The roots of the crisis can be traced back to the huge influx of cheap foreign capital to the region in the early 1990s. With inadequate prudential supervision, regional financial institutions over-extended themselves and lent excessively, often to unproductive sectors an projects. This rapid build up of foreign debt was not sustainable. It created asset bubbles in the property and stock markets. For a time, strong regional economic growth enabled the countries to service their debt obligations through buoyant export revenues.

Confidence in the region's export potential began to waver towards the mid-1990s, with various exchange rate realignments. In 1994, China devalued the Yuan. In 1995 the Japanese Yen started depreciating against the greenback. In countries whose currencies were tightly pegged to the US dollar, exports began to lose competitiveness. Economies such as China and Latin America emerged as keen competitors. These developments coincided with a cyclical downturn in the global electronics industry and precipitated a regional export slowdown in 1996.

With the export engines stalled, investors and creditors grew nervous of the regional countries continued ability to service the growing foreign debt burden. Eventually, the market lost faith in the sustainability of the linked exchange rate systems adopted by regional economies.

Thailand was the first to suffer this loss of investor confidence. Speculative attacks against the Baht mounted as concerns about the Thai economy grew. The breaking point came when Thailand's foreign reserves dipped below its short-term foreign debt obligations in the middle of 1997. Without sufficient reserves to defend its currency, the Thai Government was forced to allow the Baht to float on 2 July 1997. The contagion effect of this de-facto devaluation of the Thai Baht quickly spread to Malaysia and Indonesia as the market switched its attention to other Southeast Asian economies with similar structural weaknesses in their financial and banking systems.

By September, the financial crisis extended to North East Asia. Hong Kong's US dollar peg came under severe pressure, but managed to hold. Long standing structural weaknesses in Japan's financial and banking system caused some major institutions to fail. South Korea, with weaker fundamentals and large private sector debt, took the biggest hit. A massive US$57 billion IMF-led bail-out package was necessary to stabilise the Won, and to keep the Korean economy on its feet.

Depending on how successfully Governments manage economic recovery, maintain political and social stability, and restore investor confidence, the regional situation could either gradually stabilise and start to recuperate, or continue to deteriorate before it gets better. Even if regional countries take all the right steps and see through painful but necessary economic reform policies, the recovery process cannot be immediate. Overall, we can therefore expect slower regional growth over the short to medium term.