The baht collapse and the start of the Asian financial crisis

Thailand's long pre-1997 boom had been financed substantially through the Bangkok International Banking Facility, which channeled cheap foreign borrowing into Thai companies that assumed, implicitly, that the baht's peg to the dollar made that borrowing safe to leave unhedged. As speculative pressure built through 1996 and into 1997, the Bank of Thailand defended the peg by intervening heavily in both spot and forward currency markets rather than raising interest rates, running up a forward foreign-exchange position that reached an estimated 23 to 24 billion dollars, roughly four-fifths of the country's entire foreign-exchange reserves, by mid-1997. With reserves effectively exhausted, the BOT floated the baht on 2 July 1997, and the currency lost roughly half its value against the dollar within months, bankrupting overleveraged firms overnight and triggering bank and finance-company failures across the economy. The collapse, which later central-bank retrospectives described as ground zero for what became the wider Asian financial crisis, forced Thailand to seek a 17.2 billion dollar IMF-led rescue package in August 1997, the first of several emerging markets to need one that year.