The “Current Account crisis” is a particular type of external debt crisis that affects mostly low-income developing countries. It is characterized by a huge deficit in the current account balance which provokes a Balance of payments deficit and a currency crisis. A current account crisis occurs generally in low-income developing countries. It is most of all the result of bad macroeconomic policies. These countries have a large current account deficit, principally due to a trade deficit – because they are mostly net importers - and a fiscal deficit. Moreover, they generally have a high rate of inflation, in part because they try to finance their growing deficit by monetization. That leads to a loss of international price competitiveness. Indeed, they are under fixed exchange rate and the inflation makes the rate overvalued. Furthermore, the government dominates the economy. It is the major borrower; the private sector is underdeveloped and inactive. The consequence is a limited capital flow and the external debt is mostly a public debt.
[...] The short term sustainability depends mostly of the economy adjustment to the situation. Indeed, a slow decline by an increase of its exports will stimulate the aggregated demand the difference between exports and imports - and thus the economy's production. A sudden adjustment will result on a sharp depreciation of the dollar if investors decide suddenly to reduce their saving that go to the US or to repatriate part of their liquid capital. A loss of investors' confidence in the economy's ability to service its debt - or to repay the principal - will thus conduct to an increase of the supply of dollar in the foreign exchange market. [...]
[...] Indeed, despite its position of debtor, the nation remains the largest FDI recipient of the world. Even if its portfolio balance and the foreign private sector investments are decreasing, its revenues on foreign assets are increasing. This permits the country to offset. Thanks to a current account and a capital account completely opposed, the United States is able to manage its deficit (cf. chart.3). To date, debt service has not been burdensome thanks to this difference of yield between US assets abroad and foreigners' assets in the US. [...]
[...] It could be financed with a strong capital inflow but it is unlikely in economies with weak policy discipline. As a consequence, the international reserves decreases, the Balance of payments looks unsustainable and the country has no choice but ask for IMF support. II. General situations of the United States before August 2007 The United States has since the 1970's, with an important aggravation in the 1980's, a huge current account deficit. It is the largest in the world and historically. [...]
[...] A premature and mismanaged financial integration will lead to over borrowing. We can also consider the debate on “Moral Hazard”, which could lead the country to excessive risk-taking because of the existence of an insurance mechanism, the IMF. Contrarily to countries prone to current account crisis, we saw in the lecture that, as private sector developed, it became the major borrower. The external debt was no longer contracted by the government. In Indonesia for instance foreign borrowing was undertaken largely by firms. [...]
[...] Their incapacity of financing their deficit leads them to accumulate external debt and thus interest payments. This deficit it partially financed by capital flows from concessionary ODA grants and loans plus inward FDI. As for the capital account, it is in surplus because of theses foreign capital inflows despite a government debt in the portfolio balance. The current account and the capital account have thus opposite signs, as we can see for Cambodia during the pre-crisis period (chart.1). Nonetheless, the surplus in capital account generally does not offset the deficit in the current account, which is increasing, and the overall balance of payments is likely to be in deficit. [...]
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