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Contemporary international finance and East Asian economic integration

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  1. The features of general situation of a country before falling into the current account crisis.
    1. Overall macroeconomic performances.
    2. Balance of payments conditions.
    3. Savings and investments gaps.
    4. Development stage of balance of payments.
    5. Sustainability of the situation.
    6. Possibility of foreign exchange crisis.
  2. General situation of the United States before August 2007.
    1. Overall macroeconomic performances.
    2. Balance of payments conditions.
    3. Savings and investments gaps.
    4. Development stage of balance of payments.
    5. Sustainability of the situation.
    6. Possibility of foreign exchange crisis.
  3. The features of general situations of a country before falling in a capital account crisis.
    1. Overall macroeconomic performances.
    2. Balance of payments conditions.
    3. Savings and investments gaps.
    4. Development stage of balance of payments.
    5. Sustainability of the situation.
    6. Possibility of Foreign exchange crisis.
  4. Annexures.
  5. Bibliography.

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 country faces an international liquidity shortage and a rapid deterioration of its financial institutions and firms balance sheets. That will lead to a credit contraction and thus to a banking crisis. This twin crisis currency and banking is responsible to the capital account crisis. To sum up, the new financial and economic environment of capital liberalization leads to a capital account crisis due to interest rate differentials and sudden and massive capital flows. This new type of crisis is thus different from a current account crisis because of theses causalities. [...]


[...] Possibility of foreign exchange crises To re-equilibrate their CA balance, low-income countries finance their fiscal deficit through monetization instead of developing an active private sector and cutting in government expenditures. Indeed, we saw in the lecture that this last solution is quite unpopular. Their financial authorities - Central Bank generally - use to print banknotes. This conducts to a high inflation. However, they are under a fixed exchange rate de facto under a United States Dollar peg. The inflation thus makes the rate overvalued. [...]


[...] Moreover, the deficit may have been boosted by the US economic performances relatively to the rest of the world, which conducted to a decrease of US exports and an increase of imports. The principal component of this deficit is its huge trade balance deficit. The country's imports from Asia and Europe exceed largely its exportations. In 2006, its trade deficit was of 838 billions dollars. Its current account deficit has positive and negative effects. Indeed, if its production of exports is lower than without this deficit, its interest rate is also lower thanks to the foreign capital inflows which finance it. [...]

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