Currency crises have been extensively analyzed over the last 30 years and a recurring conclusion is that these crises are often coupled with banking crises. In fact, many of the currency crises are precipitated by a internal banking crisis. The internal shock spills over to the demand for the currency through a change in expectations on the sovereign risk of the country and the expectation that a there will be a slowdown in growth.
The banking crises will have different lengths but the end result has often been the nationalization or recapitalization of the bank system. This government bail-out restores confidence for investors both domestic and foreign. We look like we are heading down this path in the US except the form of the bank bail-out is still not clear and we may not have not seen the end of the currency run.
The banking crises will have different lengths but the end result has often been the nationalization or recapitalization of the bank system. This government bail-out restores confidence for investors both domestic and foreign. We look like we are heading down this path in the US except the form of the bank bail-out is still not clear and we may not have not seen the end of the currency run.
A good example to compare the current US currency crisis is the Scandinavian banking and currency crisis of the early 1990's. There was a combination of an overheated real estate market, liberalization of financial regulation, and pro-cyclical government policies which led to overvaluation in real estate. When a recession hit the economy, the banking system especially for those institutions with heavy real estate exposure saw a huge erosion of capital. The bail-out cost approximately 3% of GDP.
The Swedish currency saw a 60% change in the currency in about 18 month. Now Sweden is a small open economy so that any shock may have a greater impact on the currency than what may occur in the US but we should not be at all surprised if we see a dollar slide that continues into 2009 if there is uncertainty on whether the current bail-out plan will work.
The Swedish currency saw a 60% change in the currency in about 18 month. Now Sweden is a small open economy so that any shock may have a greater impact on the currency than what may occur in the US but we should not be at all surprised if we see a dollar slide that continues into 2009 if there is uncertainty on whether the current bail-out plan will work.
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