Currency crisis

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A currency crisis occurs when the external value of a currency can no longer be maintained. The result is a sudden strong devaluation of a currency or the unwanted abandonment of a fixed exchange rate . A currency crisis breaks out when financial market players exit the currency (increase in capital outflows ) and no longer extend loans (decrease in capital inflows). Due to the uncertainty about the economic development in connection with a credit crunch , a currency crisis often leads to a financial and economic crisis .

Actors (for example the government of the respective country and / or the IMF ) can try to fight the currency crisis through monetary and / or economic policy . The central bank is fighting a currency crisis with a restrictive monetary policy .

reasons

The reasons for a currency crisis can lie in poor macroeconomic fundamentals (e.g. over-indebtedness of the state), so that a fixed exchange rate is drastically overvalued. Investors expect a correction of the parity rate in the long term and bring about the outbreak of the crisis with their “ speculation against the currency”. This means that they avoid the uncertain currency and invest in safer currencies or in real assets (" capital flight ") because they expect devaluation. This can trigger the actual devaluation. Self-fulfilling prophecy ( self-fulfilling expectation) is possible - even if an expectation is not or only partially based on macroeconomic fundamentals.

A banking crisis can trigger an escape from a currency.

Examples

Examples are the dollar crisis in 1971, the so-called “ tequila crisis ” in Mexico in 1994, the Asian crisis in 1997 or the Brazilian crisis in 1999.

George Soros successfully speculated against the British pound in 1992 (details here ). The British Central Bank did not succeed - although it took decisive measures - in defending the fixed exchange rate it had announced against other major currencies; it announced that it would release the pound rate (=  let it “float” freely).

Currency crisis models

There are three different approaches to explaining currency crises. These three do not compete with each other, but are intended to explain different situations.

First generation models

Against the background of the Latin American debt crisis , Paul Krugman designed a first model of currency crises in 1979, which was further developed in 1984 by Robert Flood & Peter Garber . The crisis arises because of the incompatibility of an expansive fiscal policy and an expansive monetary policy with a fixed exchange rate peg . (In the case of the Latin American debt crisis, many South American currencies were pegged to the value of the dollar.) The increase in the money supply and large budget deficits led to high inflation rates. The fixed exchange rate peg prevented a natural exchange rate correction ( devaluation ). The excessively high exchange rate caused persistent current account deficits and consequently currency reserve losses ( current account crisis ). The central banks had to sell foreign currency reserves to support the unnatural exchange rate. When the foreign exchange reserves run out, the central banks are forced to free the exchange rate, which causes a sudden massive devaluation of the domestic currency.

Second generation models (dilemma models)

Second-generation models differ from those of the first generation in that they recognize that currency crises are not necessarily caused by unfavorable macroeconomic fundamentals (unsound monetary and fiscal policy), but can also arise from a dilemma. The models emerged against the background of the EMS crisis from 1992 to 1993. This crisis was a prime example of how the defense of an exchange rate target by means of high interest rates can become increasingly undesirable in terms of economic policy. Here the Deutsche Bundesbank had raised the key interest rate in order to dampen inflation during the unification boom. Since the EMS provided for a system of exchange rate ranges, the other EMS countries were forced either to devalue their own currency against the D-Mark, or to stabilize the exchange rate through their own interest rate increases, thereby causing growth and employment losses in their own country.

Barry Eichengreen / Rose / Wyplosz (1995), Paul Krugman (1996) and Maurice Obstfeld (1996) explained the causal relationships with the fact that there is an expectation of devaluation. This leads to speculators and investors withdrawing capital. This worsens the growth and employment situation and there is a need for an expansive monetary policy. An expansionary monetary policy, in turn, increases the likelihood of currency devaluation. As soon as the financial market players are of the opinion that the economic policy advantages of a currency devaluation outweigh the advantages of defending the exchange rate (reputation) for the government or central bank, speculative attacks against the currency begin. In order to ward off such attacks, the currency must be propped up by rate hikes, which exacerbates the decline in economic growth and employment.

Such a currency crisis can already be caused by self-fulfilling expectations, herd behavior and contagion effects. Attacks on the currency are much less likely if the country's central bank has pursued a stability-oriented policy in the past. However, it is quite possible that exogenous shocks such as B. a banking crisis leads to a change in inflation and devaluation expectations. Herd behavior is set in motion when poorly informed investors in a good economic environment allow themselves to be infected by the pessimistic behavior of individual investors. The contagion effect means that countries with similar characteristics are affected and that other fundamental factors are not taken into account.

Third generation models

The currency crises of the 1990s ( tequila crisis , Asian crisis , Argentina crisis ) could not be explained by the models of the first and second generation. There were no unfavorable macroeconomic fundamentals or political misconduct. The suspicion arose that unfounded expectations of devaluation are also capable of causing a chain reaction of distrust and capital flight. In the case of the tequila crisis, the relatively high overall foreign debt of the economy and the state could have become a problem because the debt consisted mainly of short-term loans. Growing suspicion of creditworthiness led to sharply rising costs for follow-up financing, which in turn brought many - mostly healthy - companies into great difficulty. The main cause of the Asian crisis are greatly exaggerated expectations of economic growth and, consequently, of the return on investments. The pegging of many Asian currencies to the dollar has temporarily created the illusion of a low currency risk among foreign investors. At first a lot of foreign capital was invested in Asia, then there was a sudden reversal of capital flows when capital was withdrawn from Asia in a panic ( balance of payments crisis ). One reason was probably that weakly regulated Asian banks were granting cheap loans for unprofitable projects, based on supposed state guarantees. The connection between banking and currency crises was particularly striking. A banking crisis can just as easily be a precursor to a currency crisis as it is the other way around. A distinction was made between bank run, moral hazard and balance sheet models as model variants.

Third-generation models try to take into account the fact that financial crises are not just currency crises, but also economic crises or financial market crises at the same time or immediately afterwards. These models are summarized in the English-language literature under the term "twin crises". In particular, the role of current account deficits, government guarantees for banks (also indirectly via the moral hazard problem) and weak financial market structures are linked to currency crises.

In 1999, Giancarlo Corsetti , Paolo Pesenti , Nouriel Roubini published a model which, based on the moral hazard problem, tries to represent the financial market and currency crisis in Asia in a macroeconomic way. The moral hazard problem is understood to mean that an indirect state guarantee system provides an incentive for weakly regulated and controlled private financial institutions to engage in excessive, risky investments.

See also

literature

  • Otmar Emminger : D-Mark, dollar, currency crises. Memories of a former Bundesbank President . Deutsche Verlags-Anstalt, Stuttgart 1986, ISBN 3-421-06333-8 . (Note: Emminger was President of the Deutsche Bundesbank from July 1, 1977 to December 31, 1979.)

Web links

Individual evidence

  1. ^ A b c Rolf Caspers: Balance of payments and exchange rates. Oldenbourg Wissenschaftsverlag, 2002, ISBN 978-3486259247 , pages 113-114.
  2. ↑ a b Michael Heine, Hansjörg Herr: Economics: Paradigm-oriented introduction to micro- and macroeconomics. Walter de Gruyter, 2013, ISBN 9783486717501 , p. 726.
  3. ↑ Aschinger: Currency and Financial Crises, pp. 145–146.
  4. ↑ Resinek: International Financial Crises: Causes, expiration, prevention - lessons of the Asian crisis, pp 19-27.
  5. ^ A b Rolf Caspers: Balance of payments and exchange rates. Oldenbourg Wissenschaftsverlag, 2002, ISBN 978-3486259247 , page 115.
  6. ↑ Greßmann: Currency crises, pp. 44–45.
  7. ^ Roberto Chang and Andrés Velasco: Financial Crises in Emerging Markets: A Canonical Model. Federal Reserve Bank of Atlanta. In: Working Paper 98-10, 1998.
  8. ^ Graciela L. Kaminsky and Carmen M. Reinhart: The Twin Crisis: The Causes of Banking and Balance-of-Payment Problems. In: International Finance Discussion Papers, No. 544, Board of Governor of the Federal Reserve System, 1996.
  9. ↑ Martin Schneider and Aaron Tornell: Balance Sheet Effects, Bailout Guarantees and Financial Crises. In: NBER Working Paper 8060, 2000.
  10. ↑ Jorge A. Chan-Lau and Zhaohui Chen: Financial Crisis and Credit Crunch as a Result of Inefficient Financial Intermediation - with Reference to the Asian Financial Crisis. In: IMF Working Paper 98/127, 1998.