Soros and the Thai Baht 1997: the spark of the Asian crisis
How speculative sales of the dollar-pegged Thai baht triggered the largest emerging market crisis of the 20th century
In May-July 1997, Soros and other hedge funds attacked the dollar-pegged Thai baht. Thailand surrendered on July 2. The crisis that swept all of Asia began.
Thai vulnerability
In the first half of the 1990s, Thailand was one of the rapidly growing "Asian tigers." The baht was pegged to the dollar. The problem: Thailand had accumulated huge short-term dollar debts while its foreign exchange reserves were running out. It was a crisis waiting to happen.
The speculative attack
In May 1997, Soros's Quantum Fund and other hedge funds started shorting the baht. The Bank of Thailand used its reserves to defend the exchange rate — in a few weeks it burned $20 billion of reserves. On July 2, 1997, Thailand abandoned the peg: the baht crashed 15% in one day.
The contagion
The domino spread immediately: Malaysia, Indonesia, South Korea, the Philippines. Every country with similar vulnerabilities (current account deficit, dollar debt, fragile peg) was attacked. The Thai crisis became the worst Asian economic crisis of the 20th century.
- Currency pegs with weak fundamentals are targets for speculators: markets always find weak points.
- Contagion respects risk structure, not geography: it's not that all Asian countries had the same problems — they had the same vulnerability structure.
- Foreign exchange reserves are not infinite: the Bank of Thailand defended the baht heroically but reserves ran out.