Co. This happy ending to Asia's financial crisis may confound those expecting a clear-cut victory of free markets over crony capitalism, but, it appears, good things can happen to bad economies if they are small, developing, and populated by savers. The wave of funds lifted the region's manufacturing capacity to excess, spilled over into speculative real-estate bets, and left companies swimming in debt. When anxious investors pulled the plug in Thailand in mid-1997, local currencies plunged, and all those overseas loans became too expensive for companies or even countries to pay. What the IMF appears to have overlooked was that, unlike Latin Americans, Asians are big savers. So are their governments.
Surpluses are common.
With austerity, currencies stopped falling, but as interest rates spiralled upward so did deposit rates and loan payments. Savers saved, debtors defaulted, and banks went under even faster than before. Reversing course, governments began pushing interest rates down and spending themselves into deficits. With scant demand for loans, banks invested their depositors' money in stocks, fuelling a rally that helped take pressure off debtors by raising the value of their assets. Meanwhile, heavy demand for Asian exports, especially electronics, kept money flowing in.