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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
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