In mid-May 1997, currency traders heavily bet that Thailand could not keep its fixed exchange rate (“peg”) for the baht. Defending the peg required the central bank to spend foreign reserves, which made Thailand more vulnerable to a forced policy change. These pressures set the stage for a wider regional crisis once the peg broke.
On July 2, 1997, Thailand stopped defending the baht’s peg and allowed the currency to float, meaning its value would be set mainly by market trading. The baht fell sharply, increasing the local-currency cost of paying back foreign-currency debts. This became the trigger event that spread fear to other economies with similar debt and banking risks.
As losses surfaced in property and finance, Thai authorities shut down many troubled finance firms to limit the damage to the financial system. These closures highlighted how weak lending standards and overbuilding had made the banking sector fragile. The decision also signaled that the crisis was not only about exchange rates, but also about financial-sector solvency.
Thailand submitted a Letter of Intent to the IMF outlining a multi-year plan combining monetary tightening, fiscal measures, and financial-sector restructuring. A central goal was to stabilize the floating baht and restore confidence so foreign credit lines would not suddenly disappear. This marked a shift from defending a fixed rate to managing a crisis under a floating regime.
After pressure spread from Thailand, Indonesia widened its trading band and then, on August 14, 1997, moved to a free-floating exchange rate for the rupiah. The rupiah’s drop increased stress on firms and banks that had borrowed in U.S. dollars without protecting (“hedging”) against currency changes. This helped turn a currency shock into a broader financial and corporate crisis.
On August 20, 1997, the IMF approved a stand-by arrangement for Thailand, part of a broader international support package. The program aimed to provide foreign currency liquidity and backstop reforms while Thailand operated with a floating baht. This step became a template for later IMF-backed responses elsewhere in the region.
On October 23, 1997, Hong Kong faced a large attack on its currency board system, which links the Hong Kong dollar to the U.S. dollar through rule-based monetary operations. Interest rates spiked as authorities defended the link, showing how quickly pressure could move from floating-rate crisis economies to a fixed-rate financial center. The episode reinforced fears of regional contagion.
Indonesia sent an IMF Letter of Intent on October 31, 1997, describing policies meant to restore confidence and stabilize the rupiah under a floating exchange rate. The plan combined macroeconomic steps with structural reforms, including changes affecting banks and markets. It reflected how quickly a currency float can become a high-stakes balance-of-payments crisis when foreign financing dries up.
On November 5, 1997, the IMF approved a stand-by arrangement for Indonesia to support stabilization and reforms. The goal was to slow capital flight and help Indonesia meet external payment needs as the rupiah floated and weakened. The approval also signaled that the crisis had become a multi-country international policy problem, not a single-country devaluation.
On December 3, 1997, South Korea signed a memorandum with the IMF as the won came under severe pressure and foreign reserves fell. Korea’s crisis highlighted how short-term foreign borrowing by banks and large firms can become dangerous when investors refuse to roll over (renew) loans. The agreement marked a major turning point as the crisis reached a large advanced industrial economy in Asia.
In early December 1997, Thai authorities moved from suspending finance companies to permanently closing (liquidating) 56 of them. This was part of a deeper cleanup of the financial system under the IMF-supported program. It showed that stabilizing a floating currency often requires fixing bank balance sheets and resolving bad loans, not just changing exchange-rate policy.
In August 1998, Hong Kong authorities intervened directly in equity markets, buying large amounts of shares while defending the Hong Kong dollar’s U.S. dollar link. Officials argued this was aimed at countering strategies that combined betting against the currency and the stock market at the same time. The intervention became a notable example of using broader financial-market tools to support an exchange-rate regime during regional turmoil.
On September 1, 1998, Malaysia introduced exchange controls and fixed the ringgit at a set rate to the U.S. dollar, limiting offshore trading and certain capital movements. This was a clear policy break from relying on market-determined exchange rates during panic conditions. Malaysia’s choice became one of the most discussed alternatives to the IMF-style approach during the crisis.
By late 1998, Indonesia’s program shifted toward stabilizing the financial system and addressing severe social impacts, including expanded safety-net measures. The updated Letter of Intent reflected how the crisis had moved beyond exchange rates into recession, banking problems, and hardship for households. It also illustrates the “second phase” of the crisis: managing recovery after currency collapses and capital flight.
Asian Financial Crisis: Currency Floating and Collapses (1997-1998)