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Now you are just making things up. Currency crash?
by IM on Thu Sep 8th, 2011 at 01:01:14 PM EST
[ Parent ]
When googling for a definition of currency crash, Google helpfully suggest that I look to the definition of  suggest Currency Crises instead.

Currency Crises, Krugman

There is no universally accepted definition of a currency crisis, but most would agree that they all involve one key element: investors fleeing a currency en masse out of fear that it might be devalued, in turn fueling the very devaluation they anticipated. Although such crises--the Latin American debt crisis of the 1980s, the speculations on European currencies in the early 1990s, and the ensuing Mexican, South American, and Asian crises--have played a central role in world affairs and continue to occur at an alarming rate, many questions about their causes and effects remain to be answered.

I think the scenario goes like this:

  1. ECB denies euros to banks of CA deficit country, as they have threathened to, effectively trying to kill the banking sector of that country.
  2. CA deficit country must change currency in order to have the banking system working.
  3. That currency falls sharply against the euro, worsening the CA deficit. This is the crash part.
  4. CA deficit country must balance their CA quickly. This will probably include rationing and other drastic actions.


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by A swedish kind of death on Thu Sep 8th, 2011 at 03:24:11 PM EST
[ Parent ]
Mechanically speaking, a currency crash is a run on a country's hard currency reserves. Since the €-Mark is hard currency for €-zone members (thanks to the ECBuBa's idiocy), a systemic bank run would be a currency crisis in every way that matters.

Of course, once you have to ration hard currency anyway, you might as well take the opportunity to repudiate your hard currency debts completely and exit from the €-zone. But that's a consequence rather than a cause of the run on the country's hard currency reserves.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Sep 9th, 2011 at 10:21:26 AM EST
[ Parent ]
So the currency crisis occurs in 1.

Am I wrong to assume that the exit would (likely) trigger a continued run for some time - say at least a couple of months? Markets appear a lot like herd animals to me, hard to stop once they get stampeeding in one direction or another.

Sweden's finest (and perhaps only) collaborative, leftist e-newspaper Synapze.se

by A swedish kind of death on Fri Sep 9th, 2011 at 12:44:07 PM EST
[ Parent ]
An exit from the €-Mark would involve some pretty epic defaults. If the Russian and Argentinian experiences are anything to go by, it takes 12-18 months for the hysterical children to calm down after something like that.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Sep 10th, 2011 at 03:09:45 AM EST
[ Parent ]
Mechanically speaking, a currency crash is a run on a country's hard currency reserves. Since the €-Mark is hard currency for €-zone members (thanks to the ECBuBa's idiocy), a systemic bank run would be a currency crisis in every way that matters.

May I point out that the run is already underway and has been for many months?

Back in May 2011:

German banks target worried Greeks in Germany

Greeks worried about a debt restructuring or a euro exit increasingly transfer their money to banks abroad, Bild-Zeitung reports. According to the mass circulation tabloid German banks such a savings bank in Munich have posted signs in their windows advertising in Greek and German that Greek costumers will be advised in Greek. According to the paper €30bn have already been transferred from Greece abroad since the crisis started.

Of course this puts a strain on the Greek banks which only increases their dependence on the ECB. For Greeks, another of the refuges, apart from Germany, was Cyprus which has always acted as an offshore banking center for Greece. Now Cyprus is in its own crisis.

But it's not just Greece and it's not just since last year. Remember these charts by Martin Wolf?

The top left chart indicates that the ECB has accumulated large claims on other central banks - this is the result of money flowing from the periphery to the core. Nothing surprising there, as the trade imbalances are structural and have persisted over the entire life of the Euro. However, the top-right chart indicates that the claims among central banks have developed only since the financial crisis started in 2007/8. So it's not  result of trade imbalances as one might have guessed, but of flight to safety.

And now, as we know, not even Euro assets in Germany are "safe" enough and people are piling on the Swiss Franc or (after the Swiss National Bank had enough of the Eurozone exporting deflation to it) to the Norwegian Krone.

So, yes, the run on the Eurozone banking system is well underway. It was bad enough in April already for

Bundesbank open to capital controls as a last line of defence

Bundesbank board member Andreas Dombret told Börsenzeitung that capital controls can be introduced by countries as "a last line of defence". "If they are used, it should be done temporarily and in a transparent and targeted manner", Dombret said. In combating high inflows of capital countries need to define a hierarchy of things to do. "If after that the inflows persists, capital controls can be considered", Dombret said. Capital controls were up until very recently a taboo and have only been proposed last week by the IMF in a position that was controversial among certain member states.

But he's talking about inflows of capital. Is he talking about Switzerland, rather than, say, Greece?

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Sep 10th, 2011 at 04:49:39 AM EST
[ Parent ]
The top left chart indicates that the ECBBundesbank has accumulated large claims on other central banks

Economics is politics by other means
by Migeru (migeru at eurotrib dot com) on Sat Sep 10th, 2011 at 05:18:24 AM EST
[ Parent ]

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