Debt Crises

Basic Cause:  A governments (or central bank) runs out of money and/or can no longer pay its debts

Sources of Debt Crises
    •Current accounts deficits
        -Does the cause of the deficit matter?
    •Banking crises
        -Bubbles
        -Runs
    •Declines in government revenue
        -Either actual or projected
    •Declines in confidence

Argentina 2001
    •From hyperinflation to a currency board
    •Deflation, recession, and provincial government spending
    •Freeing the Peso, freezing accounts
    •The role of the IMF, the role of domestic politics
    •Who pays for devaluation?
    •Brazil and Uruguay

Other Recent Crises
    •Turkey in 2000-2001, and East Asia in 1997
        -Current accounts deficits and financial bubbles
    •Mexico in 1982 and 1994
        -The de-banking of developing country debt
        -The increase in domestic debt
        -Globalization and the importance of confidence

Crises and Responses
    •The costs and benefits of participating in the international financial system
        -How can a country raise capital?
        -What should the responsibility of lenders to irresponsible debtors be?
    •The role of the IMF and of the US
        -Contagion versus moral hazard
        -Crisis resolution versus long-term viability