The subprime crisis was triggered by an expectation of defaults of payments on subprime mortgages in the US. It is an on-going crisis that has already led to the free fall of the US housing prices, billions of losses by banks, and generally speaking a slow-down (maybe a recession) of the American economy. The impact of the crisis has already been big enough so as to influence all the major capital markets of the world. On the other side, the 1997 Asian financial crisis was a major financial crisis that hit most of south-East Asia and Japan, also referred to as the East Asian currency crisis. There were fears that the crisis would grow through financial contagion, but it affected the world economy only relatively (afterwards investors were reluctant to lend money to developing countries, leading to a meltdown of these economies). Although we do not know exactly how bad the current crisis is going to be, we can say that both crises are serious. We will describe the main characteristics of the two crises and then compare them.
[...] To sum up with, this ongoing mortgage bond market crisis has led to the downfall of property prices and then to a financial crisis, a credit crunch and almost a liquidity crisis The 1997 Asian financial crisis started with the collapse of the Thai baht following the decision of Thai government to float the currency, cutting its attachment to the U.S The countries that suffered the most form the crisis were South Korea, Thailand and Indonesia. Japan suffered too, but the country was facing its own long-term economic problems. [...]
[...] In the U.S the bubble was created by the development of subprime mortgages, making it easier for poor families to access property. In Thailand, real estate prices rose as a consequence of the flow of investment money in the region leading to high assets value. To sum up, both crises share the same warning signs: abundant liquidity, rapid credit growth and property prices surge. These two crises are nevertheless essentially different. The subprime crisis is unique and has distinctive characteristics. [...]
[...] As investors took their money back from the Asian countries, the exchange market was subsequently flooded with their currencies that experienced depreciative pressure. The local governments bought large amounts of their own money in order to keep its value at an acceptable level, and maintained incredibly high interest rates so as to retain investors. Neither of these policies was sustainable since the governments only had limited amounts of U.S$ in their reserves, and high interest rates are very harmful for the economy's vitality. [...]
[...] The specificity of the subprime crisis is that it was caused by a lack of transparency and repartition of credit risk caused by the use of financial engineering. The securitization of illiquid assets thanks to complex financial products transferred the troubles of the mortgage bond market to the rest of the financial system. This move from traditional banking practices towards more innovative techniques spread the risk of insolvency across a much wider group, reducing the level of risk of each individual. [...]
[...] The rising prices of the subprime mortgage payments led to a very high number of foreclosures in the U.S in 2007, which eventually started a global financial crisis in early 2008. This crisis consists in a liquidity crisis in the U.S, as banks have made credit less available. The reported losses from the banks and financial institutions around the world amounts to 379 billion$ in may 2008. The whole financial system is concerned by the subprime crisis directly through two main financial devices: mortgage- backed securities (MBS) and collateralized debt obligations (CDO). [...]
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