What is a currency crisis?

 The foreign exchange market offers players meet to exchange one currency against another, such as the exchange of the euro against the dollar.

banks and can be found but also companies that work with multiple currencies.

These currencies move from one agent to another depending on their exchange rates. This exchange rate can change over time depending on many microeconomic and macroeconomic factors.

What happens when a currency-it`s loses much of its value?
When a currency loses value, at least 30% than the dollar, it is said that the country has a currency crisis. This can happen if a country does not aspire with confidence high inflation, particularly if it has a large budget deficit.

For fear of a fall in the value of the currency, the players get rid of this currency on the foreign exchange market. This event can be multiplied if speculators are anticipating the loss of value of the currency. Thus, by selling it while it is still high it is possible to make an important benefit especially then able to buy cheaper once it devalued.

This is called a self-fulfilling crisis. Indeed, by selling the currency, speculators down the value of the currency by increasing supply and decreasing demand.

The consequences of a currency crisis on the economy
A currency crisis with strong implications for a country and its economy. Let's take an example to illustrate this:

If a Swedish bank borrows $ 300 when Swedish krona equivalent to $ 0.12, it must reimburse 2500Kr. But if before the repayment date, the Swedish krona falls in value (say 30%) and not equivalent to $ 0.084, the Swedish bank must repay nearly 3571Kr for the same amount borrowed. Thus the higher the value of a currency falling and banks indebted in foreign currencies may have repayment problems.

How to deal with this kind of crisis?
Faced with such a crisis, financial institutions can act.

Central banks can increase their rate, the rate at which they lend money to other banks, so that the latter are also increasing their interest rates and the speculators have more difficulties to borrow and therefore buy currency. This will curb supply and maintain a balance of supply / demand.

Central banks also have the opportunity to use their foreign exchange reserves to balance supply and demand. Indeed, when the currencies of central banks are weak, they can sell their foreign currencies against their own currency in order to increase demand and therefore price.

change and crisis

However, by doing this, companies, banks and households are affected by the increase in the policy rate. Indeed, they may find themselves unable to borrow, repay and lend money. Accordingly, investments can be slowed or even stopped, slowed and in some cases growth, some banks may go bankrupt. This is called a banking crisis.

The value of a currency is essential for a country because it can cause various crises and whose banking crisis.