The foreign exchange exposure of capital structure: The 1997 Asian crises revisited

The financial crisis of East Asia in 1997 was largely unanticipated and was characterized by the fact that drastic currency depreciation worsens the corporate capital structure and brought widespread financial turmoil. This paper attempts to examine the vicious cycle mechanism of East Asia crisis. A dynamic panel model is proposed to estimate the foreign exchange exposure of capital structure. Using precrisis data, it is shown that the Asian crisis is in fact a problem of structural vulnerability underlying most Asian economies. First, Hong Kong and Singapore have less risky capital structure before the crisis, which also have smaller exposure magnitude. Secondly, Thailand and Korea have more risky capital structure before the crisis and significant vicious cycles are found. These appropriately explain the vicious cycle between currency crisis and domestic financial turmoil: drastic depreciation worsens the debt ratio.