2. The imbalance in the current account and the way in which it is financed is at the center of Brazilian devaluation of January 1999, and more recently Argentina’s financial and currency crisis of 2002. Analysis of factors influencing current account behavior pre-crisis should reveal valuable insight in preventing or reducing severity of financial crisis in an economy.

3. Literature Various studies have looked into the causes of the financial crises, see for example Kowai, et al (2001), Kaminsky, et al (1999), Summers (1999), Furman, et al (1998), Kowai (1998), Krugman (1998), Whitt (1998), McKinnon, et al (1996), Obstfeld, et al (1986), Radelet, et al (1998a), Radelet, et al (1998b), and Perry and Lederman (1999)

4. According to Cosetti et al (1999) and Homaifar (2004) countries with severe devaluations in 1996-97, experienced huge imbalance as reflected in their high current account deficit in the 1990s financed primarily with short-term credit.

5. Causes of Financial crises S E Asia Rigid exchange rate mechanism Moral hazard associated with financial intermediaries Lack of transparency Lax regulation Capital account liberalization

6. The effects Widening current account deficit Asset price inflation (bubble in equity and real estate prices Appreciation of real exchange rate Rising roll-over risk Export slow down Mismatch of revenue & cost (unhedged exposure to currency risk) Interest rate risk

7. Research Objectives The central hypothesis of this paper is to analyze current account as a percentage of GDP as a function of economic fundamentals for selected South American economies over the period of 1990-2003. The countries in the sample are Argentina, Brazil, and Chile. Research hypotheses: H1: As a country’s current account deteriorates the nominal exchange rate devalues. H2: As a country’s current account deteriorates the real exchange rate appreciates. H3: As the ratio of a country’s short term loans owed to major foreign banks over international reserves increases over 100 percent rollover risk rises. H4: The forward exchange and forward interest rates are inversely related to the ratio of current account/GDP; ? Ambiguous