to reform banking practices, cut government spending, and let markets set exchange rates more freely. The crisis pushed several regional economies into deep recessions and caused real, lasting hardship, but it also led directly to reforms across the region, including countries building up much larger foreign currency reserves specifically to avoid a repeat of 1997.

Key takeaways

• •Several Southeast Asian economies pegged their currencies to the US dollar while companies borrowed heavily in dollars, a risky combination.
• •Thailand's currency peg broke in July 1997 after speculative pressure drained its foreign reserves, triggering a sharp baht devaluation.
• •The crisis spread through contagion to Indonesia, South Korea, Malaysia, and the Philippines, even though each economy's situation differed.
• •A weaker local currency made dollar-denominated debts far more expensive to repay, pushing some borrowers toward default.
• •IMF rescue packages worth tens of billions of dollars came with conditions on spending and reform, and the crisis led regional economies to build much larger currency reserves afterward.