Financial Crisis Of The Brc Economies - 2217 Words

Another example of a financial crisis that occurred in the BRC economies was the 1997 Asian Financial Crisis. This financial crisis differed greatly from the Latin American Crisis, as this financial crisis entailed a speculative attack on a currency . Defined, a speculative attack on a currency is a devaluing of the exchange rate brought upon by a large sell off of a country’s currency. In the late 1980s and early 1990s, Thailand and other Asian countries had experienced growth due strong trade flows, which lead to an increase in most asset classes. Accompanied with high-interest rates(Figure 5), foreign investment flowed into the Asian regions. Taking advantage of the high-interest rates, Thai banks had started to accumulate large†¦show more content†¦These foreign currency reserves have been accumulated in times of prosperity by the home country. If a speculative attack occurs on the home country’s currency, the home country sells its reserves to purchase its own currency, to keep the fixed currency, or ‘peg’ (Hill, 2003). The peg is unsustainable in the long run, as currency reserves are limited, and holding this peg may push the country into an economic recession, and eventually a depression. Applying the idea of a speculative attack to describe the 1997 Asian Financial Crisis, the problem began with the fixed Thai Baht(THB). The THB was pegged to the United Stated Dollar (USD), at around 25 THB/USD (Figure 5). According to the figure is apparent that in 1997, the THB had lost its peg, and experienced a sharp devaluation. One way to relieve the tension of a speculative attack on a currency is to let the currency float, but the result is that the currency would devalue. There are a myriad of consequences with a devalued currency, including cheaper exports, more expensive imports (hampering the current account calculation in the balance of payments equation), and a higher cost of living. The most recent financial crisis of 2007-2008 was a financial incident that stemmed from a collapse of financial institutions in the United States. By fully understanding how the crisis occurred from the individual consumer, the effect the crisis had on the BRICs can be fully gauged. Most asset classes