Now economies without large direct financial exposures to “toxic” assets, such as Asian export-oriented economies, were sucked into the downdraft. The abrupt marking-down of the outlook for Western growth and consumption of high-value goods saw inventories pile up, especially in those countries positioned as manufacturing hubs or producers of capital goods.
In six months or less, industrial production in Japan, Singapore and Korea, for example, fell 30, 25 and 19 percent respectively. The damage to bank balance sheets from suspect loans and marked-down asset valuations, as well as the sudden exit from the scene of many financial intermediaries, showed up in restricted lending capacity and greatly expanded funding spreads.