The next Asian downturn may be only a bad currency trade away, as per economists and market analysts. 10 years after the collapse of Asian currency market in 1997, the measures they have taken to prevent a repeat may have created another set of risks. The currency and financial policies in Asian countries today risk planting the seeds for a new crisis, as per experts. It can be a dangerous system both for Asian and the global economy. In emerging markets, central banks and national governments are grappling with risks including inflation, asset bubbles and vulnerability to a U.S. slowdown. For investors, however, the risk has been underpriced, and consequently this may have adverse effects on bond, currency and equity markets.

In July 1997, Thailand has sparked Asian crisis by devaluing it’s currency (the baht) to shore up its faltering economy, abandoning it’s pegging to the U.S. dollar, which set off a chain reaction that turned Asia’s investment and real estate boom into a bust, leading to a stampede by investors hurry to pull-out their money. The crisis worsened as forex reserves were insufficient to prevent the currencies from plummeting.

Since then, many emerging markets have made a lot of progress to avoid recurrence a similar catastrophic event. Central banks are now more independent, government debt has been declining, financial systems are gfetting stronger and current account balances are mostly in surplus. From Russia to Brazil all economies are booming. Indonesia, Thailand and Malaysia have earned higher credit ratings. South Korea, on the brink of default 10 years ago, recorded its 16th consecutive quarter of growth. True, a lot of lessons have been learned.

Now going back the Asian crisis, as investors fled after Thailand devaluation, they set off a plunge in other currencies that had previously been propped up through fixed exchange rate regimes. Indonesian Rupiah fell 57% against USD, causing firms to buckle under $80 billion in foreign debt and leading to riots in Jakarta. Thai Baht has dropped 45%, and its stock market fell a whooping 75%. South Koreaan Won lost half its value, and its economy collapsed. Malaysian Ringgit fell 35%. Hong Kong, China, Singapore, Taiwan and the Philippines also suffered. The crisis eventually spread to South America and to Russia, which defaulted on $40 billion of debt.

As per economists, many governments still haven’t followed the International Monetary Fund’s advice to adopt flexible exchange rates that can help dissipate financial pressures. Fixed currencies are still a problem in the region, and they’re always politically motivated. China, Hong Kong, Taiwan, Malaysia, Singapore, Thailand, India, Russia and Argentina still manage their currencies, generally maintaining artificially low levels. South Korea and Indonesia allow more flexibility.

Cheap currencies have led to excessive global monetary and credit growth, creating asset bubbles in South Korea and China and inflating consumer prices in India, Russia and Argentina. Policy makers in Asia are adding restrictions on lending and increasing taxes on share trades to combat bubbles that have made Hong Kong rents the world’s costliest and Chinese stocks twice as expensive as others in the region.

The build-up of forex reserves in Asian countries, part of the IMF’s prescription to avoid a repeat of the old crisis, has exceeded all expectations. South Korean reserves, depleted in its unsuccessful defense of the won during the crisis, are now the world’s fifth- largest, burgeoning to $250 billion from $7 billion in November 1997. China added $1 million a minute to its reserves in the first quarter of this year and now holds $1.2 trillion. India, Japan, Taiwan and Russia hold more than $200 billion each.

Economists say that the massive reserves contribute to excess liquidity. It may no longer be appropriate to view rising reserves as a source of increasing strength against future volatility. Again, there are opportunity costs to holding excess reserves that might otherwise be invested in infrastructure improvements, health care or higher-yielding assets, as per economists. They’re paying an enormous price in terms of standards of living. By focusing on exchange rates, Asian governments may overlook other risks.