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Critical Thinking: Currency Crisis: Cause and Resolution

7 pages
1880 words
Sewanee University of the South
Type of paper: 
Critical thinking
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A currency crisis is a situation where a nation's currency drops in value. Currency is thought to be devalued when it has lost value in comparison to other countries in the international foreign exchange market. Currency devaluation is often due to a nation's monetary policies and often affects the neighboring countries. Currency devaluation diminishes the value of nations domestic output. It is a problem that has been faced by many countries, below is an in-depth analysis of such occurrences and their effects on a nation and the global community.

The decline in currency value affects an economy undesirably by producing fluxes in exchange rates; this is to mean that a single unit of the currency no longer purchases as much as it used to in another currency. This means that any goods or services imported will cost more. Serious doubt will exist as to whether a republic's central bank has adequate foreign exchange monies to preserve the nation's static exchange rate (Dabrowski, 2012, p.88). This could result in a declined trade with other states as they feel their export volumes will decrease. In other words, the devaluation brings about crises between investor opportunities and what those opportunities might lead to happen. Large and sudden devaluation may worry international investors. And it makes them less prepared to have government debts as it drastically reduces the value of their assets.

Despite the demerits associated with devaluation, it can benefit the economy by facilitating the increase of its export volume. Equally, import volumes become restrained as the fee for foreign-produced goods and services upsurges drastically. Also in accordance to (Goldfajn & Gupta, 2003) weakening of the currency might essentially strengthen the economy, as a weaker exchange will upsurge production in a country, this, in turn, will increase employment opportunities in the export sector and raise the economic progression.

The Escalation for the demand for domestic goods and services increases production, prompting the economic growth. The international demand for a republic's commodities is important for improving the economic growth. As well as to increase demand for commodities produced domestically in the foreign markets. Eye-catching prices of these goods make them more attractive to consumers. A larger margin of exports could lead to an enhancement in account deficit. This is significant if the nation has a great current account deficit primarily due to the lack of competitiveness.

It all started at the beginning of 1994 when the Turkish economy was found in a financial crisis which affected the economy of the entire country (Ozatay, 2000). The economic growth of the country was found to decline by 6%. Turkish officials, in the 1980s, made a rebellion such that there were arguments about the full membership in the EU until date since its joining the EU is prospected to have large impacts even in the macroeconomic structures of the country and the EU it belongs to (Ertugrul & Selcuk, 2001). Research made by on the impacts of Turkish accession to the EU have led to conclusions that the most beneficial scenario of the countrys economy on the grounds of its productions and domestic trades is full membership in the EU (Bekmez, 2002). As in any financial crisis, it is told that tight money can either attract funds or repel them depending on the expectations of rising interest rates. An elastic expectation fan leads to fear of currency fall and a decrease in discount rates attracting external funds and poor liquidity hence, the need to use then keep money (Akyurek, 2003; Alper, 2001).

Source of the crisis.

The root source of the crisis was the combination if a fragile banking sector and various factors that led to the transparency of the fragility (Ozatay & Sak, 2002). Currency crisis dates back in 1990 when Turkey presented to the IMF for conversion of its currency. Ten years later, just an exchange rate system operated and at the beginning of the 21st century, Turkey signed with the IMF, agreeing to start stabilizing on one among the strongholds which was a crawling peg exchange rate time (Kawai, 2002). Through this strategy, Turkey found the exit strategy publicly known even before implementation if the program and hence in a year and a half, exchange rates fell and hence collapsing, later on, making the Central Bank allow the lira to float on its own, making the dollar inflate to even rates of 300 thousand liras daily.

There was a weakness in the banking system and hence, not a surprise that some factors that triggered crisis were entailed in banking and were ways of upholding debt instruments formats (Ozatay & Sak, 2003). Some of the factors that triggered the crisis led even to the cutting off credit lines. One of these factors is the delay in structural reforms which were a major component of the agreement signed between Turkey and IMF. In the same context, the IMF started to enable policies that aimed at making Turk Telecom a private business within the Turkish commercial code, creating a regulatory body (Ekinci, 2000). However, none of the laws was provided. However, in late 2000, a Board of the Banking Regulation and Supervision Agency was fully operational even though there were fears of the loss of credibility.

The source of the crisis was also attributed to uncertainty due to insufficient administrative and political leadership of the program created. Due to this factor, the details were consolidated leading to a great influence especially to the public and hence, a myriad dichotomy in the banking system.

In November 2000, there was turbulence as a result of the fragile banking sector making it hard for various banks to issue debts to the government for long periods (Ekinci & Erturk, 2007). The Central Bank was even unable to lead to the Debirmark as limited by IMF. As a result, Debirmark sold its portfolio to the government and stopped acting in the market.

After the crisis in November 2000, there was a new problem associated with contradictions amongst the interest rate levels and rates of fall of the Turkish currency. Through the aftermath, there were queries concerning debts rollover for the treasury even before the target marker of Turkish government went at stake. (Celasun And Rodrik, 1990). It came to a place when the upper limited of the yearly rate of fall of the Turkish currency as compared to the Euro being 12% in 2001. As a result, the Treasury could not even afford to seek any amount less than 57% in annual compounds. However, just the following month, the interest rate increased to 70%, a very hectic situation for the country. It was the interest rates that were expected to decline to a level that was as concise as the rate of fall that led to the collapse.


At the very end, Russia, Brazil, and Argentina were seen to repay their IMF loans, leaving Turkey as the large debtor as at 2006 (Ito, 2007). The effects of the second crisis dating back 2000-2001 were more severe than the first.

Turkey just began it implement the IMF supported program eve 2000. Through the program, macroeconomic imbalances were created, creating some success in reversing the negative trend (Calvo, 1996). Presently, an account brokerage and actual rise of the lira is an issue of ultimate concern. To prevent such issues, instances of external shock-rising oil prices can be determined, from where there can be analyzed a built-in strategy that is the main contributor to appreciation of the currency. There are also risks regarding compiling in various banking systems and in the periods of the crisis and which can lead to an increase in currency and from which maturity can lead to a mismatch and rise in borrowed money (Ozkan, 2005).

The other resolution that could be made would regard the way of financing of a banking system. As evident from the 1990s, there were no linkages regarding inflation and debts. These deficits can, however, be solved through such a program that was created between the IMF and Turkey that can reduce borrowing requirements. It can be realized that the upward trend in government debts instrument portfolios on the bans can increase the vulnerability of the banking system, hence the need for avoidance (Calvo and Vegh 1997).

Banking crises have been realized by macroeconomists while currency crises by macroeconomists. However, considering the fragility of the banking sector, sudden breakdowns are not experienced. To curb the crisis, fragility should be effectively linked to the magnitude of the effects of shocks that can impact a particular sector. It is true that the little bank cash and principal rations and high input ratios are signs of a weak market in sustaining the expected shocks. However, there are government interventions that are introduced to protect some of a banks claimholders. In the past, the guarantees by the government were poorly designed leading o fragility so that there were frequent and costly breakdowns. Today, government interventions are becoming more accurate, and also, many countries are introducing programs of financial deregulation just as Turkey is s that the influence of market forces can be effected. However, such changes are meant to be implemented as soon as underpinnings permitting market forces are effected to operate in an efficient and successful way. An absence of either an effective market or an effective regulatory discipline, various breakdowns can lead to an increased magnitude and frequently.

Currently, there are guarantees placed by the domestic government or recognized international firms meant to curb any losses pertained to creditors as long as the currency of that country is at stake or even led to depreciation. There should, therefore, be greater international servers that should protect exchange rates, and especially the fixed ones just as a huge amount of capital is required for guarantees. To reduce the changes of exchange rate breakdowns, there should be an increased emphasis on the market forces to the offenders which should be shown on macroeconomic law so that guarantees can be reduced (Goldfajn & Gupta, 2003).

Further, maintaining a stable exchange and banking rate areas are encouraged. Currency crises are known to trigger banking cruses as soon as the government tries to hide their currency from depreciation through acts such as selling them to other countries. Through such actions, the government can reduce its external reserves and hence, lead to disparities in results of consequential credits and deposits. As soon as depreciation is permitted, the financial status of a bank is at stake by raising the price of and external debt (Kaminsky and Reinhart, 1999).

Finally, rather than issuing guarantees, the public interest is better provided as soon as the public policy is aimed at decreasing the period for market people to evaluate the guilty and the innocent and the monetary terms required. The governments can, then, start by removing the walls that they have created at times when they release information to the market.

From the currency crisis of Turkey, it is evident that there are many countries that have open economies and which are meant to mask undesirable results such as high inflation and keep losses to themselves hence, rely on domestic borrowing where such countries should never change the rules of the game. On the same note, there should not be any radical stabilization techniques where the governments of those countries should continue borrowing money. A no can lead to the inevitable collapse of the government early than they even expect.

In an attempt to reduce such a crisis, there c...

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