Currency crisis
A currency crisis exists when the external value of a currency can no longer be held. The result is a sudden strong devaluation of a currency or the unintentional abandonment of a fixed exchange rate. The outbreak of a currency crisis occurs when financial market players from the currency off (increase in capital outflows ) and loans can not extend (decrease in capital inflows ). Not infrequently leads a currency crisis into a financial and economic crisis.
Actors (for example, the government of the respective country and / or the IMF) can try to fight through monetary policy and / or economic policy of the currency crisis.
A historical novel case of a currency crisis is the euro crisis: never before has there been the case that 17 largely autonomous governments ( namely the Euro zone) had a common currency.
The reasons for a currency crisis in poor macroeconomic fundamentals are (eg indebtedness of the state ), so that a fixed exchange rate is overvalued drastically. Investors expect a long-term correction of the parity exchange rate and bring their " speculation against the currency " the crisis to a head. This means that they avoid the uncertain currency and invest in safer currencies and into tangible assets ( " capital flight " ), because they expect a devaluation. Precisely this may cause the actual devaluation. Self -fulfilling prophecy ( self-fulfilling expectation) is possible - even if an expectation is only partially based on macroeconomic fundamentals or not.
A banking crisis may trigger a flight from one currency.
Examples
Examples are the dollar crisis in 1971, the so-called " tequila" crisis in Mexico in 1994, the Asian crisis of 1997 or the Brazilian crisis of 1999.
George Soros speculated successfully in 1992 against the British pound ( more details here). The British central bank succeeded - although they took decisive action - not to defend proclaimed by their fixed exchange rate against other major currencies; they announced ( to float = free ) to release the British pound.
Currency crisis models
There are three different approaches to the explanation of currency crises. These three do not compete, but to explain different situations.
First generation models
Against the background of the Latin American debt crisis Paul Krugman designed in 1979 a first model of currency crises, which was further developed by Robert Flood and Peter Garber 1984. The crisis arises, therefore, because of the incompatibility of expansionary fiscal policy and expansionary monetary policy with a fixed exchange rate peg. ( In the case of the Latin American debt crisis, many South American currency had been linked to the value of the dollar. ) The increase in the money supply and high budget deficits led to high rates of inflation. The fixed exchange rate peg prevented a natural exchange rate correction (depreciation). The excessive exchange rate caused persistent current account deficits and consequently reserve currency losses ( current account crisis). In support of the unnatural exchange rate, the central banks had to sell foreign exchange reserves. If the foreign exchange reserves are running low, central banks are forced to release the exchange rate, this causes a sudden massive devaluation of the domestic currency.
Second-generation models ( models dilemma )
Second-generation models differ from those of the first generation by the realization that currency crises are not necessarily caused by unfavorable macroeconomic fundamentals ( unsound monetary and fiscal policy), but can also be caused by a dilemma. The models developed in the context of EMS crisis of 1992-93. The EMS crisis of 1992-93 was a prime example that the defense of an exchange rate target by high interest rates can be economically undesirable increasingly. Here the German Bundesbank had raised the key interest rates to dampen inflation during the unification boom. Since the EWS around a system of foreign exchange spreads, the other EMS countries were either forced against the D - Mark devalue its currency or to stabilize through its own interest rate increases the exchange rate, but thereby causing growth and employment losses in their own country.
The causal relationships declared Barry Eichengreen / Rose / Wyplosz (1995 ), Paul Krugman (1996) and Maurice Obstfeld (1996 ) so that a devaluation expectation exists. This means that speculators and investors deduct capital. This deteriorates the growth and employment situation, there arises a need for an expansionary monetary policy. An expansionary monetary policy in turn increases the probability of a currency devaluation. As soon as the financial market actors are of the opinion that for the government or central bank, the economic policy benefits of currency devaluation outweigh the benefits of a defense of the exchange rate ( reputation), start speculative attacks against the currency. To defend against such attacks, the currency must be supported by increases in interest rates, which the decline of economic growth and employment exacerbated.
Such a currency crisis can already be caused by self-fulfilling expectations, herding and contagion effects. Thus attacks on the currency much less likely if the central bank of the country has operated in the past, a stability-oriented policy. However, it is quite possible that by exogenous shocks, such as a banking crisis, there is a change in the inflation and devaluation expectations. A herd behavior is set in motion that can be poorly informed investors contagious in a good economic environment, the pessimistic behavior of individual investors. The contagion effect ensures that countries are drawn with similar characteristics affected and other fundamental factors are not considered further.
The third generation models
The currency crises of the 1990s ( Tequila crisis, the Asian crisis, Argentine crisis ) could not be explained by the first and second generation models. There were no unfavorable macroeconomic fundamentals still political wrongdoing. There was a suspicion that unsubstantiated devaluation expectations are able to cause a chain reaction of distrust and capital flight. In the case of the Tequila crisis, the overall relatively high external debt of the economy and state could thus be become a problem that debt consisted mainly of short-term loans. Burgeoning mistrust of the credit here led to sharply rising costs for follow-up financing, which in turn many - mostly healthy - company brought in big trouble. As the contributing cause of the Asian crisis greatly exaggerated expectations apply to the economic growth and, consequently, the return on investment. The exchange rate peg of many Asian currencies to the dollar has temporarily aroused the illusion of a low currency risk for foreign investors. First, a lot of foreign capital has been invested in Asia, it came to a sudden reversal of capital flows as panic capital was withdrawn from Asia (balance of payments crisis). One reason was probably that weakly regulated Asian banks based on perceived government guarantees awarded cheap loans to unprofitable projects. Particularly striking was the relationship between banking and currency crises. For example, a banking crisis as well as the precursor of a currency crisis be reversed. As a model variants a distinction between bank -run, moral hazard and balance-sheet models took place.
The third generation models attempt to take account of the fact that it is not just about currency crises in financial crises, but at the same time or immediately thereafter is also about economic crises or financial market crises. These models are summarized in the English literature by the term "twin crises ". Here, the role of current account deficits, government guarantees to banks (even indirectly through the moral hazard problem ) is set and weak financial market structures in conjunction with currency crises in particular.
Giancarlo Corsetti, Paolo Pesenti, Nouriel Roubini, published in 1999 a model based on the moral hazard problem which attempts to represent the financial and currency crisis in Asia macro-economically based. Under the moral hazard problem is understood that an indirect state guarantee scheme for weakly regulated and controlled private financial institutions an incentive to engage in excessive and risky investments.