Money & Finance › Bubbles, crashes & crises › Bubbles, crashes and panics: how crises unfold
Asian financial crisis and Korea's IMF bailout (1997)
1997–1998· Crisis or event
Fact, law or dataA rule, statute, definition or measured number.
A 1997–98 currency and debt panic that began in Thailand and forced South Korea into a $58 billion IMF-led rescue.
See it on the Money & Finance map →How it works
Thailand floated the baht on July 2, 1997, after failing to defend its dollar peg. Foreign lenders then fled Indonesia, Malaysia, the Philippines and South Korea, whose debt-laden conglomerates (chaebol) and banks owed short-term dollar loans. Korea's reserves ran dry, and it applied to the IMF in November. The won fell from about 900 to nearly 2,000 per dollar. Koreans call it the IMF crisis (IMF 외환위기). Korea's economy shrank about 5% in 1998; it repaid the IMF in 2001.
Why it matters
It remade Korea: Daewoo collapsed, banks merged, foreign investors moved in, and unemployment more than tripled. Asia then stockpiled dollar reserves so it would never need the IMF again.
Think of it like
Like financing a long-term building with short-term notes: fine until every lender refuses to roll them over at once.
Facts, rules and data
IMF program documents and later self-assessments, Bank of Korea data, and records of the 1998 gold-collecting campaign, when about 3.5 million Koreans donated gold jewelry.
Debates and risks
Whether the IMF's demands for high interest rates and budget cuts deepened the slump is debated; its own evaluators later said some conditions were too tight.
Connections (5)
▸The Korean won lost about half its value in Asian financial crisis and Korea's IMF bailout (1997)Fact, law or data
The connection
Korea's central bank spent its dollar reserves trying to hold the won, and once usable reserves ran low it let the currency go. The won fell from about 900 per dollar in mid-1997 to nearly 2,000 by late December, doubling the won cost of companies' dollar debts.
When and why
Seoul, October–December 1997; Korea moved to a free float on December 16, 1997.
How we know
Bank of Korea exchange-rate and reserve records show usable reserves nearly exhausted by December 1997.
Debates and risks
Whether defending the won so long, rather than floating earlier, made the crash worse is debated.
▸IMF and World Bank led a $58 billion Korea rescue in Asian financial crisis and Korea's IMF bailout (1997)Fact, law or data
The connection
Korea got a record $58 billion package: about $21 billion from the IMF, $10 billion from the World Bank, $4 billion from the Asian Development Bank and the rest pledged by governments. In return it raised interest rates, closed weak banks and opened its markets to foreign investors.
When and why
Agreed December 3, 1997, in Seoul, where IMF Managing Director Michel Camdessus and Korea's finance minister announced it.
How we know
IMF program documents and Korea's letters of intent; Korea repaid the IMF in August 2001, ahead of schedule.
Debates and risks
Critics such as economist Martin Feldstein argued its structural demands, from opening markets to reshaping chaebol, went beyond what a currency crisis required; supporters credit them with Korea's fast recovery.
▸Asian financial crisis and Korea's IMF bailout (1997) led Asia to stockpile reserves in The US dollar as the world's reserve currencyMainstream view
The connection
Burned by running out of dollars in 1997, Asian governments built huge reserves, mostly in US Treasuries, as self-insurance against another crisis. Korea's reserves grew from about $20 billion at the end of 1997 to over $400 billion; China's passed $3 trillion. That demand helped hold down US interest rates.
When and why
Across East Asia from 1998; world reserves rose from about $1.6 trillion in 1997 to about $12 trillion in the 2020s.
How solid is the link?
IMF reserve data, and Bernanke's 2005 'global saving glut' speech tying Asian reserve buildup to low US long-term rates.
Debates and risks
How much this saving glut lowered US rates and fed the 2000s housing bubble is debated, as is how long Asia keeps favoring dollars.
▸Hot money and capital flight: money that flees in a panic fled Asia in Asian financial crisis and Korea's IMF bailout (1997)Fact, law or data
The connection
In the early 1990s, foreign banks lent heavily, short-term and in dollars, to Thai, Indonesian and Korean banks and firms. After Thailand floated the baht on July 2, 1997, lenders refused to roll over loans. Net private flows to the five hardest-hit economies swung by roughly $100 billion within a year, draining their reserves.
When and why
Thailand, Indonesia, Korea, Malaysia and the Philippines, 1997–98; Korea asked the IMF for help in November 1997.
How we know
Institute of International Finance flow estimates and IMF reviews of the crisis.
Debates and risks
Was it a self-fulfilling panic, as Radelet and Sachs argued, or punishment for weak banks and crony lending? Most see elements of both.
▸Korea Exchange (KRX): Korea's stock and futures market opened wider to foreigners after Asian financial crisis and Korea's IMF bailout (1997)Fact, law or data
The connection
Before 1997 foreigners could own only a limited share of Korean companies, a cap raised step by step from 10% in 1992. During the IMF rescue, Korea scrapped most of these limits in May 1998 to attract capital. Foreigners' share of the market rose from about 13% in 1997 to around 40% by 2004.
When and why
Seoul, December 1997 to May 1998, under the IMF program and the new Kim Dae-jung government.
How we know
Financial Supervisory Service and KRX records of foreign holdings, and IMF program documents.
Debates and risks
Whether opening up sped the recovery or made Korean stocks more prone to sudden foreign selling.