As a result of the confluence of factors above, as well as others, the current account deficits of East Asian economies grew to critical levels. While these deficits were largely financed by private capital inflows, a growing proportion began to be financed by short-term capital flows which are more volatile in nature. At the same time, declining export growth meant that the foreign exchange earning capacity of these economies declined steadily.

Although in many cases the import coverage of foreign exchange reserves was adequate by the IMF's four-month standard (see figure 11), in the presence of high capital mobility, many East Asian central banks are still benchmarking their holdings of foreign exchange reserves, by convention, against current account transactions. However, it has been argued that a more appropriate comparison would be against capital account transactions. The World Bank has noted that for developing countries, levels of foreign exchange reserves need to be established in relation to variation in the capital account rather than in terms of months of imports, since the level of gross flows is higher as they become increasingly integrated to the global financial system.

Indeed, foreign exchange reserves in most of the worst afflicted economies were generally acceptable in terms of import coverage but were critically low in terms of liquid asset coverage or short-term external debt coverage (see figures below). This situation is thought to increase a (currency) speculative attack's probability of success.

Figure 11: Import coverage of international reserves	Figure 12: Short-term external debt coverage of international reserves
Source: Economist Intelligence Unit and Datastream/ICV
Figure 13: M2 coverage of international reserves
Sources: Central Bank of Indonesia, Bank of Korea, Bank Negara Malaysia, Central Bank of Philippines, Bank of Thailand, Hong Kong Monthly Digest of Statistics, Chinese Statistical Information and Service Centre, DGBAS Taiwan, Singaporean Department of Statistics, Economist Intelligence Unit and Datastream/ICV Figure 13: In the case of Philippines, M3 data was used as M2 data was not available.

It has been argued that the apparent rigidity in nominal exchange rates of East Asian economies provided a disincentive for domestic institutions to hedge short-term foreign borrowings, ie, prior to the crisis, given the relative historical stability in nominal exchange rates, the perceived costs of not hedging were minimal. This argument differs from that which suggests a lack of risk management skills among domestic companies and financial institutions. Some commentators have suggested an ironic twist to this issue¾ that when regional currencies started to collapse, the rush to hedge, in itself, placed further pressure on the market (see section below).