When a country's central bank lacks the foreign reserves to maintain a fixed exchange rate
A currency crisis is a type of financial crisis, and is often associated with a real economic crisis. A currency crisis raises the probability of a banking crisis or a default crisis. During a currency crisis the value of foreign denominated debt will rise drastically relative to the declining value of the home currency. Generally doubt exists as to whether a country's central bank has sufficient foreign exchange reserves to maintain the country's fixed exchange rate, if it has any.
The crisis is often accompanied by a speculative attack in the foreign exchange market. A currency crisis results from chronic balance of payments deficits, and thus is also called a balance of payments crisis. Often such a crisis culminates in a devaluation of the currency. Financial institutions and the government will struggle to meet debt obligations and economic crisis may ensue. Causation also runs the other way. The probability of a currency crisis rises when a country is experiencing a banking or default crisis,[1][2] while this probability is lower when an economy registers strong GDP growth and high levels of foreign exchange reserves.[3] To offset the damage resulting from a banking or default crisis, a central bank will often increase currency issuance, which can decrease reserves to a point where a fixed exchange rate breaks. The linkage between currency, banking, and default crises increases the chance of twin crises or even triple crises, outcomes in which the economic cost of each individual crisis is enlarged.[4]
Currency crises can be especially destructive to small open economies or bigger, but not sufficiently stable ones. Governments often take on the role of fending off such attacks by satisfying the excess demand for a given currency using the country's own currency reserves or its foreign reserves (usually in the United States dollar, Euro or Pound sterling). Currency crises have large, measurable costs on an economy, but the ability to predict the timing and magnitude of crises is limited by theoretical understanding of the complex interactions between macroeconomic fundamentals, investor expectations, and government policy.[5] A currency crisis may also have political implications for those in power. Following a currency crisis a change in the head of government and a change in the finance minister and/or central bank governor are more likely to occur.[6]
A currency crisis is normally considered as part of a financial crisis. Kaminsky et al. (1998), for instance, define currency crises as when a weighted average of monthly percentage depreciations in the exchange rate and monthly percentage declines in exchange reserves exceeds its mean by more than three standard deviations. Frankel and Rose (1996) define a currency crisis as a nominal depreciation of a currency of at least 25% but it is also defined at least 10% increase in the rate of depreciation. In general, a currency crisis can be defined as a situation when the participants in an exchange market come to recognize that a pegged exchange rate is about to fail, causing speculation against the peg that hastens the failure and forces a devaluation or appreciation.[citation needed]
Recessions attributed to currency crises include the hyperinflation in the Weimar Republic, 1994 economic crisis in Mexico, 1997 Asian financial crisis, 1998 Russian financial crisis, the 1998–2002 Argentine great depression, and the 2016 Venezuela and Turkey currency crises and their corresponding socioeconomic collapse.
^Kaminsky, Graciela L.; Reinhart, Carmen M. (1999). "The Twin Crises: The Causes of Banking and Balance-of-Payment Problems". American Economic Review. 89 (3): 473–500. CiteSeerX 10.1.1.321.5821. doi:10.1257/aer.89.3.473. S2CID 5960798.
^Reinhart, Carmen M. (2002). "Default, Currency Crises, and Sovereign Credit Ratings" (PDF). World Bank Economic Review. 16 (2): 151–170. doi:10.1093/wber/16.2.151.
^Camba-Crespo, Alfonso; García-Solanes, José; Torrejón-Flores, Fernando (7 July 2021). "Current-account breaks and stability spells in a global perspective". Applied Economic Analysis. 30 (88): 1–17. doi:10.1108/AEA-02-2021-0029. S2CID 237827555.
^Feenstra, Robert Christopher; Taylor, Alan M. (2014). International Macroeconomics (3rd ed.). Macmillan Learning. p. 352. ISBN 9781429278430.
^Federal Reserve Bank of San Francisco, Currency Crises, September 2011
^Frankel, Jeffrey A. (2005). "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries". IMF Staff Papers. 52 (2): 149–192. doi:10.2307/30035893. S2CID 154951242.
A currencycrisis is a type of financial crisis, and is often associated with a real economic crisis. A currencycrisis raises the probability of a banking...
of foreign debt. As the crisis spread, other Southeast Asian countries and later Japan and South Korea saw slumping currencies, devalued stock markets...
could not have triggered the crisis. This remark hugely increased pressure on the pound leading to large sterling sales. Currency traders began a massive sell-off...
The euro (symbol: €; currency code: EUR) is the official currency of 20 of the 27 member states of the European Union. This group of states is officially...
devalue its currency due to accruing an unsustainable current account deficit, this is called a currencycrisis or balance of payments crisis. When a country...
Currency substitution can be full or partial. Full currency substitution can occur after a major economic crisis, such as in Ecuador, El Salvador, and Zimbabwe...
The 2023 Nigerian currencycrisis was precipitated by a shortage of cash currency (the naira) and an attempt by the Nigerian government to force citizens...
in which a currency's value is fixed or pegged by a monetary authority against the value of another currency, a basket of other currencies, or another...
back its debt, and then increase foreign reserves to revalue its currency. The crisis happened because Russia was not able to pay back its debt. Since...
bank. Lebanon's crisis was worsened by United States sanctions targeting Syria's government and Iran-backed Hezbollah. The currency has been devalued...
the local currency. The increased supply of currency coupled with an increased demand then causes a significant devaluation of the currency. This hurts...
version of the state currency, was officially launched in Nigeria by President Muhammadu Buhari. The 2023 Nigerian currencycrisis was precipitated in...
The Mexican peso crisis was a currencycrisis sparked by the Mexican government's sudden devaluation of the peso against the U.S. dollar in December 1994...
opportunity to force its policies upon developing countries. The crisis was caused by currency overvaluation; the current account deficit, and investor confidence...
The rupiah (symbol: Rp; currency code: IDR) is the official currency of Indonesia, issued and controlled by Bank Indonesia. Its name is derived from the...
to defend a weak currency (a currency in low demand) is limited, a currencycrisis or devaluation could be the result. For a currency in very high and...
The 1976 sterling crisis was a currencycrisis in the United Kingdom. Inflation (at close to 25% in 1975, causing high bond yields and borrowing costs)...
A reserve currency is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign...
TRY; abbreviation: TL) is the official currency of Turkey and Northern Cyprus, as well as one of the two currencies used in northern Syria under the country's...
Zealand constitutional crisis of 1984 arose following the 1984 general election, and was caused by a major currencycrisis. The crisis led the incoming government...
States dollar (symbol: $; currency code: USD; also abbreviated US$ to distinguish it from other dollar-denominated currencies; referred to as the dollar...
Financial crisis and economic collapse Currencycrisis, hyperinflation and devaluation Banking crisis, credit crunch, bank run Savings and loan crisis Balance...
only currency that should be allowed to circulate was the currency that they issued themselves. Anticipating the introduction of a new currency by the...
body of government. an economic crisis which can range from or include a possible financial crisis, currencycrisis, or any economic shock, or any breakdown...
is the rate at which one currency will be exchanged for another currency. Currencies are most commonly national currencies, but may be sub-national as...
An energy crisis or energy shortage is any significant bottleneck in the supply of energy resources to an economy. In literature, it often refers to one...
short term foreign loans led the Korean economy to suffer from the currencycrisis, as foreign reserves were insufficient to deal with financial stability...
Global Information