The 1997 Asian Financial Crisis and the IMF
For Koreans, "IMF" is remembered not simply as the name of an international body but as the scar of an era. We revisit that 1997 crisis, when the value of the won collapsed together with countless companies and households.
A Domino That Began with the Thai Baht
On July 2, 1997, the Thai government gave up defending its currency, the baht, which had been pegged to the dollar, and switched to a floating exchange rate. That summer the baht's value plunged roughly -50% against the dollar.
This was the opening shot. As the crisis spread to neighboring countries that relied heavily on foreign capital, the Malaysian ringgit, Philippine peso, and Indonesian rupiah fell one after another. One country's currency crisis had spread across the whole region by contagion.
Korea: the Won's Plunge and the IMF Bailout
Korea could not escape this wave either. A structure dependent on short-term foreign debt was vulnerable to the outflow of foreign capital, and at the end of 1997 foreign exchange reserves ran dry, pushing the country to the brink of national default.
Ultimately, in December 1997, Korea requested a bailout from the IMF. The support package arranged by the IMF and international creditors was about 57–59 billion USD, the largest in the IMF's history at the time. The won-dollar exchange rate, around 900 KRW before the crisis, soared at one point to over 1,900 KRW in late 1997 to early 1998 (a collapse in the won's value).
Depending on the source, the support package for Korea is cited as 57 to 59 billion USD with slight variation. The key point is that it was "the largest in the IMF's history at the time."
What the Crisis Left Behind
As a condition of the bailout, intense restructuring followed. Large-scale corporate bankruptcies, mass unemployment, and sharp drops in real estate and stock prices ensued, and countless households suffered directly.
On the other hand, this crisis also became an occasion for Korea to greatly increase its foreign exchange reserves and to strengthen short-term external debt management and financial supervision. The crisis seared in the lesson that "the structure of exchange rates and external debt can shake even an individual's life."
常见问题
Q. Why is a rising exchange rate a crisis?
A rising won-dollar rate means the won's value is falling. Companies with dollar debt suddenly face a much larger won burden to repay, and import prices jump too, making life harder. A sharp spike in the exchange rate is especially fatal for countries with heavy external debt.
Q. Would holding overseas assets back then have been advantageous?
Since the won's value plunged, holding foreign-currency assets such as dollars would have relatively protected their won-converted value. This is one of the reasons currency diversification is discussed. However, this is a hindsight observation, and you cannot predict the future direction of a specific currency.
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