Occurs when a speculative attack on the exchange value of a currency results in a devaluation or sharp depreciation of the currency. Often forces government to defend the currency by expending large volumes of international reserves and/or by sharply raising interest rates.
1971: The U.S. suspended gold convertibility because its foreign dollar liabilities exceeded its gold holdings 1973: The U.S. devalued the dollar and then floated it : After a period of currency turbulence in Europe, the European Economic Union was established, and the Euro eliminated the former currencies of each member country. 4
Severe disruption in financial markets that, by impairing a market’s ability to function effectively, may result in significant adverse effects on economic activity.
1980s: The U.S. changed the way it managed monetary policy from targeting interest rates to targeting money supply growth, causing U.S. interest rates to rise sharply 1997: A financial crisis in Southeast Asia caused strong capital outflows 2000s: Early in the decade, the technology stock market bubble in the U.S. burst, affecting overseas economies 2007: A real estate crisis in the U.S., centered on the sub-prime mortgage industry, spread to global investors who had purchased the mortgage debts. 6
When a country cannot service its foreign debt, whether sovereign or private. 2009
: Most of the rapidly growing emerging market economies could not make their foreign debt service payments, causing major foreign debt defaults and bank loan write-offs, loan restructuring, and foreign debt swaps. 1997: The Asian financial crisis resulted in foreign debt restructurings 2010: Greece’s debt crisis in the EuroZone 8
When actual or potential bank runs or failures cause banks to suspend the internal convertibility of their liabilities, compelling the government to intervene to prevent this by extending large-scale assistance. Banking crises are significantly worse than currency crises because they last longer and it typically takes at least 3 years or longer before real GDP returns to its normal rate of growth.
1980s: U.S. Interest rates rose sharply, causing the failure of about one- third of the banks in the U.S. 1990s: The Japanese government was forced to rescue Japanese banks by purchasing their substantial nonperforming loans. 10