Asian crisis and finance theory

Abstract

The Asian crisis did not involve generalized financial panic. Stock markets behaved rationally and the crash in exchange rates is explained by the presence of credit risk. According to Jayanth R Varma, the crisis highlights the need for better risk management at the national level focusing less on the size of the external debt and more on its currency and maturity composition. There should be more freedom in capital outflows and less reliance on the banking system. IMF assistance to crisis stricken countries should be in the form of a currency swap which addresses the root cause of the crisis and subjects the IMF itself to financial discipline.