It is the tenth anniversary of the Asian financial crisis and we consider, "will it happen again?" First we need to know what happened. The crash itself came fast and furious. But the lead up to it started around 3 years prior and was characterized by a period of exceptional growth and a feeling of economic omnipotence from within Thailand.

The scale of the crisis was not something anyone could foresee in the three years that preceded it. But there was a sense of incredulity as the number of cranes and construction sites in Bangkok grew and grew so that it was possible to count more than 30 of them from most downtown Bangkok office windows in 1995.

The root cause of the crisis was the now defunct Bangkok International Banking Facility (BIBF). Established in 1992, its original purpose was to promote Thailand and its banks as an offshore banking centre.

Few loans though were made overseas. However, Thai banks made foreign currency loans to Thai companies at rates far lower than what they could have achieved onshore. The baht was fixed to the dollar, so companies didn't bother hedging their exposure to foreign currencies and as the loans were in foreign currencies, the Bank of Thailand was unable to use monetary control policies to regulate them.

Many loans were made without due diligence, on friendship and as a result of family connections or political support. The funds were squandered on projects of very poor quality with little chance of success. Banks also made local currency loans, taking advantage of a 300-400 basis point spread. Or funds lent were simply kept on deposit at rates as high as 12% in one of the many non-bank finance companies.

Between 1987 to 1993, bank loans in Thailand grew 26% per year and during the same period, the stock exchange of Thailand rose 400%.

In the three and a half years between its peak and the devaluation, the stock market declined 65%. It might well have slid further, were it not for abundant flow of money that was sloshing through the economy. But because banks had ready access to offshore funds, loans growth from 1994 to 1997 remained high at 25% per year.

Skyscrapers, financed by the borrowed money were shooting up everywhere, and much of the imports that were thought to be to investment turned out to be prestige items. To emphasise this, Thailand was the third-largest importer of Mercedes-Benz cars in the world (half of which, were actually registered as capital goods), during those three years.

In early 1996, a massive graft and corruption scandal at Bangkok Bank of Commerce broke out and was the first real indication of the problems ahead. The bank had lent out USD4bn to politicians and their related businesses and Thana One, a subsidiary of the largest non-bank finance company Finance One, proved unable to make good on a loan from an overseas lender. A run on deposits started at other non-bank finance companies and Moody's downgraded the sovereign debt in 3Q.

The system might have remained liquid and refinancing might have occurred if the money had kept flowing in. But after BIBF loans had multiplied by well over 100% in 1994 and 1995, the authorities realized the level of capital misallocation that was taking place and the BIBF was closed in October 1996.

A serious structural problem also existed in Thailand. China's steady growth and emergence as a leading nation, coupled with its currency devaluation in 1994 resulted in amazing growth in its manufacturing sector, which started to threaten Thailand. Higher prices and inflation were eroding Thailand's export competitiveness, which had traditionally been the engine of GDP growth in Thailand. GDP had risen on average 23% per year since 1987 - 22% in 1994 and 25% in 1995. But in 1996, it suddenly fell 2%.

With this mixture of characteristics in place a number of financial institutions combined forces to take a multi-billion dollar position against the Thai baht, shorting it in May. The Bank of Thailand's USD36bn in foreign reserves were almost entirely wiped out in the defense of the baht, and the currency moved from a fixed to managed float system by July 1997. The currency went from 25 to 55 against the USD by January 1998.

As the economy slowed, many of the companies with loans in a foreign currency could not maintain them. Debt-to-equity ratios for firms with foreign loans went from 280% to 420%. NPLs at the banks increased over 30%.

Thailand spent the next five years in an economic haze. From the devaluation, the stock market dropped another 80% in dollar terms, to its lowest point in September 1998. Since then it has moved up 340%, but is still 65% below the previous high.

Hedge funds had a lot to do with the troubles. The country had exposed itself to attack and when the attack came it was merciless. Had they not broken the currency peg, Thailand's economy probably would have remained in the doldrums, along with Japan's perhaps right up to now.