Summary of the 2026 Asian Financial Risk
Dr. Kohl argues that Asia may be approaching a new period of financial instability with important similarities to the 1997–1998 Asian Financial Crisis.
His central argument is that the original crisis was not simply caused by weak governments, bad banks, or speculative attacks. It was fundamentally driven by a shortage of offshore US-dollar funding within the Eurodollar system.
The 1997 crisis mechanism
Before 1997, Asian banks and companies borrowed large amounts of short-term US dollars at relatively low interest rates. They used these funds to finance long-term domestic investments, including property, factories, infrastructure, and corporate expansion.
This created two major risks:
Currency mismatch: Revenues were earned in local currencies, while debts were denominated in US dollars.
Maturity mismatch: Short-term borrowing financed long-term and illiquid assets.
The system remained stable as long as international banks continued renewing the dollar loans and Asian currencies remained relatively stable.
Once foreign lenders became concerned and stopped rolling over the loans, companies were forced to find dollars immediately. Local currencies weakened, making dollar debts more expensive. Companies then sold assets, reduced lending, cancelled investments, and generated further economic contraction.
Thailand was the first major breaking point, but the withdrawal of offshore dollar credit spread quickly across Indonesia, Malaysia, the Philippines, South Korea, Taiwan, Hong Kong, and eventually Japan.
Dr. Kohl’s 2026 concern
Dr. Kohl believes similar monetary pressure is appearing again across Asia.
Currencies in India, Indonesia, the Philippines, Japan, China, and other countries are weakening despite repeated central-bank intervention.
Governments are attempting to stabilize their currencies through:
selling foreign-exchange reserves;
entering forward currency contracts;
raising interest rates;
restricting capital flows;
encouraging foreign-currency deposits;
and subsidizing the cost of dollar borrowing and hedging.
However, the currencies often strengthen only temporarily before weakening again.
According to Dr. Kohl, this suggests that the underlying demand for dollars remains greater than the private supply available through international banks and financial markets.
Oil as the immediate catalyst
The principal difference between 1997 and 2026 is the immediate trigger.
In 1997, the crisis was associated mainly with property markets, overinvestment, banking weaknesses, and short-term dollar debt.
In 2026, Dr. Kohl identifies higher oil prices as the main catalyst.
Many Asian economies are heavily dependent on imported oil, which must generally be purchased in US dollars.
For example:
At $60 per barrel, one million barrels cost $60 million.
At $95 per barrel, the same quantity costs $95 million.
This represents a 58% increase in dollar demand without any increase in the amount of oil purchased.
Higher oil prices therefore create the following cycle:
Higher oil prices → greater demand for dollars → weaker Asian currencies → more expensive oil in local currency → higher inflation and economic pressure → even greater demand for dollars.
Why reserves may not be sufficient
Asian countries now hold much larger foreign-exchange reserves than they did in 1997. However, Dr. Kohl argues that reserves are often misunderstood.
Reserves can provide temporary protection, but they cannot permanently replace private international dollar lending.
When a central bank sells $10 billion to defend its currency, private borrowers receive the dollars, but the central bank loses $10 billion of reserves.
Unless the intervention restores market confidence and encourages private lenders to return, the country has not solved the shortage. It has only transferred the pressure from the private sector to the central bank’s balance sheet.
Dr. Kohl also explains that published reserves may include:
US Treasury securities that must first be sold or financed;
assets already pledged;
forward positions;
deposits with future obligations;
and assets that are not immediately available as cash.
India’s large forward-dollar position is presented as an example. Forward intervention may delay the visible decline in reserves, but the dollars must eventually be delivered, rolled over, or offset.
Federal Reserve custody holdings
Dr. Kohl points to the decline in foreign official reserve assets held in custody at the Federal Reserve Bank of New York.
He interprets this as evidence that foreign central banks are selling or mobilizing US Treasury securities and other reserve assets to obtain usable dollars.
He rejects the common explanation that countries are necessarily selling Treasuries because of political opposition to the United States, concerns about American debt, or diversification away from the dollar.
In his view, during periods of currency stress, Treasury sales are primarily a mechanical response to dollar shortages.
Reserve assets are sold because governments and financial institutions require dollar liquidity.
The importance of Japan in 1997
Japan played a central role in the 1997–1998 crisis because Japanese banks were major providers and distributors of offshore dollar funding.
When several Japanese financial institutions failed, international banks became increasingly reluctant to lend dollars to Japanese counterparties.
The “Japan premium” increased sharply, meaning Japanese institutions had to pay more to borrow dollars.
Eventually, the problem became more serious than high interest rates. International banks reached their maximum credit exposure to Japanese institutions and began refusing additional lending.
At this stage, the problem changed from the price of dollars to the availability of dollars.
Japan then mobilized US Treasury bills and other reserve assets to obtain dollar cash.
Dr. Kohl argues that this historical example demonstrates the limitation of national governments: even a powerful government cannot directly create offshore dollar balance-sheet capacity.
Why the modern system may be more vulnerable
Dr. Kohl believes the current Eurodollar system may be less flexible than it was in the 1990s.
Before the 2008 Global Financial Crisis, global banks had greater willingness and capacity to expand their balance sheets and provide dollar credit.
Since 2008:
bank regulation has become stricter;
balance-sheet capacity has become more limited;
dollar financing has increasingly moved into FX swaps;
securities financing has become more important;
non-bank and shadow-bank institutions have grown;
and collateral values play a larger role in determining liquidity.
These structures may become unstable when financial institutions become risk-averse or collateral prices fall.
Although Asian countries have larger reserves today, the private financial system supplying the marginal dollar may be less willing or able to expand.
The danger of policy mistakes
Dr. Kohl warns that central banks may focus excessively on the visible inflation caused by higher oil prices.
They may raise interest rates to fight inflation while failing to recognize that the underlying economy is already experiencing monetary contraction and reduced dollar liquidity.
Higher interest rates may support a currency temporarily, but they can also:
weaken domestic demand;
increase borrowing costs;
hurt property markets;
increase defaults;
and intensify economic contraction.
The danger is that authorities respond to the visible commodity-price shock while missing the less visible contraction in international credit and monetary circulation.
How contagion could spread
During the 1997 crisis, international lenders eventually stopped evaluating countries and companies individually.
Instead, they classified the entire region as high-risk and reduced exposure broadly.
Dr. Kohl describes this as the transition from Asian “tigers” to financial “toxic waste.”
If a similar shift occurs today, banks and investors may reduce exposure across multiple Asian countries at the same time, even where domestic fundamentals are relatively strong.
This could force institutions to:
sell local assets;
reduce lending;
cancel investments;
repay foreign obligations;
and hoard dollar liquidity.
Because the institutions financing Asia are also connected to markets in Europe, the United States, and other emerging economies, a regional dollar shortage could eventually become global.
The 1997 crisis ultimately spread beyond Asia, contributing to the Russian default, the collapse of Long-Term Capital Management, and severe stress in US and international credit markets.
Dr. Kohl’s conclusion
Dr. Kohl does not claim that another Asian financial crisis is inevitable or that 2026 will be an exact replay of 1997.
Asian countries now have:
larger reserves;
stronger banks;
more flexible currencies;
improved regulation;
and better regional cooperation.
However, he argues that these protections may address the lessons governments believe they learned rather than the deeper monetary lesson.
The fundamental risk remains:
dollar liabilities must still be refinanced;
oil must still be purchased in dollars;
weaker currencies still increase the burden of dollar debt and imports;
and national central banks cannot force international banks to create additional offshore dollars.
His warning is that Asia may be approaching the dividing line between manageable currency pressure and a broader dollar-liquidity crisis.
The key warning signs are:
currencies weakening despite intervention;
repeated reserve sales;
rising oil prices;
increasing use of forward contracts;
subsidized dollar-deposit programs;
capital controls;
and declining willingness among private banks and dealers to provide dollar funding.
Dr. Kohl’s final position is that reserves and policy actions can buy time, but they cannot permanently overcome a withdrawal of private offshore dollar credit.
The 1997 crisis became catastrophic when the Eurodollar system stopped treating Asian countries as attractive growth markets and began treating them as unacceptable credit risks.
He believes the developments in 2026 may represent an early movement toward that same dangerous threshold.