Question

Discuss the Argentinian Peso crisis and the Asian currency crisis. What did they have in common, and how did they differ? Why did they collapse? What two unique elements of the peso crisis are not normal to most currency crisis? Discuss the common components of most crisis, and what would be expected to occur under floating exchange rates given similar circumstances

Answer 1

Asian Currency crisis :

Asian currency crisis means

It is Series of Currency Devaluations and other instances which started in 1997 and spread through Asian Markets

Due to currency markets failed in Thailand as their currency will not accept to USD

Currency declines rapidly and lead to reduction in stock market prices, reduction in import income, government up heal.

Due to Devaluation In Thailand currency most of east Asian countries currency rates falls and lead to decline in international stocks

Argentinian Peso crisis

Argentina is referred as a most model state because of its fixed exchange rate regime devoid all speculative tendencies.

In 2000's , Argentina external debt as a percentage of GDP and Debt service ratio indicated it was the worst period compared to its Neighbour countries. Its % is around 75.8.

In 2001, due to several macro Economic reasons as mentioned below - the economy got collapsed.

Fixed Exchange rate regime.

High external DEBT

High Debt service ratio

Common Points

The first common feature is that many countries fell in to Crisis Adopted - "FIXED EXCHANGE RATE REGIME or DOLLAR PEG"

Fixed currency rate system tends to make domestic currency overvalued unless he inflation is completely controlled. The excess dollar supply in exchnage markets produces pressure for overvaluation.

Many countries experinced financial instability before the currency crisis occurred. Durinf PESO crisis, Mexican banking sector is vulnerable due to liberalizatioon and privitization of financial sector.

Heavy dependence of SHORT TERM CAPITAL inflows

Difference

Current Account deficit is one of the most important signs for crisis, it is different for all countries.

Differences in level of foreign reserves among countries when Crisis happened.

INVESTORS who are responsible for capital flights are different.

Type of booms are different among countries.

Timing of IMF rescue package are different depending on countries.

Why did they Collapse?

Many countries fell in to Crisis Adopted - "FIXED EXCHANGE RATE REGIME or DOLLAR PEG"

Fixed currency rate system tends to make domestic currency overvalued unless he inflation is completely controlled. The excess dollar supply in exchnage markets produces pressure for overvaluation.

Many countries experienced financial instability before the currency crisis occurred. During PESO crisis, Mexican banking sector is vulnerable due to liberalizatioon and privitization of financial sector.

Heavy dependence of SHORT TERM CAPITAL inflows